SGI Update

I finally read SGI’s 2012 financial statements and the figures are as expected. No surprises but below are the details that might interest you.

SGI’s High Inventory Turnover Rate

An inventory turnover of 6x suggests that SGI replenishes their inventory 6x within the year.

 

myHouse Brand’s Aggressive Sales Growth

One of the catalysts mentioned in my buying of SGI is the possible robust sales of their modular houses under the myHouse brand. myHouse sales jumped from 13 million in 2011 to 39 million in 2012 or an increase of 200%. As good as it sounds, myHouse’s contribution to SGI’s total sales is still negligible. A hint on the demand of the myHouse brand is the 31 million advances that are paid by customers for the product. The P31 million advances were computed as follows:

The 31 million is a sure sale for SGI this 2013. Again the amount is negligible but assuming that SGI will boost their marketing campaign for the product, myHouse has a high probability of driving SGI’s revenue growth in the future.

 

Presentation of the Financial Statements of Guangxi Fil-Dragon Real Estate Development Limited

The presentation of the Guangxi Fil-Dragon financial statements enlightened me on SGI’s source of real estate revenues. It appears that the only contributing real estate project of SGI is their joint venture (JV) with Samsung Corporation for the development and sale of industrial estates. However, there were no details regarding the JV with Samsung in SGI’s financial statements or PSE disclosures.

That said SGI’s P850 million customer’s deposit will eventually be recognized as revenues as soon as their Golden Hill project in Nanning, China will begin construction.

Also worth noting is Guangxi Fil-Dragon’s low debt levels. I expect SGI to acquire more debt this 2013 to fund the Golden Hill project and take advantage of the strong real estate industry in China.

Missing out and Guide to buying Illiquid stocks

I was back from my seven-day vacation last tuesday and just finished updating myself today on what had happened in that past seven days that I was out in the market. I will resume posting next week, monday.

For the mean time, enjoy reading Jae Jun’s posts in http://www.oldschoolvalue.com especially the links that I presented below.

I highly recommend that you follow his blog.

 

Missing Out

In investing, I suggest that you remain emotionless and Jae Jun say it best:

http://www.oldschoolvalue.com/blog/investing-perspective/making-money-market/

 

Buying Illiquid Stocks

Undervalued stocks that I am interested in are often illiquid (thinly traded/ few buyers and sellers) especially ROX but I just can’t ignore a stock trading at substantially below their book value (less than 50%) and trading at PE ratio of less than 10x.

Jae Jun presented a strategy on how to accumulate illiquid stocks:

http://www.oldschoolvalue.com/blog/investing-strategy/buying-illiquid-stocks/

 

 

 

Update on ALCO

I posted last January about ALCO, the thesis was simple, given the capable management of ALCO the sale of the Company’s wholly owned subsidiary will add value to shareholders through lower finance costs and increase in cash balance.

I presented two assumptions regarding the sale of Irmo, Inc., ALCO’s wholly owned subsidiary:

With the disclosure of ALCO’s annual report, it appears that assumption #1 is the closest to actual:

The transaction above made significant improvement on ALCO’s finance costs and balance sheet:

What came to me as a surprise?

Sudden decline of ALCO’s gross profit margin:

Tentatively, the declining gross profit margin hints that the Company is facing a tough competition under the luxury property development industry that they tend to sacrifice gross margin to meet sales target. However, what hold me back from that conclusion is that the decline occurred only in the fourth quarter and not throughout the year.

Looking forward for their first quarter report.

 

 

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Disclosure: See Portfolio page for my holdings.

Stock thoughts: VMC, APC, TA

VMC

Prepays debt:

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3262_VMC.pdf

More on VMC:

http://fundamentalenthusiast.wordpress.com/2013/01/17/victorias-milling-company-inc-pse-vmc/

 

APC

Sy group to consolidate power assets to APC:

http://www.philstar.com/business/2013/04/22/933301/sy-group-consolidate-energy-units-one-firm

But the Company (as usual) claim to have no knowledge about it:

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3268_APC.pdf

To those who are interested in the company:

http://fundamentalenthusiast.wordpress.com/2013/04/22/profiling-apc-group-inc-pse-apc/

 

TA

Phinma President and Vice-Chairman prepares for the property dividend of petroleum subsidiary:

http://www.philstar.com/business/2013/04/22/933311/ta-oil-finalizes-pepc-listing

The catch is its only for SC 55.

My complete rationale of buying TA:

http://fundamentalenthusiast.wordpress.com/2013/04/22/trans-asia-purchase-rationale/

Trans-Asia Purchase Rationale

The thesis of buying TA was mainly the likelihood of TA’s petroleum subsidiary to be distributed as Property Dividend and with the recent statements of Phinma President and vice-chairman Ramon R. del Rosario,^[1] that likelihood becomes highly probable. The first question that will come in mind is how much is Palawan 55 Exploration & Production Corp. (PEPC) worth?

The comparable company to PEPC is Philex Petroleum (PXP). That said, we go in detail what are the assets that underlie the mentioned companies.

PXP

PEPC

The most notable advantage of PXP over PEPC is its ownership of 36% in SC 72. However, PXP has no financial capacity to initiate the drilling of the service contract alone thus the 36% interest in SC 72 is actually misleading since this interest will eventually be diluted if a new partner with the financial capacity to perform the drilling of the well will buy-in to the service contract. In the case of PEPC, the partner with the financial capacity is BHP Billiton.

Another disadvantage of PXP’s assets is of course the encumbrance that SC 72 is a disputed area with China.

Despite all that is mentioned about PXP, the market still valued the company at P50 billion. That said, it is then safe to assume to have the following valuation model:

Historically TA declares share right offerings (SRO), assuming that TA will continue the trend, we can conservatively assume that the SRO will dilute TA shares by 50%:

Should the property dividend push through, a shareholder of TA may receive a property dividend which has a value of 0.82, 5.15, and 10.29. In the case of 50% dilution of TA shares, a TA shareholder may receive a property dividend with a value of 0.55, 3.43, and 6.86.

One may argue that it depends on the number of PEPC shares that will be available for property dividend, however, that fact is irrelevant. To illustrate my point:

Based on the illustration above, as long as the assumed value of PEPC remains constants, the value of PEPC for each TA shareholder remains the same regardless of the number of PEPC shares distributed.

At current TA price of P2.55~P2.60 the stock is still undervalued considering that at this price, the value of the property dividends may surpass TA’s current market price.

Weaknesses:

1. Non-occurrence of PEPC property dividend
2. Relative valuation may not be realized by the market.

Sources:

1. Clarification of news article: “TA Oil finalizes PEPC listing”, http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3284_TA.pdf
2. Forum Energy Plc Annual Report 2011, p. 3, http://www.forumenergyplc.com/DocumentLibrary/FOR-16846-AR11-web.pdf
3. Otto Energy Annual Report 2012, p. 10-12, http://www.ottoenergy.com/irm/content/annualreport/AR2012.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Disclosure: See Portfolio page for my holdings.

Profiling: APC Group, Inc. (PSE: APC)

APC Group, Inc. (PSE: APC, the Company) is currently not in an operating stage. The following is APC’s corporate structure:

 

All of the above subsidiaries are in the pre-operating stage. The Company is engaged in geothermal energy exploration (through APEC & PRC-Magma), coal resource exploration, cement manufacturing, and mining.

 

Geothermal Energy Exploration

The Company has a total of three geothermal steam fields under exploration and development namely, Kalinga Apayao Geothermal Project (APEC), Mainit-Sadanga Geothermal Project (PRC-Magma), and Buguias-Tinoc Geothermal Project (PRC-Magma). Among the three, the Company’s interest in Kalinga Apayao is at the most advanced stage.

Kalinga Apayao geothermal project is under development that has a potential to generate 100 MW of new capacity and will approximately cost $300 million. In November 2010, APEC and its partner Guidance Management Corporation (GMC) signed a Farm-out Agreement with Chevron Geothermal Philippines Holdings, Inc. (Chevron) which makes Chevron responsible for the exploration, development and operation of the steam field and power activities. Also, under the agreement APEC and GMC will have the option to take equity position of up to 40% of the geothermal project.

Chevron, a foreign company, intends to convert the service contract to Financial and Technical Service Agreement (FTAA) in order to own the majority stake of the geothermal project.

Drilling of exploratory wells will start by the third quarter of 2014 which will take six months to complete. If the exploratory wells prove to be feasible, construction of the power plant will start and will be expected to operate commercially in late 2017 or early 2018.

Other geothermal projects

Mainit-Sadanga Geothermal Project has a total area of 58,911 ha. in Benguet Province and is estimated to have a potential of 60-100 MW.

Buguias-Tinoc Geothermal Project has a total area of 35,424 ha in Ifugao Province which also has a power potential of 60-100 MW.

Coal Resource Exploration

Aragorn Coal has two Coal Operating Contracts (COCs) located in Isabela (3,000 ha.) and Masbate (2,000 ha.). Masbate was dropped since extraction is not feasible and Isabela was put on hold due to anti-mining sentiment.

Cement Manufacturing

ACC was envisioned to manufacture of 1.5 million tons of cement a year. The Company has two Mineral Production Sharing Agreement (MPSA) issued in 1997 covering 1,000 ha. land containing limestone deposits in the Municipality of Ginalitan in Southern Cebu. An area of approximately 29 ha. has a proven and probable reserves of more than 50 years.

ACC is currently seeking prospective partners for the cement plant.

Mining

APC mining currently has an exploration permit in Alubijid, Misamis Oriental for a potential source of chromite and copper.

Currently, APC Mining is seeking prospective partners to further explore and develop the tenement.

 

Other business developments

On April 17, 2013, the Board of Directors of APC approved the sale of a wholly owned subsidiary, Environmental and General Services, Inc. (EGSI) to Viridi Environment, Inc. ^[1] for P14.5 million. ^[2] EGSI has a net asset of 41.6 million as of December 31, 2012 which suggests that the sale of ESGI is at a loss.

EGSI is engaged in the business of general and janitorial services and cleaning of buildings and other premises.

 

Sources:

1. Board approval of sale of equity interest in Environmental & General Services, Inc. to Viridi Environment, Inc., http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3161_APC.pdf
2. Additional information re: Board approval of sale of equity interest in Environmental & General Services, Inc. to Viridi Environment, Inc., http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3238_APC.pdf

Stock thoughts: VUL

VUL

VUL will serve as a backdoor vehicle for National Bookstore:

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3164_VUL.pdf

This does not surprise me and I do not see it attractive. Anybody would care to point to me the growth potential of a bookstore? Sell more books abroad? Increase the prices? Go to digital like Amazon? Partnership with schools?

I honestly don’t know.