(01-08-2012, 10:21 PM)RBM Wrote: [ -> ]Am I being naive? Am I driving the counter-cyclic thinking a bit too hard? KarlMarx's 1st February 2012 one-liner posting on this thread appears to have come home to roost - at least for now. Would much appreciate forummers views on this.
Hi RBM,
Nice to engage you in a serious discussion on a Company's merits and demerits. I believe that I can comment based on my prior experience with Tat Hong, which is a close competitor of Tiong Woon in all aspects except Heavy Lifting and Haulage.
Looking at the nature of the business itself, I think we all can conclude that it's definitely cyclical and thus is subject to the vagaries of economic cycles and recessions/booms. As to whether Tiong Woon is already at the nadir of the economic slump due to Europe, I really cannot tell. The crisis may drag on many more months without a satisfactory resolution, and global growth could be dragged down as a result as well. The fact that China is slowing down and India just had a massive power failure also do not add much confidence in terms of economic growth- this will all translate into slower spending on infrastructure in general.
Though countries such as Singapore and China have ongoing projects and mega-budgets for construction projects, there is also the possibility of delaying/deferring them or even to downscale them. This would affect Tiong Woon for sure, and the fact that there are also many fragmented players in the industry means low barriers to entry, while customers squeeze them for better margins and slower payment (from a 5-Forces perspective it does not look too good).
Looking to the financials, Tiong Woon reported in its 3Q 2012 results that gross margin had contracted significantly. Gross margin for 3Q 2012 was 18.8% against 23.9% a year ago, which shows that costs remain high while ASP is an issue. 3Q 2012 showed a loss of $373k though 9M 2012 showed a small profit of $872k.
The Balance Sheet has not strengthened much either, with cash decreasing, receivables increasing (in line with sales growth), payables growing substantially while gross debt has not budged much at all. The Company is in a net debt position of about $83m, and Finance costs have risen 57% year on year (9M 2012), which is a drain on profits while margins have all but contracted.
One positive I can note is there was +ve FCF generated for both 3Q 2012 and 9M 2012, but the fact that there was a rights issue to raise $10m does sound a warning bell as to why the Company would resort to asking for money from shareholders to shore up its Balance Sheet.
Looking at the breakdown by divisions, it appears heavy lift and haulage saw a revenue increase but a PAT decrease, while Fabrication and Engineeing saw a large jump in revenues (due to low base effect) but recorded a higher loss. Question: Is the Company focusing resources on the wrong division? They should be focusing more efforts on improving margins for their Heavy Lift instead of generating more revenues for Fabrication while costs remain just as high (if not higher).
Though I acknowledge that TW has paid a consistent dividend over the years, the business looks tough to manage and the fact that it is subject to cycles also makes it riskier (as no one can predict the cycle with accuracy). The discount to NAV is not, in my opinion, a very good reason to purchase any company (an exception would be if the Company has unique assets for which there is very high replacement value); as NAV can be eroded over time by losses and cash burn.
Just my 2-cents.