Blue chip stocks and penny stocks get plenty of attention in Singapore. Rain or shine, bull or bear market, Straits Times Index constituents and penny stock plays tend to be very actively-traded and make the headlines every now and then. While such counters command their own merits, it is prudent to look beneath the waves of market action to scout for great companies that have been overlooked. Scanning list after list of locally listed stocks, a few counters caught by eye, and Tai Sin Electric is one of them.
Quick Facts
Tai Sin produces and distributes electrical
cables, switchboards, electrical products and accessories. It recently
ventured into the test & inspection segment
for materials, after acquiring CAST Laboratories.
It provides manufacturing, distribution and technical services to
support customers in the industrial, infrastructure, commercial and residential
sectors. It mainly supplies electrical cables and other electrical equipment to
industries, for the construction of infrastructure such as rail lines, and all
kinds of buildings.
The company has 4 production plants, in Singapore, Malaysia, Vietnam and
Brunei.
Tai Sin is founded and owned by the Lim brothers. The Lim family collectively
controls a 50% stake.
Fiscal year 2016 (the company begins its FY in July) earnings per share
(EPS) was $0.0531, net asset value (NAV) per
share was $0.379 and dividends per share was $0.0235.
This gives it a price-to-earnings (P/E) ratio of 7.34x, a price-to-book ratio (P/B) of 1.03x
and a dividend yield of 6.03% as of 10th
Feb 2017. Its market capitalization is currently $170M.
Tai Sin’s core business is in producing and distributing
electrical cables/wires, which accounted for 68%
of revenue in FY2016. 76% of its total sales
were to Singapore, making it very
exposed to local economic developments.
At this point, the company looks rather mediocre. Cable manufacturing is
an old and boring, but stable business. It’s a small local company supplying
wires to the region. Valuations do look
cheap with this kind of P/E and P/B values, and that 6% dividend yield looks
tasty. But then again, these low valuations also imply low growth prospects,
in a very saturated and low-margins industry. Nothing’s very exciting here worth
writing home about.
But wait! Don’t discount this stock altogether just yet.
Slow Growth, But an
Electrifying Balance Sheet
*All figures in millions of SGD.
Yes, revenue growth has been
rather lackluster over the past 5 years, growing just 15% throughout this time. Gross and net profit follow
suit, at a gradual uptrend. Growth prospects do not look exciting here, but shareholder’s equity has been steadily increasing,
despite the fluctuating revenue figure. It does hint at management growing the company slowly, but steadily.
*All figures in percentage.
As previously mentioned, Tai Sin operates in a saturated and low margins industry. Well, electrical cables and
equipment isn’t exactly revolutionary technology with sophisticated know-how.
It’s very much like the local food & beverage industry, many industry players but all without a
moat. The industry is saturated with many players, putting pressure on profit
margins, notably with net profit margins being in the single digits.
However, it is still rather remarkable that gross (GPM) and net (NPM) profit
margins have managed to stay rather constant over the years. With an increasing
focus on its test & inspection segment, which commands higher margins, we
could see both GPM and NPM improve in the years to come.
*All figures in percentages.
Similarly, profitability metrics
measured by returns have been rather consistent throughout this period,
although return on equity (ROE) has fallen noticeably. While the numbers
overall are not in the jaw-dropping range, it does show that operating performance is indeed quite
steady. Management is doing a good job of managing ongoing businesses, but
is not the best at enhancing business returns.
Subtle and Safe? -- A Silent
Dividend Earner
*All figures in millions of SGD.
Save for FY2016’s seemingly huge plunge in cashflow from operations
(CFO), which translated into negative free cash flow, this figure has been growing very steadily since FY2012.
The puny
2016 CFO number may appear at first glance to be a disaster, but a closer look
at the financial statements reveal that it is likely nothing more than a short term anomaly, being caused by a
huge change in working capital, specifically a net change in trade receivables
of negative $21M. CFO before working capital changes would have been $33.7M in
FY2016 compared to $25.9M a year earlier. Assuming that this is a
one-off event unlikely to recur constantly, FY2016’s CFO figure shouldn’t be
too concerning.
Save for FY2016, free cash flow
has been persistently higher than total dividends paid, which is a sign of financial prudence and it speaks
volumes about the stability of dividend payouts (dividends are not financed
by taking on debts). Rising capital expenditures (capex) are not of concern as
long as they rise in tandem with revenue and CFO. Capex as a percentage of
total revenue has been rather consistent at around 2%.
*All figures in millions of SGD.
Moving over to Tai Sin’s debt profile, we see that the debt load is not excessive, with immaterial long term debt. One suspects that short term debts are
meant to supplement capital for day-to-day operations. Both total and net debt to equity ratios have been falling since
FY2012. In fact, the company was in a net
cash position in FY2015!
The fact that net debt/EBIT has persistently been
below 1 shows that the company should
have no problems at all paying off all its debt load at once should the need
arise.
A low debt load also means the company can tap on taking on new debt to
finance future expansions, or acquisitions.
Liquidity wise, Tai Sin is in extremely good shape, with current ratio
persistently above 2. Since current ratio is the ratio of total
current assets to total current liabilities, the company should have no problems at all paying its short term
obligations.
Even better still, quick ratio
has constantly been above 1, implying that the company has the ability to pay all its short term liabilities
with just its cash on hand and accounts receivables. It is rare to see a
company with a quick ratio above 1, let alone for such a protracted amount of
time.
While only one of the several metrics that measure sales, inventory turnover has been climbing
steadily, which shows improving
product sales. It also implies that days sales in
inventory had fallen from about 104 days in FY2012, to about 86 days in FY2016,
meaning it took about 86 days on average in FY16 for all of the company’s
inventories to be sold. Improving sales is a very positive sign as it
demonstrates business is picking up.
Acquiring a Gem
It is not every day that we chance upon companies with fundamentals as
such. Try as I might, I can barely come out with negative remarks about this
company. It is indeed like an undiscovered gem beneath the waves. While the Straits
Times Index floundered in 2016, Tai Sin’s stock price was up more than 20%.
Throw in that dividend
yield of 6% and total return was nearly 30% in 2016. This is extremely
impressive given the volatility of 2016 with its 2 major financial shocks
(Brexit and Trump).
This company has the potential to become a candidate for acquisition by a larger company, at a nice premium to
its current market value, given its near-perfect fundamentals and very low debt
levels.
With the Lim family holding about 50% of outstanding shares, a buyout offer for the entire company could
be issued, also at a healthy premium to current prices. This seems
increasingly likely now given the recent buyout offer of a similar-sized
company, Spindex. The offer made was about 20% above last traded price. Should
there be a privatization offer by company insiders, I expect the deal to
command at least the same premium as Spindex’s.
With demand for electrical cables and components very dependent on the construction industry, Tai Sin’s fate is much
correlated to the state of the local construction industry. While in recent
years local construction has been moribund, the industry could see better days
ahead, following what seems like a rebound in business for property developers,
like Capitaland and City Developments. Should
the construction industry turnaround next, those supplying materials used in
construction, such as concrete and electric cables are the next in line to rebound.
Not forgetting that with an ever-increasing population, Singapore has
planned for the construction of several new MRT lines. Currently under
construction is the 42km Thomson-East Coast Line, which would be opened in
several phases. Its construction could
create new demand for electrical cables and components. Also,the 50km
Cross-Island Line to be completed in various phases by 2030. Tender offers for
construction of segments of the new line could begin as early as 2019. With a combined length of planned MRT
projects at around 100km, just imagine the length of electrical cables
required…
Lastly, it is only a matter of
time before a local broker catches wind of such a decent company and initiates
coverage (very likely with a buy rating), creating awareness of this stock
among the investing retail public. Such a move would be a major positive
catalyst for the stock price.
Not being a component of any index and having thin daily trading volumes, Tai Sin has flown under the radar for
too long. One day it will surface from beneath the waves to be made known to
all.
The Flip Side
So much for its merits, I am obliged to provide possible downside risks for
a balanced evaluation, starting with copper prices.
Following the 2016 US Presidential Elections, copper prices have been on a tear, rocketing by more than 20%. This
huge surge has enabled copper prices to break
the long term downtrend (green line) that has been in place since 2013. The
fact that copper tested this line and rebounded quickly is testament to the strength of the rally. [Note: I am using the CFD
contract XCU/USD as a proxy for copper prices. Copper for industrial purposes
is usually traded via futures contracts.]
For an electrical cable manufacturer, copper is the main raw material used in production. Rising copper
prices would increase the cost of production, and should the company not be
able to pass on this increase to customers, it would crimp profit margins. A glance at the footnotes to their 2016
annual report reveals the company does have derivatives hedges for copper in place, valued at around $10
million. But the concern is whether this is sufficient to cover for future
production. Not to mention that these hedges would eventually expire and new
ones would have to be bought…
Also, the fortunes of the company is very much tied to the local
construction industry, given that 68% of its revenue is derived from cables and wires,
and 74% of
its revenue is derived from Singapore. The outlook for local construction
is not bright, as the industry has been in the doldrums for several years now,
following property cooling measures by the government and an economic slowdown.
One way to accelerate Tai Sin’s growth would be to increase exports to foreign
customers, but there is no guarantee it’ll be able to reduce exposure to the local
market in a short time.
Lastly, electrical cables and wires is a low margins business with intense competition stemming from the
many industry players. The company constantly has to carefully navigate a difficult operating environment with rising costs
pressures and intense industrial rivalry. It lacks a strong economic moat to stop
rivals from stepping on its turf.
A Look at the Charts
Tai Sin was a remarkable performer in 2016, returning more than 20%. The stock consolidated into year-end 2016 but
looks like it may resume its uptrend. Key
resistance lies ahead at $0.40, the high
printed in mid-2014. A breach above this level would be extremely bullish for
the stock. On the downside, support comes in at $0.385 and then $0.36, a very strong support level.
Historically, the stock has always traded at about 0.8x to 1.1x price-to-book value.
Current book value stands at $0.379, making it a steal
at $0.36 if the stock falls to that level. However, thin trading
volumes may make it difficult to purchase many shares, and I suspect there are
many others who are waiting to buy in at that level as well.
The Final Word
Stock Ticker:
|
500.SI
|
Dividend Yield:
|
6.03%
|
Last Price:
|
$0.390
|
500-day Beta:
|
0.280
|
P/E:
|
7.34
|
500-day R-Squared:
|
0.55%
|
P/B:
|
1.03
|
Overall, Tai Sin Electric is a compelling company to own for the next
3-5 years, and a solid dividend earner as well. It was one of the unnoticed few that performed strongly in 2016, and
this looks set to continue into 2017.
With patience and a long enough
investment horizon, I suspect this stock
may one day hit $0.60, translating into an
approximate 50% gain before dividends. Barring
any unforeseen circumstances, this stock may be one of the star buys of 2017.
Just my two cents.
