Tiong Woon Corp

[Musicwhiz]

Tiong Woon has just released a profit warning for its FY 2012 results ended June 30, 2012. The loss is due to forex movements and also a provision for DD.

Should shareholders be concerned about the level of potential bad debts for which the Company has to make provision for? Or are the prospects for the Company decent and this is just a minor blip?

(Not vested)

[RBM]

I read this evening's Tiong Woon profit warning disclosure to the SGX with more than passing interest. Having kept upto date with this particular VB thread and done a bit of my own (admittedly amateur) DD, I wonder if this evening's news constitutes a good opportunity to buy in to Tiong Woon?

Despite the cyclic nature of the business Tiong Woon operates in, I note that for the last five (5) years, it has paid a consistent S$ 0.4 cents p.a. dividend - they also appear to have a "no-nonsense, no-surprises" approach to disclosure. I believe that Tiong Woon's management team is a good one and during my oil industry travels in Australia, I see their craneage kit operating under what I believe is (very) long term contracts on quite a few remote locations (i.e. locations where it would be costly to replace them with a competitor). It is difficult to reconcile the current share price with the much higher NAV.

Am I being naive? Am I driving the counter-cyclic thinking a bit too hard? KarlMarx's 1st February 2012 one-liner posting on this thread appears to have come home to roost - at least for now. Would much appreciate forummers views on this.

Not vested (currently).

Tiong Woon has just released a profit warning for its FY 2012 results ended June 30, 2012. The loss is due to forex movements and also a provision for DD.

Should shareholders be concerned about the level of potential bad debts for which the Company has to make provision for? Or are the prospects for the Company decent and this is just a minor blip?

(Not vested)

[Musicwhiz]

Am I being naive? Am I driving the counter-cyclic thinking a bit too hard? KarlMarx's 1st February 2012 one-liner posting on this thread appears to have come home to roost - at least for now. Would much appreciate forummers views on this.

Hi RBM,

Nice to engage you in a serious discussion on a Company's merits and demerits. I believe that I can comment based on my prior experience with Tat Hong, which is a close competitor of Tiong Woon in all aspects except Heavy Lifting and Haulage.

Looking at the nature of the business itself, I think we all can conclude that it's definitely cyclical and thus is subject to the vagaries of economic cycles and recessions/booms. As to whether Tiong Woon is already at the nadir of the economic slump due to Europe, I really cannot tell. The crisis may drag on many more months without a satisfactory resolution, and global growth could be dragged down as a result as well. The fact that China is slowing down and India just had a massive power failure also do not add much confidence in terms of economic growth- this will all translate into slower spending on infrastructure in general.

Though countries such as Singapore and China have ongoing projects and mega-budgets for construction projects, there is also the possibility of delaying/deferring them or even to downscale them. This would affect Tiong Woon for sure, and the fact that there are also many fragmented players in the industry means low barriers to entry, while customers squeeze them for better margins and slower payment (from a 5-Forces perspective it does not look too good).

Looking to the financials, Tiong Woon reported in its 3Q 2012 results that gross margin had contracted significantly. Gross margin for 3Q 2012 was 18.8% against 23.9% a year ago, which shows that costs remain high while ASP is an issue. 3Q 2012 showed a loss of $373k though 9M 2012 showed a small profit of $872k.

The Balance Sheet has not strengthened much either, with cash decreasing, receivables increasing (in line with sales growth), payables growing substantially while gross debt has not budged much at all. The Company is in a net debt position of about $83m, and Finance costs have risen 57% year on year (9M 2012), which is a drain on profits while margins have all but contracted.

One positive I can note is there was +ve FCF generated for both 3Q 2012 and 9M 2012, but the fact that there was a rights issue to raise $10m does sound a warning bell as to why the Company would resort to asking for money from shareholders to shore up its Balance Sheet.

Looking at the breakdown by divisions, it appears heavy lift and haulage saw a revenue increase but a PAT decrease, while Fabrication and Engineeing saw a large jump in revenues (due to low base effect) but recorded a higher loss. Question: Is the Company focusing resources on the wrong division? They should be focusing more efforts on improving margins for their Heavy Lift instead of generating more revenues for Fabrication while costs remain just as high (if not higher).

Though I acknowledge that TW has paid a consistent dividend over the years, the business looks tough to manage and the fact that it is subject to cycles also makes it riskier (as no one can predict the cycle with accuracy). The discount to NAV is not, in my opinion, a very good reason to purchase any company (an exception would be if the Company has unique assets for which there is very high replacement value); as NAV can be eroded over time by losses and cash burn.

Just my 2-cents.

[karlmarx]

At some point in the future, TWC's business will once again flourish. As it did during 06-07. Unless building technology improves to the point where cranes are no longer necessary; which I believe is highly unlikely. For now, it seems the pain for TWC will continue, for perhaps the next two to three quarters. Even if an investment is made at a very low price, the next construction boom may take years to come, who knows, right? But if the shares slide low enough (16cts?) it will certainly pique my interest. Otherwise, there are still good issues out there even in this market.

[RBM]

Many thanks for taking the time to give such a comprehensive and thoughtful response Musicwhiz - sincerely appreciated.

I note that Tiong Woon's share price does not seem to have taken much of a hit following their profit warning disclosure. Tiong Woon's share price closed at S$ 0.245 on Monday evening - only half a cent off the price immediately pre-disclosure. I suspect there must have already been some expectation in the market that FY profits would not sparkle.

Having done a bit more digging, I can only endorse what you say about the cyclic nature of the business Tiong Woon operates in - it is extremely cyclic. I'll be very interested to see if they maintain their dividend when the next payout is declared.

I'm going to hang fire for a tad longer - I worry that this one has not seen the bottom yet.

Not Vested
Thanks again MW

Am I being naive? Am I driving the counter-cyclic thinking a bit too hard? KarlMarx's 1st February 2012 one-liner posting on this thread appears to have come home to roost - at least for now. Would much appreciate forummers views on this.

Hi RBM,

Nice to engage you in a serious discussion on a Company's merits and demerits. I believe that I can comment based on my prior experience with Tat Hong, which is a close competitor of Tiong Woon in all aspects except Heavy Lifting and Haulage.

Looking at the nature of the business itself, I think we all can conclude that it's definitely cyclical and thus is subject to the vagaries of economic cycles and recessions/booms. As to whether Tiong Woon is already at the nadir of the economic slump due to Europe, I really cannot tell. The crisis may drag on many more months without a satisfactory resolution, and global growth could be dragged down as a result as well. The fact that China is slowing down and India just had a massive power failure also do not add much confidence in terms of economic growth- this will all translate into slower spending on infrastructure in general.

Though countries such as Singapore and China have ongoing projects and mega-budgets for construction projects, there is also the possibility of delaying/deferring them or even to downscale them. This would affect Tiong Woon for sure, and the fact that there are also many fragmented players in the industry means low barriers to entry, while customers squeeze them for better margins and slower payment (from a 5-Forces perspective it does not look too good).

Looking to the financials, Tiong Woon reported in its 3Q 2012 results that gross margin had contracted significantly. Gross margin for 3Q 2012 was 18.8% against 23.9% a year ago, which shows that costs remain high while ASP is an issue. 3Q 2012 showed a loss of $373k though 9M 2012 showed a small profit of $872k.

The Balance Sheet has not strengthened much either, with cash decreasing, receivables increasing (in line with sales growth), payables growing substantially while gross debt has not budged much at all. The Company is in a net debt position of about $83m, and Finance costs have risen 57% year on year (9M 2012), which is a drain on profits while margins have all but contracted.

One positive I can note is there was +ve FCF generated for both 3Q 2012 and 9M 2012, but the fact that there was a rights issue to raise $10m does sound a warning bell as to why the Company would resort to asking for money from shareholders to shore up its Balance Sheet.

Looking at the breakdown by divisions, it appears heavy lift and haulage saw a revenue increase but a PAT decrease, while Fabrication and Engineeing saw a large jump in revenues (due to low base effect) but recorded a higher loss. Question: Is the Company focusing resources on the wrong division? They should be focusing more efforts on improving margins for their Heavy Lift instead of generating more revenues for Fabrication while costs remain just as high (if not higher).

Though I acknowledge that TW has paid a consistent dividend over the years, the business looks tough to manage and the fact that it is subject to cycles also makes it riskier (as no one can predict the cycle with accuracy). The discount to NAV is not, in my opinion, a very good reason to purchase any company (an exception would be if the Company has unique assets for which there is very high replacement value); as NAV can be eroded over time by losses and cash burn.

Just my 2-cents.

[dydx]

I guess to invest in a cyclical business one has to first make sure that the management team and market position - the company's technical/products/services capabilities vs. their customers' needs and the competition - are good enough, and the company's finances are strong enough. A purchase price at a deep discount to NAV will provide the required margin of safety and extra value, especially if the underlying assets are long-lasting, of good quality, and continue to generate good FCF.

Having taken a look into Tiong Woon's latest profit warning statement.....
http://info.sgx.com/webcoranncatth.nsf/V...D0011D442/$file/TWCH_ProfitWarning_1Aug2012.pdf?openelement
I get the feeling that the now expected loss for FY12 may well turn out to be just a manageable one, likely caused by forex translation loss on the fiscal year-end trade receivables balance - bearing in mind of the strength of the SGD vs. the regionals in the past months - as well as additional provision on trade receivables required by the auditors (PwC) for the usual accounting prudence reason. I guess we will be able to confirm this and the details by 29Aug12.

[Musicwhiz]

A purchase price at a deep discount to NAV will provide the required margin of safety and extra value, especially if the underlying assets are long-lasting, of good quality, and continue to generate good FCF.

Hi dydx,

What would you consider to be a range of (deep) discounts which may be used in the case of Tiong Woon, as a % below NAV to achieve sufficient margin of safety? My concern as an investor would be, of course, to review whether the erosion of the NAV through losses materially impacts the business; and how much margin of safety is required to mitigate that risk.

Thanks.

[dydx]

Based on today's (7Aug12) closing price of $0.245, Mr Market is now pricing Tiong Woon at only 49.8% of its 31Mar12 NAV/share of $0.4922. Quite obviously, Mr Market is neither kind nor fair to Tiong Woon, bearing in mind the company's up-to-date and well-maintained fleet of mostly heavy tonnage cranes and other haulage/transport equipment acquired carefully over many years does have good resale or market value. Unless Tiong Woon suffers an actual cash loss or negative FCF in its business operation - I doubt this has happened before in the group's history! - IMHO, any loss and its impact on NAV are more accounting in nature and have little immediate bearing on the value of the company's crane fleet and other equipment.

I guess one can easily look into the past 1-year share price evolution to analyse the differential margin-of-safety offered by Mr Market vs. Tiong Woon's NAV/share.....
http://finance.yahoo.com/q/bc?s=T06.SI&t...&z=l&q=l&c=
With hind sight, the best points of entry were (1) between 30Dec11 till 11Jan12 (traded price range: $0.21 to $0.22), soon after Tiong Woon announced the 1-for-4 rights issue at $0.11/share on 29Dec11; and (2) between 5 to 7Mar12 (traded price range: $0.20 to $0.22), during which the share price was pushed down temporarily by some shareholders arbitraging between Tiong Woon shares and the rights sold by other shareholders who did not want to take up their rights entitilements, after the counter went "ex-rights" on 23Feb12. For investors who were alert, they could have picked up Tiong Woon at even slightly lower than $0.20, by buying the rights at less than $0.09 apiece and put in another $0.11 to convert them into new Tiong Woon shares. So at an all-in cost of say $0.20/share, these lucky people actually managed to buy in at close to a 60% discount to the 31Mar12 NAV/share at $0.4922.

So I suppose investing with a good, big margin-of-safety would also mean being able to take advantage of super-good buying opportunities offered by Mr Market occasionally.

[mrEngineer]

Hi dydx,

May I know why your preference of Tiong Woon over Tat Hong? Naturally as a beginner investor I would choose Tat Hong for its profitability (at this moment) and its market leadership (although MW have mentioned before that market leadership in crane business does not mean much as competition is still rough and larger fleet leads to larger capex) . Is the preference mainly due to investment reasons where you see more upside potential for Tiong Woon?

[dydx]

I find in Tiong Woon a focussed and well-managed heavy lift and haulage business that is destined to grow further in Asia and return to more acceptable profitability given enough time. The company has a conservative B/S including a fair level of gearing. Its share price when I first bought into the company was at a deep discount - and it still is! - to its NAV/share and the value of the underlying assets. Assuming Tiong Woon can return to acceptable profitability, I guess there is a fair chance that its share price would be re-rated upwards towards its corresponding NAV/share then. Tiong Woon's business being of a medium-size scale would also mean that it can be quite easily bought up or privatized.

I find Tat Hong's overseas expansion efforts a little too aggressive and gearing a little too high for my liking.