LanTroVision: finally ready to return cash?

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

Posted in Singapore stocks and tagged .

NeverLoseMoney

Author of ValueInvestingBlog.net. Private investor.

11 Comments

  1. hi there,

    don’t sell yourself so short.. this is an interesting idea. On the excess cash front I would assume the cash is needed for surety bonding when bidding on and working on large (and of course profitable) projects.. if the company is purchased by a larger construction company (or a conglomerate) they could simply use their own balance sheet and distribution the cash to themselves.. so the current price could be interesting to a buyer with this in mind (considering they would be getting the cash back).. that said can I ask how you are going about retrieving information on the company?.. I can only get an annual report from the company’s website. Is there a Singapore SEC.gov online filings equivalent? Please elucidate?

    The only real issue I currently see and need to resolve is why there was so much share dilution between 2012 and 2013.. but still looking through the annual as I write this.

    Thanks, Thomas

    • Hi Thomas,

      Thanks for the comment! Glad you like the idea.

      For financial statements of listed companies in Singapore check the Singapore exchange website at: SGX.com. In the menu, mouse over “Company Disclosure” and select “Annual / Financial Reports”. Then select the company name in the drop-down menu and click “Go”.

      For other announcements I use Company Disclosure -> “Company Announcements” where you can get an overview of quarterly statements, insider filings, etc. for a particular period.

      I think the dilution stems from the rights issue. There was a complicated transaction to effect a reverse split. It is described in more detail in the filings to SGX.com in Sept-Okt 2012. To be honest, I don’t fully understand why they chose to structure it like this.

      Good point about the excess cash. I didn’t really consider the value of the company to a larger company. It’s easy to only see things from the perspective of an individual investor and forget the value a company like this could have for a larger company.

      Paul

      • Hey Paul,

        Thanks for the information. I was able to look at the the all of the docs. Very cool. Still seems interesting.. it’s nice to see insiders buying, as well as their large ownership in the company. Also it was nice to see the older annual reports and see how the company weathered 2008-2012.

        On the reverse split/rights offering.. it was most likely to aid with listing requirements as well as to give interested parties (as well as insiders) the opportunity to purchase interests in the company at bargain basement prices.. you see this a lot with US micro caps and with US distressed investors.. I could be off base with my conclusion here but again this is what I’ve seen in the US

        I have never purchased a Singapore company and really do not know much about the economy/or general stock market levels and regs.. it would to interesting to get a boarder feel of the general market level and general corp governance laws in the country before diving into this.. can I ask how you came across this? What is your interest in Signapore.. is the market as a whole cheap or? Are their graham net net screens or other simply value screen for Singapore that you like? I just think its good to take the temperature of the market you are investing in..

        My only real problem I have with a company like this is.. I don’t really know what the next steps in terms of research on a company like this would be. Have you ever reached out to management? It would interesting to hear what they stay about the rights offering and the large cash balance.

        Best, Thomas

        • Thanks for the explanation about the split and rights offering. This is not a situation I have encountered yet, so it’s useful for me to learn a bit more about this.

          I regularly use the FT.com screener to search for stocks trading at low P/B and P/E ratio’s, low price to cash flow multiples, etc. What happened here was that a few small caps in Singapore popped up. I found out that my broker offered access to Singapore and I then just went through the A-Z listing on SGX.com and looked briefly at every company, using FT.com to get a snapshot of the company (company profile, balance sheet and cash flow statement). This method works well to find very small companies that don’t screen well for some reason. I believe I came across LanTroVision in this way. Initially my broker didn’t offer this particular stock for whatever reason, but the other day I went through my Singapore watchlist again and found out they do offer it now.

          I mainly like Singapore, because:
          – There are a lot of small listed companies.
          – Financial reports are available in English.
          – I have more confidence in their regulators and justice system than in those of other countries in the region, for example China. In Singapore sometimes you’ll see questions being raised by the regulator about a company’s financial reports in a similar way as the SEC in the US. The CEO of another company I own (AP Oil) was actually fined by a court for not making a disclosure to the exchange. In my opinion he did have a good reason, but he certainly made a mistake and he was punished for it.
          – Singapore companies have exposure to other fast growing economies. Since Singapore itself is so small, many companies get a significant part of their revenues from Malaysia, China, Indonesia, etc. So, I think it is a good way to get exposure to this region.

          That said, I take a basket approach to this market and the Japanese market and do not concentrate. I also avoid the S-chips. Since I don’t have much capital, a number of small positions in these stocks still adds up to a decent chunk of my portfolio. Yeoman Capital Management also takes a very diversified approach to investing in this region. I came across them in a few filings of Hong-Kong companies where they were shareholders and seeing their solid long term record also convinced me that it was the best approach for me to take.

          I have not contacted management of any of my Singapore holdings, mainly because I feel my basket of companies in Singapore & Japan will do well as a whole and I’m not too concerned about any individual holding. Also, those few times I did try to get a response to questions from management of micro-caps I have not had any success.

          Paul

  2. Hi Paul,

    I like your article and I am also looking for undervalued stocks in Singapore mainly because I am a Singaporean. It has been a very difficult search for the past 2 years. Probably because our economy has been “bubbled”. Jesse Colombo from Forbes wrote about Singapore recently “Why Singapore’s Economy Is Heading For An Iceland-Style Meltdown” (http://www.forbes.com/sites/jessecolombo/2014/01/13/why-singapore's-economy-is-heading-for-an-iceland-style-meltdown/). I agree with him generally but I am not so sure about heading for the Iceland-Style Meltdown.

    I notice LanTroVision’s businesses are largely in Singapore, Malaysia, Hong Kong and China. With China facing slow down and these countries depend largely on China’s economy, LanTroVision maybe facing a big headwind in coming months. I would think the coming 3 quarters will decide how LanTroVision will be affected. However, I think the share price of $0.29(the cash per share) will be a safe price to hold for long term provided they are not making losses.

    In my humble opinion, I am expecting at least a big correction in Singapore shares within this year.

    • Hi,

      You did a pretty thorough job of discussing AP Oil yourself! I really liked your write-up and don’t have much to add really. I still own my shares.

      One issue I have with the company is that there has been a conviction of two insiders of this company in the past. I commented on this issue in a post on a message board: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/5auses-ap-oil-international-ltd/msg172232/#msg172232

      As I said there, I think it was a mistake by the CEO, but I do not think that automatically means there are more serious issues with the company. It could explain the valuation.

      • Hi,

        Thanks for your positive feedback regarding my analysis.

        I’m aware of this situation before I took my position but like what you’ve mentioned in the message board, it seems more towards negligence than fraud. In my post, i mentioned that if one can find 10 companies like this (in terms of its financials and business track record), the diversified results should turn out quite satisfactory. I still think this stands true.

        Probably I’ll talk more about some reasons for its undervaluation in my future post. Look forward to hear your comments in my blog too 🙂

  3. Hello secret investors, great write up there. I have been monitoring this stock since it dropped from its high of 0.685 due to lacklustre results.
    Its 2015 results were not up to expectations compared to previous years with the first 3 quarters showing a decline in profit.
    what is your take on this set of results and do you think it will be permanent?

    • Hello dexter choo,
      I’m still following Lantrovision even though I have sold my shares since the date of my first post about the company. The company is facing margin pressures currently. I think one should probably look at a longer period (5+ years) to see how the company performs. The last few years have been pretty strong. My concern is that this was probably a boom period for the company as the economies of the countries in which they were active were growing quickly. Now economic growth is slowing down in many of those places.

      So I think looking at the recent past perhaps gives us a too optimistic picture of what we can expect in the next few years. I do think the company looks a little cheap at the current price, but I’m looking for a lower price.

      • Yes i agree. What price are you looking at?
        Since earnings are not predictable, we are taking a risk at this price as prices may drop accordingly to earnings result?

Comments are closed.