CASA Holdings and Fiamma Holdings

I recently found out I can buy Singapore stocks at IB, so I have been looking at some stocks over there. I used the FT.com stock screener to find some interesting stocks. This post will be about Casa Holdings Ltd (C04.SI).

Casa Holdings’ (company website) activities in Singapore consist of the distribution of electrical and electronic home appliances. It also has a manufacturing subsidiary in China which makes air-conditioning units and dryers machines.

The company currently has a market cap of 39m SGD and Casa has shown solid profitability over the last few years, making 9.47m SGD in 2012 (6.7m excluding a reversal of impairment loss), 6.8m in 2011 and 5.9m in 2010. Annual reports for Casa and other stocks in Singapore can be found on the Singapore Exchange website.

What caught my eye initially were not the earnings or cash flows of Casa, but its balance sheet. Looking at the FT.com data, Casa showed shareholders’ equity of 53m SGD on 09-30-2012, so Casa is trading at about 0.75 times book value. The most striking thing on the balance sheet are the ‘long-term investments’ of 26m SGD. What are those investments? We find the answer in the annual report.

The balance sheet in the annual report shows about 1.4 million SGD consists of an investment in a joint venture. The far more important item however is an investment in an associated company of 24.9m SGD. To find out more about this investment in this company we have to look at the notes to the financial statements.

Note 16 shows that Casa Holdings has a 26.5% equity interest in a Malaysian company called Fiamma Holdings. I thought the story would end right there, but Fiamma Holdings turns out to be a publicly listed company in Malaysia and it files financial reports in English. So this post continues.

Fiamma Holdings

Since a significant part of the assets and earnings of Casa Holdings come from its interest in Fiamma an investor in Casa needs to dig into Fiamma’s financials. Financial reports for Fiamma Holdings (company website) can be found on this page on the Bursa Malaysia website.

Like Casa, Fiamma also distributes products like kitchen appliances and bathroom furnishings, but their activities are located in Malaysia. Unlike Casa, Fiamma has a property development segment. Fiamma has a market cap of 171m Malaysian Ringgit, which should be about 69m SGD if I calculated correctly. Revenues and net income have been steadily increasing. This all looks very good. The cash flow statement show a less positive picture, because working capital requirements have gone up as inventory needs and receivables balances have increased. Some of this is to be expected with a business like this. Sales have grown from around 160m Ringgit in 2008 to 260m Ringgit in 2012. Still, on balance the company has generated a reasonable amount of cash and has distributed some of it to shareholders as dividends.

What I don’t like about Fiamma’s is that it has spent a lot of cash on acquiring land and developing real estate over the years. The 2012 cash flow statement shows property development costs of 8.5m Ringgit and 5.4m in 2011. The balance sheet now shows 52m in property development costs and 74m in land held for property development. Total shareholders’ equity was 261m on 09-30-2012.

The property development activities of Fiamma are much bigger than I am comfortable with in an investment. In 2008 the company issued rights and warrants and the proceeds seem to have been used for acquiring two property development companies. I know very little about real estate and nothing about Malaysian property development. In general I am willing to take real estate for free in an investment, but here it is a significant part of Fiamma’s business. It looks certain that a significant amount of future cash flows will be used to acquire land and develop property.

Also, I saw a big revaluation of real estate in the annual report that I am uncomfortable with. Another thing that is a red flag for me is note 7 of the latest annual report. This shows a list of Fiamma subsidiaries. Three active subsidiaries of Fiamma (of which two are involved with property development: the two companies that were acquired after the rights & warrants issue in 2008) have not been audited by Fiamma’s auditor, KPMG. In my view it should not be that difficult to change the structure of the company to ensure that all activities of the company are covered by one auditor.

Additionally there have been a number of related party transactions. Here is one from July 2012 that includes the sale of property to directors of a subsidiary: http://www.bursamalaysia.com/market/listed-companies/company-announcements/1015389#13594758475751&3161. I can’t judge how questionable a deal like that is, but I don’t like to see these types of deals. In my view even the appearance of a conflict of interest should be avoided and selling real estate to related parties is something I don’t want to see in companies I invest in.

One other thing to mention is that the CEO of Casa – Mr Lim Soo Kong – is on the Board of Directors of Fiamma.

Conclusion

Nate from Oddballstocks.com has talked about killing an investment in some of his posts and it is a way of thinking that I found very useful. Instead of getting excited initially and thinking that a stock looks incredibly cheap, it is far better to start with a negative mindset and think to yourself: ‘this is probably not a good investment for some reason I don’t see yet’. Then go out and try to find that reason. This helps avoid feeling disappointed and feeling committed to your first impressions.

Since a big part of the value of an investment in Casa Holdings comes from Fiamma Holdings an investor needs to make an assessment of Fiamma’s business to determine whether Casa could be a good investment. Personally I am not able to judge the property development side of Fiamma’s business and that kills the investment for me. I have seen enough things in the annual reports of Fiamma that make me want to avoid this stock.

Disclosure: no position in Casa Holdings, no position in Fiamma Holdings