In my recent article on “The “Big Headed Devil” in EverSendai” in the link below,
I have shown that Sendai met the requirements of some ”Golden Rule”, that it has increasing profit for two consecutive quarters from second quarter 2018 from 1.38 sen to 1.68 sen in third quarter and then to 2.51 sen in the final quarter 2018 and a PE of 5 (<<10). However, there is a “Big headed devil” there as it has very poor cash flows.
Over the last 5 years, Sendai has negative net cash flows from operations totaling RM305m, and negative free cash flows every year, and amounting to a total of outflow of cash of RM777m for the last 5 years. It results a net drawdown about RM666m of loan from banks to fund its operations with total debts increased by about the same magnitude to RM1.25 billion now. Besides, it had sold off some of its investment securities and unit trust funds amounting about RM147m over the years to help to fund its operations. It was a total disaster!
Here we look at another contracting company which has undergone similar faith, but not quite as Sendai, Dayang Enterprise Holding Berhad which dwells in the oil and gas industries.
Dayang also meets the “Golden Rule” requirements with increasing profits for the last two quarters, with profit growing from 4 sen in the second quarter, to 5 sen in the third and 10 sen in the final quarter of 2018 as shown in Table 1 in the Appendix. It is also selling at a PE ratio of less than 10.
Dayang Enterprise Holding Berhad
Owing to the unexpected plunge and prolonged and depressed down cycle in crude oil price from the end of 2014, the performance of Dayang was adversely affected by the tough operating environment in the oil & gas industry with greatly reduced work orders and low vessel utilization. In May 2015, Dayang took over 98% stake of the listed Perdana Petroleum, an offshore supply vessel operator through a Mandatory General Offer (GO) upon amassing more than 33% shares. The takeover consumed RM120m existing fund, plus an additional bank borrowing of RM680m, incurring high gearing and interest expense. That was a timing mistake. Dayang made its maiden loss, a huge loss of RM153m in 2017.
At the peak in 2015, Dayang has total debts of RM1.8 billion, for a high gearing of 1.5 times (>>1), with an interest expense of RM100 million a year. That was twice worse than what was suffered by Sendai at its peak. However, there is a difference, a big difference indeed, in the cash flows.
Dayang reported its final quarter 2018 results in February 2019 and showed a turnaround. For the full financial year ended 31 December 2018, the Group’s revenue of RM938.8m was higher by 35% compared to the last financial year. Operating income galloped to RM293m and net profit attributed to common shareholder for the year is RM164m, or earnings per share (EPS) of 16.6 sen.
Cash flows of Dayang
Since listing, Dayang only suffered a loss in just one year, that was last year in 2017. However, the loss was besides reduced work orders, to a large extent the high depreciation costs, impairment of property plant and equipment, and high unrealized foreign exchange loss during the period. Even then, its cash flows remained healthy, with positive cash flows from operations (CFFO) and free cash flows (FCF) as the losses were mainly non-cash items. Table 2 in the Appendix shows the cash flows of Dayang over the last few years.
Dayang has had positive CFFO all the years. Even after spending for capital expenses, it still has FCF left behind. Over the last 5 years, total cash inflows from operations were RM1.4 billion and FCF of RM1.2 billion. Average FCF a year for the 5 years was RM237m, or 25 sen a share.
Owing to the excellent FCF over the years, Dayang has been gradually reducing its debt burden from the FCFs through the years. As a result, net borrowing of Dayang has reduced steadily from RM1.5 billion in 2015 to RM821 million in 2018. Net gearing ratio has reduced substantially from 1.25 to 0.73 which is below one now. Coupled with good cash flows, there appears to be no issue on the present gearing and its ability to pay debt.
Dayang and Sendai have the same traits as contracting companies with increasing earnings for the last 2 quarters and selling at low PE ratios of less than 10, meeting the “Golden Rule”. They both have the same problem in high debt levels. But that is where the similarity stops. With good cash flows, Dayang is likely to do well in the future if oil price remains good as present. Whereas Sendai with its extremely poor cash flows is likely to get into trouble, deep trouble, even before a financial or economic crisis.
In order to be successful in investing in the stock market, it is pre-requisite to have the knowledge in the language of business, as investing in a stock is akin to investing in part of a business. It is also very useful for everyone to understand personal finance. From the knowledge that I have, the experience that I have acquired through the years in reading, writing and doing investment course and real life investing, I have published a book titled, "Invest like a stock market guru: the complete value investing guide that works!" on personal finance and investing which I believe is very useful for those who wish to build wealth through investing in the stock market. For those who are interested, you may get it from the major bookshops like MPH and Popular, or you may contact me at,
It may end up as your best invetment.
Table 1: Quarterly performance of Dayang
Table 2: Financial performance of Dayang
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