Hai Leck

[freedom]

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.

you can't use the psychology of retain investors for management or controlling shareholders.

for management or controlling shareholders:

the share price of around 29cents, does not mean too much to them, if they commit more fund into the company with potentially low return. no matter what the market price is, they can't just sell into the market. it will crash the stock.

for retail shareholder:

sure, 29 cents means premium to the exercise of warrants.

[nextwave]

don't mean to be negative, some quick thoughts

1. what are the market dynamics like for this low tech commodity business- are the back alleys of tuas and woodlands full of such businesses only not listed? what is to stop some of their managers from setting up another hai leck?

2. what is the sense in using PE for a company that has not demonstrated atleast 10yrs of earnings through diferent cycles? i noticed in their IPO prospectus they conveniently chose to display their earnings only from 2005 onwards to time it with the oil cycle, they have been around 20 yrs or so so why not start from atleast 2000? probably did not want to show losses?

3. Linked to ques 1- what edge do they have over competitors that will esnsure they get business for the next 3- 5yrs? are their scaffolders , painters and welders the best in the industry?

4. what meaning does linking valuation to cash have in a virtually family controlled company , do you have any say at all in how they spend it? can a corporate raider come in buy up a controlling stake and distribute the cash to minority shareholders?

5. issuing warrants to dilute shareholders so soon is a big red light irrespective of the price

6. finally value and cheap are different things

[dydx]

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!

A "negative" Profit Guidance announcement (dated 2Feb11) by Hiap Seng has caused a massive $0.07 (or 10.9%) loss so far in the share price today......
http://info.sgx.com/webcoranncatth.nsf/V...A0033A1AE/$file/Profit_guidance_3QFY2011.pdf?openelement
The announcement forewarns that the company is expected to report a net loss in Q3-FY11.

I sure hope that Hai Leck and other service providers operating in the O&G space would not have to suffer a similar fate.

[mrEngineer]

dydx, pls help to explain what you meant by the big squeeze by Shell and Exxon Mobil companies?

I still trying to ascertain whether the fall in the gross margins in Q2 was industry wide impact or rather due to revenue recognition issues. As the warning mentions cost overrun, I am unsure whether this is a one off decline or permanent impact.

I believe the net loss is mainly due to foreign exchange losses as USD has fallen against SGD.

[freedom]

revenue and profit dropped a lot.

the same to Hiap Seng

[valueinvestor]

Expected, because most of their projects had been completed as advised by the management in its performance review in 1Q result announcement.
Without the revenues from projects, the EPS still remain fairly impressive at 0.6 cts , better than expected. Market expected its 2Q result could be in the red like Hiap Seng's.

[redcorolla95]

don't mean to be negative, some quick thoughts

1. what are the market dynamics like for this low tech commodity business- are the back alleys of tuas and woodlands full of such businesses only not listed? what is to stop some of their managers from setting up another hai leck?

2. what is the sense in using PE for a company that has not demonstrated atleast 10yrs of earnings through diferent cycles? i noticed in their IPO prospectus they conveniently chose to display their earnings only from 2005 onwards to time it with the oil cycle, they have been around 20 yrs or so so why not start from atleast 2000? probably did not want to show losses?

3. Linked to ques 1- what edge do they have over competitors that will esnsure they get business for the next 3- 5yrs? are their scaffolders , painters and welders the best in the industry?

4. what meaning does linking valuation to cash have in a virtually family controlled company , do you have any say at all in how they spend it? can a corporate raider come in buy up a controlling stake and distribute the cash to minority shareholders?

5. issuing warrants to dilute shareholders so soon is a big red light irrespective of the price

6. finally value and cheap are different things

1 & 3. they're the largest in their field in Singapore, which should say something, even though what they do is not rocket science. And anything they do is higher tech than anything in F&B or making shoes.

Barriers to entry are the track record with the ExxonMobil, Shell, etc. These are very safety-reputation conscious: to bid for a job, you have to be on the pre-qualified list, but to be on that list, you have to have track record. Almost 0 incentive for the project buyer to save a little bit of money to try someone new. This closed loop is a key difference from the general civil engineering construction industry, so higher barriers to entry, higher margins, get paid etc.

So next question: how did they start in the first place? The general sense from industry is that in the 90s when there was a dearth of orders, the foreign / Western firms in the biz packed up and left, so since the local players couldn't leave, those who could survive managed to pick up biz when it came back.

2. To be fair PE is quite meaningless, but then if you look at any company IPO-ing, they're not going to give you the last 10 years of earnings. Let me know if you can find one.

3. What's more interesting is: if you look during the IPO they raised something like $22m, but then in 2007, they paid a nice $80m dividend to their shareholders, and that's after paying out $22m to shareholders (in FY ended jun 07 & 06). Perhaps raising capital for expansion is not the primary intention of their IPO.
Also the whole warrant exercise raises something like $1.3m, which isn't exactly that they desperately need either.
Maybe the scene is being set for some generation transition, esp re the age of founder vs 2nd gen.

[Not vested].

[wee]

redcorolla95

thanks for the detailed breakdown. I note that you are not vested despite the positives you have listed. What don't you like about the company at the current price?

don't mean to be negative, some quick thoughts

1. what are the market dynamics like for this low tech commodity business- are the back alleys of tuas and woodlands full of such businesses only not listed? what is to stop some of their managers from setting up another hai leck?

2. what is the sense in using PE for a company that has not demonstrated atleast 10yrs of earnings through diferent cycles? i noticed in their IPO prospectus they conveniently chose to display their earnings only from 2005 onwards to time it with the oil cycle, they have been around 20 yrs or so so why not start from atleast 2000? probably did not want to show losses?

3. Linked to ques 1- what edge do they have over competitors that will esnsure they get business for the next 3- 5yrs? are their scaffolders , painters and welders the best in the industry?

4. what meaning does linking valuation to cash have in a virtually family controlled company , do you have any say at all in how they spend it? can a corporate raider come in buy up a controlling stake and distribute the cash to minority shareholders?

5. issuing warrants to dilute shareholders so soon is a big red light irrespective of the price

6. finally value and cheap are different things

1 & 3. they're the largest in their field in Singapore, which should say something, even though what they do is not rocket science. And anything they do is higher tech than anything in F&B or making shoes.

Barriers to entry are the track record with the ExxonMobil, Shell, etc. These are very safety-reputation conscious: to bid for a job, you have to be on the pre-qualified list, but to be on that list, you have to have track record. Almost 0 incentive for the project buyer to save a little bit of money to try someone new. This closed loop is a key difference from the general civil engineering construction industry, so higher barriers to entry, higher margins, get paid etc.

So next question: how did they start in the first place? The general sense from industry is that in the 90s when there was a dearth of orders, the foreign / Western firms in the biz packed up and left, so since the local players couldn't leave, those who could survive managed to pick up biz when it came back.

2. To be fair PE is quite meaningless, but then if you look at any company IPO-ing, they're not going to give you the last 10 years of earnings. Let me know if you can find one.

3. What's more interesting is: if you look during the IPO they raised something like $22m, but then in 2007, they paid a nice $80m dividend to their shareholders, and that's after paying out $22m to shareholders (in FY ended jun 07 & 06). Perhaps raising capital for expansion is not the primary intention of their IPO.
Also the whole warrant exercise raises something like $1.3m, which isn't exactly that they desperately need either.
Maybe the scene is being set for some generation transition, esp re the age of founder vs 2nd gen.

[Not vested].

[redcorolla95]

Industry is quite cyclical. There IPO coincided at a time of near (or at) record orders for the industry, even then, there was a roughly even split between project and maintenance revenues. Also projects have generally higher margins than maintenance.

Generally, unless you've very strong reasons to believe that we're seeing lots of orders coming up, my preference is to buy a company in a cyclical industry near a trough valuation. Now if you compare the current PB vs when they IPO-ed, it's not obvious that we're near a trough.

Plus points from #3.

[wee]

Many thanks. Appreciate your clarification.

Industry is quite cyclical. There IPO coincided at a time of near (or at) record orders for the industry, even then, there was a roughly even split between project and maintenance revenues. Also projects have generally higher margins than maintenance.

Generally, unless you've very strong reasons to believe that we're seeing lots of orders coming up, my preference is to buy a company in a cyclical industry near a trough valuation. Now if you compare the current PB vs when they IPO-ed, it's not obvious that we're near a trough.

Plus points from #3.