Sorry for the lack of posts lately. Finding new stocks to buy has become quite a challenge. Perhaps I will write a few posts about stocks I ended up rejecting if the lack of bargains persists. I did buy one new position this week though: LanTroVision (SGX:Q7W) has joined my basket of cheap Singapore small caps.
LanTroVision (website) specializes in the installation of cabling systems. The company also sells cabling products and provides consulting and maintenance services. In major IT infrastructure projects LanTroVision provides the cabling solutions for their clients. The company mentions that they mainly work for customers in the financial sector:
“The Group’s major customers’ base consists primarily of major financial institutions and multi-national corporations in Singapore, Malaysia and Hong Kong.”
LanTroVision is active in 10 countries mainly in Asia. About 48% of their revenue in fiscal 2013 came from Singapore with Malaysia (13%), Hong-Kong (12%) and China (10%) being the other major markets.
The investment case for LanTroVision is fairly simple. Let’s look at some of the basic facts:
Current stock price: $0.36 SGD
Outstanding shares: 269,741,836
Market cap: $97.1 million SGD
Cash & deposits (09-30-2013): $79m
Total liabilities (09-30-2013): $32m
NCAV (09-30-2013): $98.6 million
NCAV adjusted for dividend payment: $93.2m
Net income year ended 06-30-2013: $9.1m
The company has been able to earn around $9m in fiscal 2011-2013. In fiscal 2009 and 2010 the company felt the effects of the crisis and saw reduced revenues and profits: the company earned $4.2m in 2009 and $3.2m in 2010. More importantly, LanTroVision also generated cash in the last five years. Operating cash flow has been solid and the business has not required large capital expenditures.
At almost 11x earnings LanTroVision doesn’t immediately look like a bargain, but one has to take into account the excess cash that the company has on its balance sheet. Determining how much of their cash can be considered excess is not simple. I think LanTroVision might need some of the cash to be able to bid on certain projects, but I have not been able to find more information about their cash requirements.
Also, until recently, investors had not seen any cash returned to them. Cash balances grew over the years without the company paying a dividend or repurchasing shares. In 2012 the company did issue a special dividend, but this was part of a pretty complicated transaction that also involved a rights issue and a reverse stock split. If I have understood this transaction correctly, the goal of the transaction was to effect the reverse split and to allow investors to purchase additional shares to receive round lots (1000 shares). In any case, this transaction did not result in a net return of cash to shareholders.
Finally, in October 2013 it was decided that a $0.02 dividend per share would be paid to shareholders. This dividend has since been paid, so keep this in mind when looking at the latest financials. If we adjust for the dividend, NCAV would be $93.2m. To get the current NCAV you need to add an estimate for the earnings that have been generated since Sept. 30, 2013. All in all, the stock should be trading pretty close to NCAV currently.
There is another indication that management might be ready to return more cash to shareholders. In an extraordinary general meeting held on Dec. 2, 2013 the company received approval for a share repurchase. A maximum of 10% of the outstanding shares can now be repurchased. While this does not mean that management will actually repurchase shares, I do think it is a positive sign here, because the company has not asked for permission to repurchase shares in prior years. Many companies regularly ask shareholders permission to repurchase, but never actually repurchase. LanTroVision has not displayed this habit of asking and then not acting.
Management and directors owned around 37% of the outstanding shares as of June 30, 2013. There have also been some fairly recent insider buys by a director (Yeo Jiew Yew).
If LanTroVision has now reached the cash levels where management is willing to return cash to shareholders, I think the company should receive a little more credit for this than the market is currently giving it.
LanTroVision is certainly not a fantastic bargain at these prices. The company is a good example of the type of opportunities I can still find today and where the upside is probably modest. The downside looks well protected though, with the stock trading at a slight discount to book value and a business that has remained profitable during a few leaner years.
Update: LanTroVision released their results for the quarter ended Dec. 31, 2013 last night, shortly after I published this post. I didn’t realize they were that close to reporting. The results look very good. Revenue is up 27% in the second fiscal quarter and net income is $5.5m, up 72% from last year. NCAV is now $99.0m and cash & deposits stand at $79.8m, this is after the payment of $5.4m in dividends in the quarter. My guess is that the market will probably like the results as well.
Disclosure: long LanTroVision