kcchongnz blog
Banging on Eversendai: Risk and Return kcchongnz
When Charlie Munger talks about on the ‘rule of inversion’, he said, “A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage etc.”
So, as an investor, this has been my investing manifesto.…
- Less of how to earn great returns, and more on how to avoid permanent capital loss;
- Less on how to pick the great stocks, and more on how to avoid the dangerous ones;
- Less on things to do for investing success, and more on things to avoid for investing failure.
I have also been emphasizing this manifesto to all my investment course participants with this evergreen moto in investing, again, and again, and again.
If you are interested to know what I mean, with my own personal experience, and published records, you may refer to my recent articles in i3investors in the links below,
http://klse.i3investor.com/blogs/kcchongnz/131801.jsp
http://klse.i3investor.com/blogs/kcchongnz/131584.jsp
http://klse.i3investor.com/blogs/kcchongnz/127935.jsp http://klse.i3investor.com/blogs/kcchongnz/128386.jsp
http://klse.i3investor.com/blogs/kcchongnz/127825.jsp
http://klse.i3investor.com/blogs/kcchongnz/127559.jsp
http://klse.i3investor.com/blogs/kcchongnz/127444.jsp
http://klse.i3investor.com/blogs/kcchongnz/113300.jsp
This stock, Eversendai, is chosen to illustrate how I would look at the risks of investing in a stock, and then weigh the risk against the potential return, to determine if it is worth investing, more for educational purpose. It has no intention to bash any stock. If you own this stock, do not have the feeling that I am against you. Take it positively as there may be something useful for you. If you think otherwise, just ignore my point of view here, and say to yourself, or even comment in the thread that it is a stupid article. No hard feeling.
The “investment thesis” of Eversendai
Eversendai is heavily promoted as a stock to invest/speculate in public forum and magazine for some of the reasons below,
- It is an established company with reputable records in the construction of steel structures
- It has many years of overseas exposure
- It has a huge order book, with RM2.7 billion of jobs on hand, all over the world, especially in the Middle East, India and South-East Asia.
- It has a huge workforce of 15000 personnel.
- It is going to complete all the jobs at hand and on time as promised by the boss
- It has a major investor with deep pocket
I must say all the points above are probably true. However, as a risk-averse investor, before I invest in the stock, I would seek answers to a few simple questions as below,
- What is the industry it is in, and how is the competitive environment?
- What is the expected bottom line, rather than the size of the order book?
- What are the risks?
"Value investing" - is supposed to be about buying based on the present value of assets, rather than conjecture about profit growth in the far-off future. - Howard Marks
Financial performance
Table 1 in the Appendix shows the financial performance of Eversendai in the last 5 years, spanning from the oil and gas boom in the year 2012 to 2014, before the crash of oil price in year 2015.
The revenues over the years were huge in billion Ringgit, no doubt. However, the net profit margins were very low at about 3.5% over the years, even during the years when oil price was high in 2013 and 2014. It made a huge loss of RM274m last year. Its loss was over RM100, even at the operating level, before considering the impairment loss of another more than RM100m.
In the cash flows aspects, it was even more precarious. At the cash flows from operations (CFFO) level, there already huge deficits the last two years, RM53m in 2016, and RM216m in 2015. Free cash flows (FCF), after capital expenses, were negative 4 out of the last 5 years. In the last 4 years, the company bled a whopping total of RM662m in cash.
Interest payment alone amount to an average of about RM30m for the last two years, with no earnings, nor cash flows, just to cover this huge interest payment.
The balance sheets
The poor cash flows of Eversendai over the last 5 years were mainly due to the growing receivables from trade and contract works. Total receivables amount to RM1.7 billion, same as that of revenue. This means Eversendai takes about one full year to collect its dues after worked done.
Are they any disputes on the amount owed by customers, or doubtful claims? Were there counter-claims from the customers? Were the accounting profits real? Will there be impairment losses in the future due to disputable claims in the future?
Inevitable, these are some of the questions which come to our mind.
Total borrowings, as a result, have ballooned from RM254m in 2012 to RM1190 million now as shown in Figure 1 below! Total debts are now 1.4 times its equity, substantially higher than what I consider safe at 0.5 time.
It is no surprise that there will be many cash calls to come for the next few years. So shareholders, prepare for some money to buy rights issues, or convert your “free” warrants to underlying shares.
The assets of Eversendai, at RM1.13 a share, are mainly made up from 60% Receivables, 24% Property, Plant and Equipment, 8% of Inventories, and 7% cash. How much of each is recoverable in case of bankruptcy?
A company with bad financial results and balance sheets is not necessary a bad investment. It depends on the price to pay.
Is Eversendai a good investment?
To answer this question, we have to do some simple valuations, at least.
Simple market valuations
We can’t value Eversendai based on its annual results from 2016 as it incurred a huge loss of 36 sen a share. Let us use its last two quarters results to try to project its annual earnings for 2017. I would think this would be an optimistic scenario.
Latest two quarters results ended 30th June 2017
Its latest financial results show a turnover of RM466m for the last 2 quarters, with a net profit of RM22.8m. For simplicity, we annualized the net profit to RM45m for the year.
Eversendai utilizes huge total assets of RM3 billion, and equity of RM873m to earn a net profit of just RM45m, or a return of assets and equity of just 1.5% and 5% respectively. The 2 quarters sucked another RM70m of cash with a negative RM34 in CFFO and capex of RM36m.
Is that good?
With earnings per share, EPS of 5.3 sen and at the close of RM1.03 today on 12th September 2017, the PE ratio is 19.3.
Is that price reasonable, especially with that kind of performance?
Conclusions
Construction industry is filled with many problems and uncertainties. It is a dog-eat-dog world. Contractors win jobs by competitive pricing. There are many reasons which can delay the construction works and causes cost overrun, almost for all construction projects. There are also a lot of contract disputes, payment problems, which often, contractors are the one who suffer most.
That doesn’t mean contractors cannot make money. There are some niche players in different fields in the construction industry. Those with special skills, good contacts, and have good balance sheet had done well as shown in their records, and they will continue to do well.
Meanwhile, most of them struggle, and many will disappear once a financial crisis strikes.
Hence, be smart, take care of the downside first, and let the upside takes care of itself.
But how do you know what to look for when someone touted you with a sure-win stock, whether it is plausible or something you must avoid for your financial wellbeing?
I have been providing a service which I am proud of as shown in the links above.
You may write to me at the email address below if you wish to build your long-term wealth safely, slower but surely,
ckc14invest@gmail.com
K C Chong (12th September 2017)
Appendix
Table 1: Financial performance of Eversendai
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| Chart | Stock Name | Last | Change | Volume |
|---|
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Discussions
10 people like this. Showing 26 of 26 comments
Like all red chips, I just want to bring home one point. i.e. I don't trust the owner. Regardless what other people want to say, I always remind myself if I don't trust the Director, I will stay away from that counter.
Remember what analysts told you about Linear Corp when it announced to the whole world it got Dinding District Cooling Tower project worth RM 1000 million (1 Billion)?
Remember Masterskill? What happened now?
There are many many similar example.
If Directors not credible, your hard-earned money will go down the drain.
To invest in any counter, first and foremost look at who are the owners/ Directors.
Certain characters you should by all means......AVOID.
There are thousand and one other counters to look at..............
2017-09-12 21:06
KYY bought into Eversendai at prices below 50 sen. The share price rose as he bought into this company.
Eversendai is facing a challenging time. I think its costs of doing business in the Middle East has gone up when the Saudi impose various difficulties on Qatar.
2017-09-12 21:19
The receivables are largely related to USD. With the strengthening of RM, we may see the 3Q results being dragged by forex loss
2017-09-12 21:47
Uncle Fong also buy..., but some taught n homework time now., still got many to choose..., no worry do not choose a tree over the forest.. ok
2017-09-12 22:35
Wow, Low margin & yet extraordinary long payment term, very scary.
The poor cash flows of Eversendai over the last 5 years were mainly due to the growing receivables from trade and contract works. Total receivables amount to RM1.7 billion, same as that of revenue. This means Eversendai takes about one full year to collect its dues after worked done.
2017-09-12 23:03
As I wrote earlier under Sendai's thread, Sendai's fair value is RM0.30.
2017-09-12 23:41
Phew lucky no have this one - looks same same like General Lee's KNN- huge orderbook,High rev but low profit sometimes even loss coz low margins or no margins LOL, high receivables - good luck in collecting them especially taking a year doing so, skyrocketing borrowings,high loan servicing interest oso beh tahan somemore no CF OMG like identical twins this Sendai n KNN, right issues n free warrants ah ask General Lee - he is expert - maybe can ask him HOW to oso do the split 1 to 4 then do back the reverse,can oso ask takeover plans- sure guarantee kaput wan of course but initially will get all excited n goreng goreng LOL
2017-09-13 02:17
For similar market cap, why not consider Gadang? Net cash, paying dividend and net profit higher than Eversendai
2017-09-13 08:54
i am tire of managing downside, in bull market margin of safety seems useless, high continue to go higher. stock with margin of safety continue to stay as it is or even lower.
2017-09-13 14:20
Posted by limhh > Sep 13, 2017 02:20 PM | Report Abuse
i am tire of managing downside, in bull market margin of safety seems useless, high continue to go higher. stock with margin of safety continue to stay as it is or even lower.
Then buy Sendai.
• It is an established company with reputable records in the construction of steel structures
• It has many years of overseas exposure
• It has a huge order book, with RM2.7 billion of jobs on hand, all over the world, especially in the Middle East, India and South-East Asia.
• It has a huge workforce of 15000 personnel.
• It is going to complete all the jobs at hand and on time as promised by the boss
• It has a major investor with deep pocket
The bigger fool theory does work once in a while.
2017-09-13 14:30
manutdchampion has left a new comment on your post "Banging on Eversendai: Risk and Return kcchongnz":
still can hold sendai?my average price is 1.150 thanks.
It is a tough question as I have no idea what the share price will be tomorrow, in the next month, or the next year.
However, I think I have given you some analysis in this thread for you to make an informed decision
Good luck. You need it.
2017-09-13 18:19
Posted by 3iii > Sep 12, 2017 09:19 PM | Report Abuse
KYY bought into Eversendai at prices below 50 sen. The share price rose as he bought into this company.
Eversendai is facing a challenging time. I think its costs of doing business in the Middle East has gone up when the Saudi impose various difficulties on Qatar.
For an illiquid stock like Sendai, it doesn’t need a lot of capital to jack its share price up from 50 sen to RM1.70+, especially with concerted effort from other major shareholders. People who follow would have made a lot of money. That is provided they bought them before it was promoted relentlessly in public forums, and even in magazines.
Hence share price movement often has nothing to do with its value, especially in the short term, during which the stock market is a voting machine.
In the long-term, the stock market is a weighing machine.
2017-09-14 00:24
Posted by Stock Kingdom > Sep 12, 2017 11:03 PM | Report Abuse
Wow, Low margin & yet extraordinary long payment term, very scary.
In construction works, payment usually takes about 3 months after work done. It involves submission of claims, certifications by consultants, issue of payment certificate by the architect, follow by payment by client.
If the receivables are so high for every quarter like that of Sendai, most probably there are problems such as below,
1) Client has no money to pay
2) 2) There are disputes in claims
3) Work delay and hence
4) Defective works and hence
5) Counter claim by clients
6) Arbitrations or long-drawn cour case
None of the above is favourable to the contractor.
2017-09-14 11:31
One logical & rational explaination of placement is good for u, is when u had bought alot of the share at Rm 0.60, and the stock is being place out at above rm 0.90 loh...!!
2017-09-14 11:41
Posted by sense maker > Sep 12, 2017 11:41 PM | Report Abuse
As I wrote earlier under Sendai's thread, Sendai's fair value is RM0.30.
Anything about corporate finance and investing which comes out from sense maker is worth two thoughts.
2017-09-14 12:57
Hi kcchongnz, thanks for the useful sharing.
May I know how do you calculate FCF from the cash flow statement?
The only thing I know is
Free cash flow = cash flow from operating activities - net capital expenditures
From the "SECOND QUARTER ENDED 30 JUNE 2017" quarterly report, under cash flow statement page, I can see
"Net cash flows (used in)/generated from operating activities" is -33,796,000.
May I know how do you find out "net capital expenditures"?
Thank you.
2017-09-29 01:26
Posted by Yan Cheng Cheok > Sep 29, 2017 01:26 AM | Report Abuse
Hi kcchongnz, thanks for the useful sharing.
May I know how do you calculate FCF from the cash flow statement?
The only thing I know is
Free cash flow = cash flow from operating activities - net capital expenditures
From the "SECOND QUARTER ENDED 30 JUNE 2017" quarterly report, under cash flow statement page, I can see
"Net cash flows (used in)/generated from operating activities" is -33,796,000.
May I know how do you find out "net capital expenditures"?
Thank you.
Net capex = purchase of PPE less of proceeds from disposal of PPE
2017-09-29 08:20
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And why does Sendai has such huge receivables and debt? Maybe the explanation lies with their Middle East customers. Since crude oil price collapsed, their customers are now pretty cash strapped. Saudi has been running double digit deficits. Where got money to pay? Chances are, they will drag payment as long as possible. Look, if they can't even pay the wages of their own civil servants, where does Sendai rank as an overseas contractor?
2017-09-12 20:13