(10-03-2012, 05:51 PM)RBM Wrote: [ -> ]Positives
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+ve 1. Impressive, constantly improving track-record of bottom-line growth. For example, Techcomp's revenues have grown year-on-year every year for the last ten years. If correction is made for the costs of the second listing in Hong Kong and a divestment in FY 2010, actually FY 2011 would be Techcomp's record year for profit.
+ve 2. Compared to its peer companies (manufacturers of scientific and laboratory analystical instruments), Techcomp is trading on by far the lowest P/E ratio. I am using US companies such as Agilent, Mocon & Life Technologies when making this comparison - correcting for the HKEX listing costs, Techcomp's P/E, based on FY 2011 results is ~ 7.0, whereas its competitors have P/E's in the teens and twenties.
+ve 3. For holders of the Singapore shares - the potential for the Singapore share price to catch-up with the Hong Kong share price. I suppose it could be argued that for holders of the Hong Kong shares there is a risk that the HKEX Techcomp share price descends to the SGX Techcomp share price.
Negatives
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-ve 1. I am not convinced by the success of Techcomp's European acquisitions - both the track record so far and the future prospects from these purchases are concerns. And Techcomp's leadership keeps talking of more acquisitions. I would prefer that they focus on the growth markets of Asia Pacific and demonstrate that they can deliver on promises made at the time of acquisition.
-ve 2. The old chestnut of receivables - these are getting higher. Yes Techcomp was not immune to effects of the Japanese Tsunami - which is understandable - but the rising level of receivables associated with Techcomp's China business is a concern.
-ve 3. Gearing is currently in the mid 40's and borrowing seems on the up - with a particular jump upwards over the last year. And management seems comfortable with even higher levels of gearing than this.
Secondly, trying to answer your questions.............. which are in italics.................
Noted that Techcomp incurred dual listing fees for HK, which means that if stripped out, profit would be flattish. Any reasons for the dual listing? Was it just a share migration or to raise more funds?
Answer - When comparing FY 2011 with FY 2010 results, we should also factor in a 2010 divestment. FY 2011 was actually a darn good year, in my view, and I don't share the view that profitability was "flattish". The S$ 3.5 Million dual listing exercise was clearly one of share migration. But based on the belief that the Hong Shares would trade on a better multiple. And so far....... Techcomp's BoD has been proven correct! (and me incorrect!!).
What are your views on the business and its prospects? Would be interesting to hear from a shareholder
Techcomp seems to be one of NextInsight's most covered counters - worth reading. But I have tried to summarise how I view Techcomp in my +ve's and -ve's above. The two key reasons I decided to invest in Techcomp was a) my belief that they should be trading on a far higher profitability multiple (viz. competitor P/E ratios) and b) their track-record of year-on-year revenue growth.
Vested
Hi RBM, and thanks for your very detailed analysis broken down into pros and cons.
To address your points:-
Positives
Techcomp has grown revenues year-on-year for the last ten years, but how about bottom line, net margin and ROE? No doubt growing revenue is impressive, but for many companies growing top line is not always a difficult thing; it's more of how you manage the expenses and streamline the operations which would see profits rising and cash inflows increasing. I have not done a detailed analysis for Techcomp so at this stage I cannot comment; but just wondering if you know how their track record is with regards to growing net profit, gross/net margin and ROE (consistent?).
When comparing with peers, you also have to look at the size and scale of the competitors. If Techcomp is, say, a smaller player then it would trade at a discount to the PER of the larger competitors. One can also look at the revenues of the company to determine the market share of the Company with respect to competitors.
Negatives
With regards to acquisitions, I do concur that a Company should not be overly aggressive when it comes to M&A, otherwise it would be labelled as a serial acquiror, with very dim prospects for organically growing its own business. How exactly are their acquisitions faring and are they profitable and contributing to the bottom line? More importantly, did they pay a fair price for these companies? How does the acquisition of these companies gel or integrate with their core business? Any synergies to be expected and how are these being realized over time?
As for receivables, you can try computing days receivables for Techcomp to assess if there is indeed a deterioration in this aspect, and whether the cash conversion cycle has lengthened. Assuming their sales keep rising, there is always a chance that they are selling in advance to customers with more favourable credit terms, and then are slower in collecting the cash. As you said, this may become a serious (cash flow) problem in time to come.
It pays to look at their gearing and how much they are paying for their debt. No doubt debt is cheap now but if they screw up on an acquisition it could become very costly indeed.
And why does the Company need to dual list in HK just to justify "higher valuations"? To me, a good company should be a good company, whether it is trading on SGX or HKEX. In fact, if it is under-valued, all the better because this means shareholders can collect more with a margin of safety.
Oh yes, one last thing - have dividend payments been consistent over the last say 5 years? And what has their payout ratio been?
Thanks! Great to have this discussion.
P.S. - I won't pay too much attention to NextInsight's article, they have companies in their stable which they are promoting (aggressively). Best to look at the annual reports and numbers coming out directly from the Company; or speak to the CEO/CFO in order to ascertain business prospects.