Market Strategy - RHB Invest 2016-02-03: Finding Diamonds In The Rough (Part 2)

Market Strategy - RHB Invest 2016-02-03: Finding Diamonds In The Rough ISOTEAM LTD 5WF.SI  SHENG SIONG GROUP LTD OV8.SI  SINGAPORE SHIPPING CORP LTD S19.SI 

Finding Diamonds In The Rough (Part 2)

ISOTeam (ISO SP, BUY, TP: SGD0.82) 

  • ISOTeam is a market leader in the repairs & redecoration (R&R) and addition & alteration (A&A) segments in Singapore’s public sector projects industry. 
  • The R&R business boasts defensive, recurrent qualities while the A&A division complements the former, with both riding on government initiatives. 

Strong net PAT growth with a net cash position. 

  • Since 2014, ISOTeam has managed to deliver strong net PAT growth of 187% and 33.5% for FY14 and FY15 respectively. 
  • Coupled with its net cash position and highly maintainable gross margins of above 20% – this was due to good cost controls over the past 10-15 years since its founding – this has enabled the ROEs to be at attractive levels of more than 15%. 
  • Going forward, with a steady orderbook of about SGD80-85m, we expect ISOTeam to deliver another 24.7% net PAT growth in FY16 as well. 

No direct peers in Singapore. 

  • The company has no direct peers in Singapore. ISOTeam – which is in a net cash position and has over 80% of revenue from the Government and its related bodies – is just trading at 7x FY16F P/E. 
  • In addition, its cash flow has also been very healthy since listing, generating SGD9m of free cash in FY14 and SGD19m in FY15. 
  • Our DCF valuation derives a TP of SGD 0.82. 

Reasonable corporate governance. 

  • ISOTeam has three independent directors in a 6- person board with a simple corporate structure. It has not changed auditors over the past 10 years and was listed in 2013. 
  • Since its listing, management has displayed transparency and proactiveness in dealing with investors and analysts. 
  • ISOTeam has also engaged an investor relations firm to help liaise with the investment committee. 

Sheng Siong (SSG SP, BUY, TP: SGD1.05) 

  • Sheng Siong is a supermarket operator. The company employs an asset-light business model, renting most of its retail store space on long-term leases. It also does not require substantial capital investments. This is further enhanced by the cash-generative nature of its business and the positive working capital cycle. 
  • Management has a strong track record of being operationally efficient, and Sheng Siong enjoys one of the highest gross margins for a supermarket operator in this region. 
  • Considering the company has no financial leverage, its ROEs are even more impressive. 

Higher operating margins. 

  • Sheng Siong has been experiencing higher operating margins since 2013. This was on the back of both higher gross margins as well as more efficient operating costs. 
  • We believe operating margins are most relevant for this industry because they measure the profitability of a business without being distorted by non-cash gains/losses and financial leverages. 
  • Going forward, we expect its operating margins to improve further through: 
    1. more direct buying, 
    2. a higher proportion of fresh food sales that provides better gross margins, and 
    3. incremental improvements of backend operations and distribution. 

Trading at lower multiples against peers. 

  • We use grocery retailers operating in ASEAN as its peer comparison. Using this, Sheng Siong is trading at a lower multiple than average. We believe this is mainly because the company operates in a single mature market, Singapore, which is perceived to have limited opportunities for growth. 
  • While market potential is lower, we believe Sheng Siong’s business is much more resilient and medium- to longer-term growth may still surprise on the upside. This is due to the structural shift to supermarkets from wet markets previously. 
  • Amongst peers, Sheng Siong also has one of the highest dividend yields. 

Strong corporate governance. 

  • We believe the company has strong corporate governance despite being a family-dominated business. 
  • Since its listing in 2011, management has displayed transparency and proactiveness in dealing with investors and analysts. 
  • Chairman Mr Lim Hock Eng has been in his role for more than five years since the listing. Together, the Lim family owns more than 70% of the company. 
  • Out of the eight board members, four are non-executive directors that are external – and this includes three independent directors. 
  • With a simple operating structure consisting of a single-market/single-business, there is also less room to confuse auditors and investors. 

Singapore Shipping Corp (SSC) (SSCL SP, BUY, TP: SGD0.67) 

  • SSC is the only listed “pure play” car truck carrier (PCTC) company in the world, and is a rare gem that offers both safety and growth in the highly-cyclical shipping sector. 
  • Operating in the extremely oligopolistic PCTC sector, the company has carved a profitable niche by: 
    1. securing a decades-long profit visibility through its long-term charters to blue chip clients, and 
    2. enjoys quality growth with its fleet expansion plans. 
  • Minimum earnings risk justifies high gearing in order for good ROEs. 
  • SSC’s ultrasafe ship-owning business model – with its decades-long charter contracts with century-old blue chips at fixed contract terms – ensures minimum earnings variability going forward. 
  • As such, Japanese banks allow the company to gear up (net gearing of around 150% as at FY15) at favourable fixed interest rates (around 2%) in order to expand and get better return for investors (FY16F ROEs of around 21%). 

Superior to its peers with a forward P/E of 5.5x. 

  • If we were to compare SSC to its SGX-listed shipping peers – who are largely unprofitable at the moment – the company operates in a more favourable niche space with higher barriers of entry, ie PCTC vs container ship/dry bulk/etc. PCTC is a niche industrial shipping sector that requires a high degree of specialisation and where oversupply is a far less serious issue. 
  • Going forward, demand and supply is expected to grow at the same rate. 
  • Currently, SSC trades at a significantly higher ROE to its peers. 

Shrewd management that keeps minority shareholders in heart. 

  • SSC is known by the market to have one of the best management teams in Singapore market for keeping minority shareholders close to its heart. 
  • Since the company was first listed in 2000, SSC has dished out more than SGD200m worth of dividends and has never raised equity. 
  • Executive chairman, Mr CK Ow – who owns an around 37% stake in the company – showed uncanny timing in the disposal of SSC’s vessels before the downturn. 
  • Subsequently, the company distributed capital back to shareholders as special dividends back in 2008.

Ong Kian Lin RHB Invest | http://www.rhbinvest.com.sg/ 2016-02-03
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.82 Same 0.82
BUY Maintain BUY 1.05 Same 1.05
BUY Maintain BUY 0.67 Same 0.67