Saturday, 20 January 2018

Update on First Ship Lease Trust (FSL)

A few major developments has happened at FSL Trust. Hence, it is time that a review of FSL's performance and financial strength be done to determine if the trust is still a viable investment.

Recent Developments

The recent sale of 3 ships (FSL Tokyo, FSL Santos & FSL Santos) was a major development. FSL is estimated to receive a cash proceed of 26 mil which will be used to lower their debts to 132 mil. Based on the past three quarters of financial results, the 3 ships have produced for the trust about US$2.2 mil in BBCE. Annualising it, it means FSL was selling an asset that was yielding about 10% in cash yield. The three ships contribute about 6.7% of FSL's revenue.

Given how hard FSL is trying to refinance its current debt facility, I feel it is a compromise FSL has to take. After all, the 3 ships are likely to have only about 9 years in service left before they have to be scrapped.


A major concern for shareholders now is that FSL is in the process of obtaining the renewal for its debt facility. Not all bankers being in favor of a renewal. This has resulted in the refinancing moving on to a scheme of arrangement of stage which involves a court meeting. It remains to be seen if the banks will agree to an eventual renewal of debt facility. In my view, the recent 3 disposals of ships is likely to make renewal of the debt facility easier to achieve.

Evaluation of FSL

It is important to see how much is FSL worth now in the current Tanker climate. In this part, I will be evaluating on an asset based level and on a cash flow.

Asset basis

KGI securitites did an estimation of the second hand market value of FSL's assets by a ship by ship breakdown, Based on the past three transactions, KGI's valuation of the ship has been below the price which FSL has sold. This means KGI's estimation are conservative and perhaps is a good benchmark to evaluate. 

Based on KGI's, the remaining ships are deemed to be worth US$199 million. Netting off FSL's debt of US$132 million, interest accumulation of US$5 million and estimated disposal fee of US$6 million, shareholders are likely to get back US$56 million for the ships. And with US$16 million in cash holdings, the current value of FSL is US $72 million or 14.9 cents per share.

Cashflow basis

From the past 3 quarters of financial results, FSL has generated US$32.6mil in BBCE revenue. BBCE is the revenue that goes to FSL after netting off all relevant cost. Taking into consideration the loss of US $2.2 mil BBCE from the disposal of 3 ships and a 10% discount on future BBCE revenue due to ageing ships etc, FSL's BBCE generation ability is US$37 million per year until 2021.

After 2021, the lucrative US$20mil in BBCE from the Yangming contracts will expire and this means, the 3 containerships' BBCE revenue is likely to be about US $4mil per year. Hence from 2021 and possibly to 2026, BBCE for FSL is US$21 million per year.

At a debt level of US$132 mil and constant repayment of US$44 mil per year based on existing cash holdings and BBCE generation until 2021, it will take FSL until 2022 to repay all debts. From 2022 to 2026, the cashflow generated as well as the scrap value of the ships will be for shareholders. Based on current scrap metal prices, the ships are worth about US$65 million. This means shareholders will receive a total cashflow of about US$170 million, or about 26 cents per share.

Discounting it to present value at a 10% discount rate, the current value of FSL is coincidentally about US $72million or 14.9 cents per share.

Monday, 1 January 2018

World Precision Machinery - Undervalued Gem or another "S-cheat"?

Shareholders of World Precision Machinery (WPM) have suffered a torrid time owning this company. Since 2013, shares of WPM have tumbled from a price of $0.40 to $0.196. That’s a decline of 51% (before accounting for dividends).
What it does
In one sentence: WPM makes metal stamping machines for hundreds of customers in China ranging from automotive plants to household appliances brands. Stamping machines are machines which bends/folds/presses metal sheets into the desired form required by the user. There are two types of machines manufactured by WPM – i) Conventional stamping machines and ii) High end stamping machines.
Decline of business
So what contributed to WPM’s decline in share price? Well the answer is because of a deterioration in orders for its stamping machines. While China is “growing”, it seems the manufacturing side of China is in contraction mode. Many stamping plants including WPM have experienced a decline in orders for their stamping machines.

From its Annual Report 2016, we can see that demand for WPM conventional machines are declining, fortunately, its high end machines demand has been fairly constant. Table 1 and 2 are extracts of WPM's revenue and the demand for its conventional and high end stamping machines.
Table 1: World Precision Revenue/Profits and Conventional Machine Demand

Table 2: World Precision High End Machines Order and Dividend payout
Based on its AR16, we can see that the fall in WPM's revenue and profits is due to the a decline in demand for its conventional stamping machines.
Has the decline stopped?
This is a question which I posed. Based on WPM’s revenue and profit for the first 9 months of FY17, WPM’s revenue has grown by 16% as compared against the same period while it net profits has grown by 13.8%. It signals that the decline in profitability for WPM has stopped and perhaps one can start valuing WPM based on its current financial results.
I do not think WPM will continue to experience a drop in demand for its conventional stamping machines.
Strengthening Balance Sheet
One thing which attracted me to WPM is how the company has reduced its debts even during tough times. From a FY13 debt level of RMB 300mil, the company has reduced its debts to only RMB 38 million. The company’s cash level has reduced by about RMB 30 mil during this time (35mil to 5mil).
This was largely due to the cash flow generating ability of the company:
Operating Cash flow (RMB)
Investing (RMB)
Free Cash Flow
273.6 mil
(125 mil)
148.6 mil
210 mil
162.8 mil
194 mil
(56 mil)
138 mil
150.8 mil
(38.6 mil)
112.2 mil

The strong cash generating ability of the company has been used to pare down debts and as dividends r shareholders.
Current results
As of now, WPM has RMB 38 mil of debts. In the current 9 months, WPM has already generated RMB 124 Mil in CAPEX with a cash outflow of RMB 44mil.
Extrapolating its current 9 month cash flow results, one can expect WPM to generate about RMB 100mil in free cash flow for this financial year. Translated to Singapore dollars, this means WPM’s business is generating about 5.1 Singapore cents per share. With such a strong cash flow generation ability, I am quite optimistic that WPM will be debt free by the end of FY2018.

As of Q3FY17, the net asset value of WPM is 54 Singapore cents; this means it is selling at a rather low book value of 0.36. What is more tantalizing is the cash flow yield one can get now from acquiring this company. At a share price of 0.196, the cash flow yield for owning a share of WPM’s business is 26%.
Liquidity of WPM shares
WPM is a fairly illiquid shares on the company with 87.43% of the shares are held by the major shareholders. This makes purchase of the shares rather difficult. For me, I had to patiently monitor the buy/sell bids of the shares before purchasing it. Fortunately for me, I was able to obtain some at 0.196.
While it is an S-chip, what surprised me was the amount of dividends WPM has been returning to shareholders. From Table 2, it can be seen that WPM has been constantly giving out dividends on shareholders since 2010. FY16 was the anomaly where dividends were stopped. Since it's listing in 2006, WPM has returned more dividends than the cash amount it raised during its IPO. This is a good sign for a Chinese Listed Company.

Given the cash generating ability of the company and low debt, I believe WPM will resume its dividends soon.
Is it an S-Cheat?
This to me is another issue. Being a Chinese company and the terrible reputation Chinese listed entities have here, one does not know if its financial accounts are real. However, given that the modus operandi of "S-cheats" is to raise money on the SGX and run away with the money, it does not make much sense that WPM has paid more dividends than it had raised nor the large shareholdings of its owners unlike the other frauds whose owners had a less than 50% stake.

In my opinion, it may be worth staking a small percentage of your portfolio; Sometimes you have to take a leap of faith first, the trust part comes later.

<The author is vested in World Precision Machinery>