Wednesday, 27 January 2016

Koyo International (5OC.SI) - Is It Worth The Risk?

Koyo International (Company Website) is listed in the SGX Catalist since 2009 and its principal activities broadly consists of four core segments, namely:

  1. Mechanical and Electrical engineering services
  2. Supply of renewable energy and green products for building services
  3. Property development and construction
  4. Supply of construction materials and ancillary services

The company has been operating since the 1980s. As of 1H2015, it has S$42.2M (VS S$20M Revenue for 2014) worth of contracts on hand with completion dates between 2015 to 2021. I'm not going to talk much here - readers can understand more and judge for themselves in the annual reports or company website.

As mentioned in my previous post, I would prefer to keep my articles brief in the future. I'll keep this analysis simple without delving too much into the specifics. Some basic metrics are as follows:

Price = S$0.061
P/E (ttm) = 7.8x
EV/EBIT = 3.7x (est $6M excess cash VS $14.9M net cash)
P/B (mrq) = 0.66x
ROE (TTM) = 8.4%

The Story

Over the past 1-2 years, for largely unknown reasons, the share price skyrocketed from around S$0.05 all the way to a high of S$0.40. Readers of my blog would have known that I bought into its shares a couple of years back and sold it for a decent profit. More details here.

On 15 Jan 2016, SGX released a statement and urged caution when dealing with Koyo International's share as >30% of the trading was done by the same group buying and selling among themselves.

When the market reopened the next trading day (18 Jan 2016), the share price crashed >80% to about S$0.05 and subsequently recovered to between S$0.055-S$0.065 range.

Summary of Investment Thesis

  1. There's currently no evidence or indications from SGX that the management or insiders themselves are manipulating the share price.
  2. On 18 Jan 2016, the company bought back 6,300,000 shares @ about S$0.099 for a total of $630K. That's about 3.3% of outstanding shares.
  3. On 19 Jan 2016, independent director Serena Lee purchased 800,000 shares and raised her stake from zero to about 0.42% of outstanding.
  4. On 20 Jan 2016, Serena Lee again bought another 700,000 shares, raising her stake from 0.42% to 0.78%. A quick check shows that if Serena does not sell any shares from this point on, she should be one of the top 20 largest shareholders of the company. To my knowledge, Serena did not own any shares of the company since at least 2011.
  5. Current price is one of the lowest since 15 months back and my valuation work shows that the company would be worth at minimum S$0.07 and its intrinsic value should be closer to S$0.10.
  6. Some brokerages have instituted trading restrictions on the company after the "Trade with Caution Alert" by SGX, causing the share price to remain depressed even after crashing significantly.
  7. The company has a relatively long operating history, is in sound financial condition and I can reasonably expect it to continue turning in respectable results in the next 5-10 years.

Key Risks

The 2 main risks I observe were: 1. Accounting issues with financial statements and/or 2. Certain parties are in fact the ones manipulating the share price (its not hard to find out who stands to gain most when the share price of the company is up). If an analyst bought it even at such low prices, any one of these materializing may mean a disastrous investment result. No amount of margin of safety can save an analyst from a fraudulent financial statement and a management that lacks integrity.

So far, there's no indication or evidence of such risks materializing (yet). Also, the share buybacks from the company and an independent director provide some level of comfort.

Conclusion and Some Thoughts

At S$0.40, Koyo International is clearly expensive and a purchase at that point would certainly prove reckless. At the same time, a price of S$0.056 clearly undervalues the company and absent the 2 key risks coming true, a purchase should turn out profitable.

Does being slapped with a "Trade with Caution" alert by SGX warrant a significant sell-down to huge undervaluation territory? It really depends. Security selection requires a skillful balance between the facts of the past and possibilities of the future. The future is uncertain and as investors, we always have to take and manage risk. The risks mentioned above are very real but the fact is that there are currently little evidence that it will happen. An investor always have to deal with probabilities and as of now, my own judgement (I may be dead wrong) tells me that the risk to reward ratio is largely skewed to my advantage.

To be sure, if any of the risks mentioned turn out to be true, it is sensible to sell the stock (even at a loss). Before that, one can only control his/her risk by first understanding them and then diversifying adequately as well as sizing such positions appropriately so that it will not inflict mortal damage to the portfolio as a whole.

Interestingly, this situation bears some resemblance to that of Avi-Tech Electronics which is listed in the SGX Watchlist due to 3 consecutive years of pre-tax losses. The share price got hammered so badly that a purchase (do refer to my write-up here) made just last year would have reaped respectable results and dividends for the aggressive investor.

Let me know what are your thoughts.

Disclosure:
Long Koyo International (5OC.SI)

Note: Disclaimer applies. Not a recommendation to buy or sell.

6 comments:

  1. if you look at the chart on the 15th, some already run road and 2170 lots traded to low of 31 cents 30% dropped. After SGX announcement share went for free fall until 10 cents supported by the company buy back and went further down 5.5 cents. so if nobody is charged soon and the stock slowly recover, it will move up to most 10 cents till the results on the 23 Feb!. If still making money and giving dividend then 10 cents is the support price.

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    1. Hi Elephant,

      Thanks very much for your comment. If you check the company announcements on 10 Feb, Managing Director Mr Foo is being investigated by MAS and CAD for possible offences of the Securities and Future Act.

      Although Mr Foo disputes the allegations and the company informed that the business and operations will continue as usual, the risk of being vested in the shares of the company is of a different scale now. This is one of the 2 key risks that I mentioned in my post. Both risks are somewhat related - if its from the inside, the reliability of financial statements reported may also be in doubt.

      All the best,
      Secretinvestor

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  2. Thumbs up if you are in for the mid-long haul. Short term wise, pls check with the local brokerage such as RHB, Frasers etc to get a better pictures of how much losses they have incurred through the manipulators...expect lawsuits flying soon...

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    1. Hi Fesserie,

      My intention for Koyo is actually to liquidate it for a decent profit in the short-mid haul, very much like Avi-Tech that I wrote about previously. I classify it as an event-driven category of my portfolio.

      As mentioned in my reply to Elephant's comment, the risk for holding the shares of Koyo at this point is of a different nature now that we know managing director Mr Foo is being investigated by MAS and CAD (although there's still no confirmation that Mr Foo was in violation of any related act).

      Although my average price is still above the current price (I also sold some amounts for a decent profit between $0.068-$0.072 last week as well), its probably prudent to relook and reconsider maintaining a vested position in the company.

      Lastly, as mentioned in my article, I think one important part of minimizing overall portfolio risk during the investment process is to size such positions properly and diversify adequately.

      Have a fantastic week ahead!
      Secretinvestors

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    2. Hi

      Do you have any update on Koyo International?

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