The Little Gem | Company Analysis: Tai Sin Electric (SGX: 500.SI)

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 10^th 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.