Rock Solid Shares – where are they now?

Markets are down. On one hand I am happy to see the low price of good stocks (which means I can pick up bargains).

Investors Please Smile… Because The Market Has Fallen! (read here)

“I’m always fully invested. It’s a great feeling to be caught with your pants up.” Peter Lynch

On the other hand, the red figures in my portfolio do not make me too happy. Actually come to think of it, my property price also got hit (just that I am not reminded of it everyday).

I tried buying some Colex stocks recently, but again due to the low trading volume, my bids were not processed. Managed to buy some shares of Super Group though.

“It would be wonderful if we could avoid the setbacks with timely exits, but nobody has figured out how to predict them.” Peter Lynch

For me writing a blog allows me to record down my thoughts and to make me think in the process. Occasionally, I am asked questions which I did not think about before.

Normally in my blog posts, I tend to talk about pricing stocks, rather than predicting their course of action next month or next year. Valuing is not the same as predicting. In the short run, the market is a voting machine. In the long run, it’s a weighing machine. Which brings me back to my first paragraph of looking at the price vs looking at the profits / losses.

With the recent correction in the Singapore Market, one wonders what happened to the “Rock Solid Shares” as stated by Motley Fools (not too long ago) in Jan 2015 (read here). The article started off by talking about the expected rise in interest rate and the effects it will have on heavily indebted companies. It mentioned that rising interest rates might eventually cause the share prices of such companies to suffer.

According to Motley Fools, the Great Ones which have impressive returns on equity without use of heavy leverage are:

1. Raffles Medical Group Ltd (SGX: R01),
2. Silverlake Axis Ltd (SGX: 5CP),
3. Kingsmen Creatives Ltd (SGX: 5MZ),
4. Vicom Limited (SGX: V01)

So what happened to the share prices of these companies?

 

The Stock price of Raffles Medical on 2 Jan 2015 is 3.92. On 21 Aug 2015, its stock price is 4.37. This represent a rise of approx. 11.4% (YTD).

 

The Stock price of Silverlake Axis on 2 Jan 2015 is 1.0625. On 21 Aug 2015, its stock price is 0.64. This represent a drop of approx. 60.6% (YTD)!

The company called for trading halt on Friday, 21 Aug 2015.

 

The Stock price of Kingsmen Creative on 2 Jan 2015 is 0.95. On 21 Aug 2015, its stock price is 0.81. This represent a drop of approx. 14.7% (YTD).

 

The Stock price of Vicom on 2 Jan 2015 is 6.26. On 21 Aug 2015, its stock price is 5.9. This represent a drop of approx. 5.8% (YTD).

“We have long felt that the only value of stock forecasters is to make fortune-tellers look good.” Warren Buffett

Except for Raffles Medical, all the other 3 stocks dropped. To be fair, Motley Fools did not predict that the stock prices of these companies will rise within 2015. It basically states that “But regardless of what happens, the quartet, by virtue of their strong balance sheets, would likely not face high financial risks.”

“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” Warren Buffett

Having looked through the prices, perhaps it is time to think about the business & financial performance of these companies during these past 8 months plus. To be frank, I haven’t been tracking all four companies diligently. However, I have bought Vicom shares, written a few posts on Vicom and did a post on Silverlake Axis.

 

1. Raffles Medical Group Ltd (SGX: R01)

With reference to the Motley Fool’s report (read here): In the recent 2nd quarter earning report, profit only managed to creep up by only 2.2% to S$15.95 million from S$15.61 million a year ago primarily due to increased staff costs. Raffles Medical’s earnings per share (EPS) for the reporting quarter had stagnated from the 2.81 Singapore cents seen in the second-quarter of 2014 due to slightly higher share count (due primarily to share option schemes for employee remuneration and the issue of shares in place of cash for dividends).

Nevertheless, the drop in Raffles Medical’s profit margin is attributed to increased staff costs. This spending though, can be seen as for a good cause – Raffles Medical had been busy recruiting more doctors, specialists, nurses, and ancillary staff that’s needed for the Raffles Hospital expansion and new medical centres at Shaw Centre in Orchard Road which started serving its first patients in June 2015. Hence, the increased staff cost and capital expenditure should be seen as a drive towards future expansion, and outlook remains good.

 

2. Silverlake Axis Ltd (SGX: 5CP)

I have previously did a post on this company in 27 July 2015 (read here).

The historical performance of Silverlake Axis is something worth remembering. To quote from Motley Fools:

It is a software outfit that has been thriving in Southeast Asia – over the decade in review, the company has seen its revenue and net income grow at impressive compounded annual rates of 32.4% and 31.2% respectively.

40% of leading SE Asian banks use Silverlake’s software and services.

It has a near perfect financial performance, if one study the history of Silverlake Axis’s Revenue, Gross Profit, Net Profit, ROE, Net Assets Per Share, EPS and Dividend, and seemingly too good to be true profitability and management effectiveness.

In that post, I have calculated that the intrinsic value of Silverlake Axis as 1.03. So given the share price (on 21 Aug 2015) of 0.64, there is approx. 38% margin of safety. GIven the PE ratio of 26.59 (as of 21 Aug 2015), the trailing PEG is 26.59/(4.17+23.76)=0.95 (which is less than 1, and undervalued).

So the recent share price drop has presented an undervalued situation purely looking at the financials.

However, if one has been tracking Silverlake, one would know that the share price of this stock is very volatile. It is not a stock for someone with a weak heart (esp. If u know nothing about the company and its business). Share price actually dropped 30% from April to June 2015 (read here), which could be attributed to a financial blogger’s blogpost, titled “Foreword & Introduction: The Daredevil’s Case Guide to Detect Accounting Fraud in Asia”. In it, there was only a short section on Silverlake Axis, but it did raise questions about the accounting practices of the company in relation to some of its mergers and acquisitions over the past few years.

The share price rebounded in late July only to retreat again in Aug 2015. Again by an article by another blogger. Its stock sank as much as 27 per cent on Friday (Aug 21) (read here).

On 20 Aug 2015, razor99 released a 42-page short-seller report on Value Investors Club and Dropbox that said Silverlake Axis Ltd. engaged in third-party transactions with private companies run by its chairman to inflate its reported results. Razor99 noted that the company’s profitability was the result of significantly higher revenue per employee versus peers. It also said that the company chairman had pocketed more than RM$1.0 billion through stock sales and dividends, while minority shareholders had contributed more than RM$550 million of the company’s net capital.

On 21 Aug 2015, the company requested a halt in trading.

Being a software provider, it is easy to create a business moat, with low capital expenditure.

My only bugbear about this company is that its business of providing IT software and services is beyond my circle of competence. Its high profitability does raise suspicion, and it is aggravated by the razor99 report and my ignorance about the narrative and operation of this company (industry). It is just too ‘exciting’ for my liking.

“Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.” Peter Lynch

 

3. Kingsmen Creatives Ltd (SGX: 5MZ)

From one volatile stock we move on to another, Kingsmen Creative. Share price seems to be in an upward trend until 11 Aug 2015 when prices abruptly dived. It appears that 2nd quarter 2015 results are disappointing (read here). 2Q15 revenue remained flattish YoY at SGD82.9m while PATMI fell 42% to SGD3.1m. The quoted report painted a gloomy outlook: Retail Interiors segment will be heavily weighed down by the slowdown in expansion of high-end retailers in the region.

The near term outlook for the Retail and Corporate Interiors division (which constitute a higher proportion of Kingsmen’s revenue) appears bad. To quote from the report: 2Q15 revenue for the segment dropped 29% as a result of softening demand from high-end luxury retail segment. China and Malaysia constitute ~30% and ~8% of total revenue historically. With the devaluation of CNY and depreciation of MYR, we believe Kingsmen will see more foreign exchange losses in the near term.

The construction industry (like almost every other industry in Singapore) is facing a slowdown. It would take a remarkable resilient company (with exceptional management) to generate a high profit margin. The management has stated that “The Group will continue to monitor and adapt to changes in the market, offering effective solutions to help our clients, while staying relevant to market needs.”

 

3. Vicom Limited (SGX: V01)

Vicom is a company that I have been tracking, since I have invested in its shares. It did a post about this company on 16 March 2015 (read here). In it, I have commented about the shrinking pool of cars that are over three years old in the next few years, slow down in the construction and oil & gas sector that would adversely impact its earnings in the short term. Nevertheless, a vehicle inspection hike (or other forms of rate hike) is possible to counter the drop in earnings but this has not materialize yet.

Not surprisingly, the recent 2nd quarter results of Vicom is anemic (read here and here):

• Profit after taxation increased 4.8% yoy
• Operating Profit increased 4.8% yoy
• Revenue increased 0.1% yoy

The bottom line had benefitted from lower operating costs and higher interest income, rather than growth in revenue (up a mere 0.1% from the same quarter a year ago).

Near term outlook wise, it does not appear bright: “Demand for vehicle testing services is expected to moderate as more vehicles are expected to be deregistered during the year. Demand for non-vehicle testing services is expected to fall as growth in some industries slows.”

In 13 Jan 2015, my calculated intrinsic value for this stock is 5.28 (read here) – though may not be that accurate / up to date now. The current stock price has not fallen below the intrinsic value.

 

In Summary:

These four companies were singled out by Motley Fools in Jan 2015 due to the following:

• Return on equity of at least 15%
• Firm’s good track record since 2007 (gives us clues on how strong the business is since that timeframe is when the great financial crisis occurred.  Impressive returns on equity without use of heavy leverage)

These are the rock solid growth stocks in the Singapore Market in Jan 2015. What will happen in the future is anybody’s guess, but their historical strong financial performance and strong balance sheet remains a fact.

Reading the Business Times today, the news revolve around the following:

1. Looming interest rate hike in the US (which might be delayed again due to market plunges),
2. Oil slides – Brent Oil at US$46.4 a barrel (weaker OPEC members panic)
3. China suffers sharpest contraction in factory activity in 6.5 years
4. Japan warns China against frequent yuan devaluations to prop up economy
5. Silverlake hit by anonymous shortselling report

Macro economic status wise, the news are nothing new. I reckon only the fittest companies will thrive moving forward (even for these rock solid companies). Thinking back, in Jan 2015, can anyone anticipate what would happen to sme of these Great Ones (eg. Silverlake Axis, Kingsmen Creative). The concept of investing is simple, but the implementation of the idea is difficult.

Nevertheless, if one knows the company’s business and operations very well (within his/her circle of competence) and believe in its long term fundamentals, he/she should not be swayed by these short terms volatility and bad news.

“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” Peter Lynch