Transit-Mixed Concrete Ltd

[valuebuddies]

Transit is a less known company in SGX but apparently they have been in business for 35 years already, and is one of the biggest player in concrete pumping services in Singapore. Transit operates in 3 main business segments, (i) supply of ready-mixed concrete, (ii) rental of concrete pump equipment, and (iii) waste management services. Main source of income from the concrete pumping segment which contributed approx. 62.7% in FY2013, follow by 26.4% from concrete supply and 10.9% from waste management.

Supply of ready-mixed concrete
Net profit margin for this segment is rather low which is approximately 5%, the revenue from this segment has been quite stable at around S$5-5.5 million annually, the net profit before tax (excluding one-off items) from the last 5 years are ranging between S$250-350 thousand. Nothing much to expect as it is rather a stable figures with little surprise.

Concrete pumping
Profit margin from this segment is much higher at 15.1% in FY2013 (2012/2011 at 14.3%/18.8%). Year 2009 and 2010 were exceptional high at near to 40% profit before tax, which could be due to much lower depreciation and some other reasons which are unknown to me. For prudent purpose, I will assume the profit margin at 15%. Capex spending on the concrete trailer and boom are very high, S$2.2M in 2013, S$6.8M in 2012, S$3M in 2011 etc. With this expensive spending, we saw increases in revenue from S$9.4M in 2011 to S$13.3M in 2013. Capex spending were mostly financed with leases and overdraft, I don't know the true reason why Transit prefers overdraft facilities rather than term loan, but I guess is probably because of the flexible repayment option. Generally, revenue grows in accordance with the increase in total construction demands, I expect a slowdown in the construction activities from the private sector but on public infrastructure and housing is still positive in my opinion.

Waste management
Transit's major projects in this segment includes cleaning contracts at Resorts World Sentosa, SIAEC Base Maintenance, Changi Airport, 120 schools, Ngee Ann Polytechnic, Republic Polytechnic and waste disposal services at Marina Coastal Expressway Project. The margin is higher than the above 2, which is around 28-30% for year 2009 to 2012, but margin dropped to 23% in 2013 due to higher labour and operating cost, per management. Revenue increased rapidly over the past couple of years, from S$1.1M in 2009 to S$2.3M in 2013. Surprisingly, the segment asset and Capex spending aren't in tandem of the increases in revenue. It spends average of S$200K in Capex for year 2009 to 2012, but a huge S$500k in year 2013. There are little information on regarding the awarded projects, but with the unusual Capex for year 2013, I am expecting more contracts and higher revenue in this segment.

Since the year 2006, the company has been constantly paying out dividend ranging from 2c to 3.5c per share, which equivalent to about 5.8% to 10% dividend yield based on the current closing price. However the company has been in negative cash position and yet with million of overdraft. The latest 1H2014 result indicates that the company has managed to bring down the overdraft significantly by generating a positive cash flow of S$0.6M. It was also a great performance with revenue and profit both increased by 21% and 68% respectively, I trust that this was mainly from the waste management contribution.

Am looking forward to the upcoming FY2014 result, comments for the above is much welcome.

[Nick]

Thanks for the analysis !

I have been keeping an eye on this Company over the past year. Trading liquidity has always been my biggest bug bear with it. The spread is really wide. Business wise, it is truly a proxy for the construction sector here though it is quite lumpy as evident from the results over the past 5 years. Moreover, the PBT margins seems to be falling from its peak levels in 2008 which could imply competition. Any idea what the 1H 14 capex was for ? I must confess, I hadn't spent a lot of time reviewing it so kindly point out any errors I may have made.

(Not Vested)

[LionFlyer]

I had looked at Transit-Mixed briefly a while back, but I am not sure if they are the three biggest. There is still HL Asia (Island Mix) , Pan United even NSL. What is your thoughts on them?

[yeokiwi]

There is also Engro Corporation.

Engro is involved in property development.
Pan United is involved in port management.
HL Asia has china auto part and consumers' electrical appliances business.

Interestingly, although all are doing cement business, the valuations are supported by non-cement businesses.

So, does it mean that cement business is basically so-so...

[valuebuddies]

Yes, I don't think they have a big market share in terms of supplying ready-mixed concrete, but they are one of the biggest in provision of concrete pumping rental and services. As quoted from its website:

TMC Concrete Pumping Services Pte Ltd (TMCCPPL) are the leading concrete pump rental supplier in Singapore with total of more than 70 units of truck mounted concrete pumps, trailer pumps and concrete placing boom equipments.

The concrete pumping is the main driver for the revenue as well as the profit. As Nick has pointed out, the segment margin has been deteriorating from the peak of 30-40% (2008-2010) to less than 20% (2011-2013). Two possible reasons in my opinion:

i) change of accounting policies in the PPE. Per the FY2009 AR, the concrete pump were depreciated over 10 years, but latest AR shows that the depreciation years has been changed to 5-10 years. Concrete pumps accounted between 80-90% of the total PPE cost of the company, and with this depreciation expenses has gone up from S$1.2M in FY2008 to S$2.6M in FY2013. The increase is also in line with the huge amount of Capex spending over the same period. By the way 5 years depreciation for concrete pump seems too short, unless they purchased used equipments, I can't confirm this.

ii) increase in fixed costs with decrease in revenue. I think most of the costs in this business segment are fixed and not variable, for instance depreciation, staff cost, upkeep and maintenance etc. During FY2011, the revenue on concrete pumping reduced to S$9.4M versus S$12.2M immediate preceding year, with (possible) higher fixed costs on bigger number and older fleets, the net profit has also reduced to S$1.8M versus S$4.2M year before. But take a closer look, netting the revenue against the profit, the cost for FY2011 is S$7.6M comparing to S$8M for FY2010, doesn't this make sense?

Actually what caught my eye are not the concrete supply business, but rather the other 2 segments (concrete pumping and waste management). I have noted that Transit has been spending a lot on Capex for this two segments, which I think is positive but yet worry because they seems to over-stretching with negative cash flow produced for the past 2 years. The Capex spending for 1H2014 was S$1M, with no increase in finance leases. Positive sign is that overall the gearing has reduced to 13.7% versus 16% reported in FY2013.

For the last 8 years, the company has maintained at least 50% dividend payout, though there is no clear dividend policy, I would expect an increase in the dividend from 2c to at least 2.5c in line with the rise in EPS.

[violinist]

Why does kheng leong company hold 21% and no wees on bod?

[valuebuddies]

Why does kheng leong company hold 21% and no wees on bod?

The Wees are already busy with the banking business, 21% just only S$5M in monetary terms, if the Wees are on board, how much fee Transit has to pay them wo?

[ghchua]

Why does kheng leong company hold 21% and no wees on bod?

Chairman, Mr Low Wing Hong represents Kheng Leong and he is in the Board of Directors.

[valuebuddies]

The corporate structure of the company is rather simple, no outstanding share options, no warrants, no bonus shares/rights issues, except for a private placement of 2million shares in 2009 for the purpose of transition to SGX mainboard. The CEO's and founder's shares have been maintained since year 2009, no increase/decrease in number of shares. The only thing that puzzle me is the relationship between CEO Chua Eng Him, Founder, Yap Boh Lim and the major shareholder the Wees. Any buddies could enlighten me on this please?

[ghchua]

Actually what caught my eye are not the concrete supply business, but rather the other 2 segments (concrete pumping and waste management). I have noted that Transit has been spending a lot on Capex for this two segments, which I think is positive but yet worry because they seems to over-stretching with negative cash flow produced for the past 2 years. The Capex spending for 1H2014 was S$1M, with no increase in finance leases. Positive sign is that overall the gearing has reduced to 13.7% versus 16% reported in FY2013.

Concrete supply business is tough. CEO told me that previously they were more concentrated in concrete supply but decided to slowly move out. Reason being they do not have the source for raw materials and have to buy from other suppliers. This meant that they could not control the price of their raw materials which means low margin.

Negative cash flow and working capital issues had been bought to their attention during the previous AGMs and it seems that they are financing long term assets with short term liabilities like using bank ODs to finance purchase of equipments etc.

However, their principal banker is UOB and Kheng Leong Company (Private) Limited holds around 22% of the company. Therefore, I think as long as they don't over-gear too much, it should be quite safe.