A look at my recent buys (Part 2) - Hock Lian Seng vs UMS

Hock Leng Seng (HLS) vs UMS? Why compare them? How are they related? 
Nothing except that both are listed on Singapore Exchange and I bought them recently in September as dividend counters.  

What do they do?
Hock Lian Seng is a leading civil engineering group that is established for 45 years. It is listed on SGX mainboard in December 2009. At any one period, the group does not have many projects but they have big projects with revenue that is recognized over a few years. Some recent completed projects include Marina Bay Station, Marina Coastal Expressway. On-going projects include CAG airport runway and Maxell Station. Upon listed, they forayed into property development and had developed industry building such as ARK@Gambas and ARK@KB and collaborated to developed the Skywoods condominium. The remaining project that the group is doing now is Shine@Tuas South. The other segment is investment properties which contributed negligibly in the latest financial year.

As seen from the segment value, the group seems to have gone a full circle with tapering civil engineering projects to an increase in it after a few years in experimenting properties development and investment. Going forward, it seems that they will be focusing on civil engineering business.

UMS is a is a one-stop strategic integration partner providing equipment manufacturing and engineering services to Original Equipment Manufacturers of semiconductors and related products. It is formed with the merger of Norelco Centreline (listed on SESDAQ in 2001 and upgraded to mainboard in 2003) with UMS Semiconductor in 2004. The key change in their product occurred in 2010/2011 when they acquired Integrated Manufacturing Technologies Pte Ltd and Integrated Manufacturing Technologies Inc. Since then, their revenue is mainly from Applied Materials.

Recent development, results and price movement
Hock Lian Seng proposed a special dividend of 10 cents in the latest financial year. Wow, a big windfall for investors who have invested in the company before that. Unfortunately, I am not one of them. 20171H performance has been muted as there is no contribution from property development. Revenue from Civil Engineering segment was flat from previous year. The bright spot since the beginning of the year is the record order book which stands at a high of 890 million. Also, it has about 27 cents of cash per share which means I am just paying about 18 cents for its solid order book. Share had drifted to $0.4+ in August/September when I made my purchase. It was moving up over the past week and is now at $0.51.

UMS renewed its integrated system contract with Applied Material for 3 years (and has the option of extending it for another 3 years). It is also attempting to diversify its customer base by subscribing to 51% of the enlarged share capital of Kalf. Recently, it has also gone XB for its 1-for-4 bonus. Its price has dropped from its high of $1.2+ (pre-bonus) in May/June to $0.9 (pre-bonus) when I made my purchase. It has gone ballistic after XB recently and is now at $0.99 (post-bonus).

Dividend and Sustainability?

Year         HLS         UMS
2016 12.5 c 4.8 c (adj)
2015 2.5 c 4.8 c (adj)
2014 4.0 c 4.2 c (adj)
2013 1.8 c 3.8 c (adj)
2012 1.8 c 3.8 c (adj)

As seen from the above table, both companies have been quite consistent in giving out dividends with HLS giving out special dividend periodically and UMS has increased its dividend.

Dividend payout for HLS around mid 30%, while UMS ranges from 70+% to 100+% if based on net profit. Based on free cash flow, UMS is around low 80%. Also, as mentioned earlier, HLS has about 27 cents in cash; while UMS cash holding is around 14 cents.

Based on the above, I am quite confident that both companies will sustain their pay out in the coming year (HLS – 2.5c, UMS – 6c) and this will translate to a yield of about 4.9% for HLS and 6.1% for UMS.

Conclusion
I first purchased both when their price has slid downwards in August/September. I was quite impressed by Hock Leng Seng as it has a strong net profit margin and return of equity. The property development has probably masked the NPM and ROE figures and I have not spent time drilling down on its AR. However, if I based it on 2009, 2010 figures when property development has not started NPM is around 10% and ROE is high 20%. Impressive numbers. 

Based on these numbers, order book and cash per share, I have added slightly more this month, bringing my average price to $0.45. I would like to see how things unfold in the coming quarters before deciding if I would accumulate more.

With the contract renewal, there is more certainty of  UMS for at least the next few years. I have not added to UMS since my purchase at an average price of $0.76 (adj) in August, as the price has ran up and I was waiting to see if it would correct to below $0.80 after XB. The run up after XB was totally unexpected. I would be waiting for its Q3 results and the price then before making further decision.

Buy and sell actions in October

Unlike the past 3 months, I have taken relatively less actions in October.

1. Added more iFAST as I felt excited and confident of its future growth after reading through the past annual reports. See previous post on my thoughts about the company. It now occupies 5.4% of my portfolio with my average price at $0.935.

2. Added more Hock Lian Seng after learning more about the company through the past annual reports. With a strong order book and balance sheet, feel confident that it can maintain its 2.5 cents of dividend. That gives me a yield of 5.5% with my average price of $0.454.

3. Added more Frasers Centrepoint Trust after its stellar Q4 performance and price dipped to $2.17 from the recent high of $2.2+. Expect DPU and NAV to continue to grow next year now that AEI of Northpoint is almost completed. Assuming that DPU comes in at 12.2 c, it will provide a yield of 5.6% at $2.17. My average price is now $2.06 which is only slightly above its current NAV of $2.02.

4. Bought ULTA Beauty at USD196.85. Felt that it was way oversold from its recent high of USD300 in June, especially when it is growing at 20% to 25% for this financial year. Its current PE of 25-27 is much lower than its past 5 years average of 38.

5. Bought 800 Super at $1.21. After a closer look at its business, decided that there is still room for growth in the next few years especially with the Waste-to-Energy (WTE) coming into operation at the end of this year.

6. Sold CDLHT at $1.63, making a small gain of 2.7%. DPU after rights is lower and the outlook of the hospitality sector probably need another year or two for greater clarity. So decided to sell and use the proceed for other counters.

7. Sold OUEHT at $0.805, making a gain of 5.8%. Similar reason on hospitality sector. Decided not to wait for quarterly results in the coming week as I have made a small gain and am unsure how the DPU will be affected as there will be no more income support.

A closer look at my recent buys (Part 1) - iFAST

In August and early September, I have initiated positions on iFAST, Hock Lian Seng, UMS and 800 Super (re-entered) after chancing upon their price drop of about 20% from recent high in June. I did a quick scan on their news and did not find any major fundamental change in their business and hence took a bite.

I decided to take a closer look at the them to decide if I should add more to my initial holdings. I will start with iFAST as I am most excited about it after scanning through their latest annual reports.

What do they do?
Listed on SGX on 11 December 2014, iFAST business revolves around internet-based investment products distribution platform with assets-under-administration (AUA) of about 6.1 billions. It has presence in Singapore, Malaysia, Hong Kong and China. Two main business divisions, business-to-business (B2B) and business-to-consumer (B2C) with B2B contributing 75% of revenue in 2016. About 83% of its net revenue is recurring.

Recent development, results and price movement
iFAST has a strong rebound in their 20171H results. Revenue was up by about 20% and net profit up by 75% but this came from a weak 20161H results. The poor results in 2016, a 55% drop in EPS has caused the share price to plunge from $1.35 to $0.85 for that year. The price continued to slide in 2017 till April to reach a low $0.60. The release of its strong results this year has resulted in a strong rebound of its share price, reaching a high of $1.1+ in June.

It has also launched its SGX stockbroking service in June 2017 after being admitted as a Trading Member of Singapore Exchange Securities Trading Limited (“SGX-ST”) and a Clearing Member of The Central Depository (Pte) Limited (“CDP”).

Management
Based on what I read on the annual reports and action taken by the company, I think iFAST Chairman, CEO and co-founder Lim Chung Chun is a forward looking and strong leader who drives the company to put their company values (Integrity, Innovation and Transparency) into action. The following is the final paragraph from 2016 report.

"We are aware that our approach may sometimes cause disruption in the financial sectors that are often dominated by traditional business approaches and mores on how investors should be treated – if it means these disruptive changes we are introducing are pro-client, we will continue to remain steadfast in achieving this outcome in the markets we operate in. When changes are pro-client, we are confident we will succeed in the longer term despite shorter-term challenges."

And I do not think it's just talk. Fundsupermart.com in 2000, FSM Mobile in 2011, Bondsupermart in 2015, and robo-advisor last year are evidences that show that the company is among the first movers.

Crunching the numbers
With the exception of 2016, iFAST has grown both its top and bottom lines, with its EPS growth outpacing its net revenue growth.

Base on the above data, I believe the company should be able to continue to grow its earning at a rate of 20% to 30% for the next few years.

Valuation
Together with the rest of the market, iFAST's price has rebounded quite a bit since the beginning of October and closed at $0.96 on 6 October. Forward PE based on the current price and projected EPS is about 26x. Assuming I am right about its ability to grow at 20% to 30% in the next few years, forward PEG ranges from 1.1 to 1.3. My personal take is that it is fairly priced with potential to surprise on the up side but risk still lingers.

When will I sell?
These four rules still apply.

a. The fundamentals of the company has deteriorate

b. The company is overvalue at the current price

c. To raise cash for a better buying idea

d. To raise cash for other reasons

Conclusion
My first encounter with the company was more than a decade ago when I opened my Fundsupermart account. Did not really use its services as I was on dollardex then. Recently, I wanted to explore its FSMone platform for stock trading and hence decided to register an account. Apparently my record is still in their data base and I need to re-activate my account which I will probably do by the end of the year.

As an investing idea, I came across it somewhere in late 2015 but the PE was crazy then. The sell down due to poor results in 2016 and the recent correction provides me an opportunity to buy a small stake in the company.

I can sense my excitement as I read the development of iFAST over the years and imagine what more can come from them in years to come. Hence, I decided to buy more yesterday at a price of $0.975 (yes, I am not good at market timing). Together with my initial purchases, my average price is $0.93.

I am prepared to add more to this counter at the appropriate junctures.

Why staying in the market works for me

In the recent 9-month report, I mentioned that I eked out a small return for the latest quarter due to a surge in price of Valuetronics and UMS in the last few days of September.

I am once reminded again that being an average retail investor, it works best for me when I just stay in the market, instead of frequent trading in an attempt to catch the low/high prices.

Taking a look at the year-to-date prices of a few of my holdings, one can see that the spike in prices only occur for a short period of time. Most of the time, the prices just fluctuate within a smaller range. If I have missed that few short periods, I would have miss the return.

Valuetronics

Food Empire

Straco

Of course, if I am a full-time expert trader and I monitor the price movement closely, I could still benefit from it. However, I am not and I couldn't possible be looking at the price movement so frequently while working. Even if I am not working, looking at the price at such frequency is not really what I would like to do.

Hence, the best method for me is to just find the correct business to invest in and once vested, stay in the market for as long as possible.

What if there is a market crash? Well, I just have to ride it out. Having a war chest also allows me to take the opportunity to buy more shares of the business that I like.

2017 9M performance

Performance
Another quarter has passed and it's time to take stock of portfolio's performance.

It is a muted performance for the quarter, resulting in a slight increase in NAV compared to 20171H performance. In fact, if not for the strong performance of Valuetronics and UMS over the past few days, this quarter will post a return lower than 20171H.

NAV of portfolio grew from $3.78 (30 Dec 2016) to $5.22 (30 Sep 2017), providing a return of 37.8% for 9 months. Definitely happy as this is well above my stretched target of 12% and also beats benchmark STI ETF which returned about 14% (inclusive of dividend) over the same period. 

The chart below shows the performance of  past 7 quarters.

The muted quarter's performance can be attributed to the following:

• weaker market sentiment for the past quarter, 
• continued sell-down of Raffles Medical Group, 
• correction of Food Empire,
• divestment of  Micro-Mechanics which shot up 20% after I sold, *ouch*
• increase in trading activities as I look for new ideas for the next few years.

Gainers and losers
The following tables show the top gainers and losers for this year thus far. The list should remain pretty much the same by end of the year.

I am glad that 7 out of my 10 core holdings have returned more than 10% thus far this year. Even with the divestment of Best World and Micro-Mechanics, the ratio of 5 out of 8 still looks good.

Looking at the table, it seems that I have a tendency to divest my non-core holding once it has done well. This is something which I wasn't aware of before this post. It will be something that I will take note of in future. Instead of divesting the counter after a strong performance, another option would be for me to spend more effort in understanding the counter and determine the possibility of turing it that into a core holding.

Punting on counters based on minimal information and uncertain business outlook continues to be a game of chance. Fu Yu went 10% up but Oceanus and Innotek went the other way. Not in a hurry to divest Oceanus and Innotek yet as amount put in was minimal, especially for Oceanus. Also, am still feeling positive of a possible turnaround next year or the year after next.

The table also highlighted the strong performance of my three counters in my CPF portfolio which returned 16% thus far. If this continues for the rest of the year, it will be the 9th consecutive year that my CPF portfolio beats STI ETF.

Allocation

Dividend vs Growth
With the divestment of two core holdings and exploration of the US market, the allocation looked quite different from the the first half of the year. Cash stands at a high of 15%. Dividend yield of portfolio based on cost is at a low of 3.4%. 

	Planned	Actual
Dividend	~ 60%	55%
REIT/ Business Trust	<= 30%	25%
Growth	~ 40%	30%
Punt	<=10%	3%
Cash	0%	15%

Singapore vs US

Being new to US market, I decided to allocated at most 15% of my fund to it till end of 2018. Currently, it stands at about 12% with 4% invested and 8% in cash.

Action

For the month of September, I have sold

• Dairy Farm at US$8.03 for a gain of 5.0%.
• Singapore O&G at $0.49 for a gain of 2.1%.
• mm2 Asia at $0.49 for a gain of 1.9%.
• Mapletree GCC Trust at $1.15 for a gain of 4.9%.

I have bought the first 3 in August due to their steep drop. Decided to divest them for a quick profit and re-invest them in other counters which I am more familiar with. As for Mapletree GCC, bought it last month with an incorrect understanding of the location of its HK property. Got lucky with it, so decided to take profit.

On the US Market, I have also sold 

• Cognex at US$114.45 for a gain of 3.4%.
• Mastercard at US$140.23 for a gain of 6.1%.
• Priceline at US$1840.60 resulting in a loss of 5.1%.
• Chipotle at US$307 resulting in a loss of 13.4%. 

Dug into the numbers and checked the PE and growth rate of my US counters. The current PE for the first 3 stocks are all much higher than its historical average and PEG are all above 2. Hence, decided to divest them. As for Chiptole, there is currently too much uncertainty and so decided to stay away from it for the moment.

I have added

• more Straco at $0.87. Continue to like its cash generating business. This article by the "Rock" in NextInsight provides a good reading.
• more Hong Kong Land at US$7.28. Same reason as initial purchase in August. Cheap P/B and good results.
• more 800 Super at $1.085 as it continued to trend lower after its announcement of its Q4 results. Two quarters of weaker performances but it has continued to increase its dividend. Looking for a better performance in 2018.
• more Japan Food at $0.435. Same reason as initial purchase - consistent dividend.
• iFAST at $0.87. Its price has slid from its high after announcing a strong 1H results. While its China business will take some time to break even, its other countries performance is growing very well.
• Hock Lian Seng at $0.445. High visibility due to strong record book. If the company is able to maintain its dividend of 2.5 cents, then the yield is about 5.6%.
• ComfortDelgro at $1.995. Bought a tiny stake as I felt that it is oversold. While Taxi business is under great pressure, rail and bus are still doing well. Due to a sudden turn in its share price, I sold it today at $2.08 for a small gain of 2.8%. 

You can click on July and Aug for my actions taken in those two months.

Core holdings

Core holdings are counters which I am more familiar with. These are counters which I am more confident of and have a more substantial holding (at least 5% of portfolio); hence I am more likely to hold them for a longer period of time.

The current average holding period is about 2.4 years, as compared to 0.5 years for the remaining holding.

Divestment of Best World and Micro-Mechanics and purchase of VICOM has resulted in partial change of core holdings. These 8 (out of 26) holdings make up 53% of my outlay cost.

1. Food Empire (9%) @ $0.46
2. Raffles Medical (8%) @ $1.41
3. Straco (8%) @ $0.85
4. Parkwaylife REIT (6%) @ $2.32
5. Valuetronics (6%) @ $0.54
6. Fraser Centrepoint Trust (6%) @ $2.03
7. VICOM (5%) @ $5.75
8. Starhill Global (5%) @ $0.70

Looking Ahead

For the remaining quarter, I am looking forward to dividend from various REITs, 800 Super, RMG, SingTel, UMS, iFast and Japan Food. 

I am also hopeful of good quarterly result from Food Empire, Straco and Valuetronics which might have a positive impact on their prices. Raffles Medical Group should report another quarter of muted performance.

Barring any unforeseen circumstances, return for the year should be above 35%. With some luck, it might breach the 40% mark.