VIB Premium: Company 1 – Teckwah Industrial

Preview: Company 1 is a Singapore listed company trading at a low P/E multiple and a low price to free cash flow multiple. There’s also a substantial discount to book value.

Article type: Portfolio position, the author has a long position in this stock at the time of publication.
My position size: Small

Teckwah Industrial Corporation (SGX:561) is a Singapore listed company that offers printing and packaging solutions for companies. In addition Teckwah has over the years developed logistical solutions for its customers. These range from inventory management to refurbishment and recycling of products.

An overview of some financial details about Teckwah:

Share price: $0.51 SGD
Outstanding shares: 233,550,248
Market cap: $119.1 million SGD
Shareholders’ equity (Dec. 31, 2016): $147.2m
Cash: $42.4m
Debt: $12.6m
Profit attributable to owners of the company, 2016: $13.7m
Profit attributable to owners of the company, 2015: $12.4m
Free cash flow, 2016: $25.9m
Free cash flow, 2015: $16.3m

Valuation ratio’s:
P/BV: 0.81x
P/E: 8.7x
P/FCF: 4.6x

Just glancing at the numbers above should make it obvious what attracted me to Teckwah. The shares look cheap when using most traditional value based metrics, whether it is price to book value, price to free cash flow or a simple price to earnings ratio.

I first looked at Teckwah a couple of years ago. At that time I ended up rejecting the company, because the company was spending a lot of money on new corporate headquarters. I wasn’t comfortable with these large investments and Teckwah itself said the disruption caused by the relocation to the new building would depress earnings somewhat. At the time, it seemed best to follow the story and reevaluate things after the move. In 2016 I looked at Teckwah again and was impressed with the progress that had been made.

Capital expenditures

One thing that jumps out when you look at the last few annual reports is the amount of money that has been spent on property and plant. These amounts greatly exceeded depreciation charges. Much of these expenses were related to the purchase of land and the subsequent construction of a new head office in Singapore. This building is called Pixel Red and it is now completed. Teckwah’s goal with this building is to create a “print-hub”. The company hopes to create a one-stop shop for printing and related services. Other non-Teckwah businesses can also rent space in Pixel Red and offer complementary services.

Teckwah has realized significant savings from the relocation to Pixel Red. Rental and utilities expenses for 2014 were $10.8m and have declined after the relocation to $6.8m (2015) and $8.4m in 2016. I read on a forum that the total cost of Pixel Red was around $50m, which is huge for a company of Teckwah’s size. The fact that Teckwah is realizing significant cost savings from the relocation does make me more comfortable about the investment in the building. When I first looked at Teckwah I was worried that Pixel Red was more a status symbol for the man running the company, rather than a true investment. In hindsight, I don’t think that was a valid criticism. Of course you can always argue whether the company could not have found a cheaper solution.

Teckwah has also invested in new industrial properties in Iskandar Development Region in Malaysia. These sites now harbor the company’s high volume print business. It was getting harder and harder to do this work cost effectively in Singapore, which has relatively high labor costs.

Although Teckwah will have to continually invest substantial amounts for the print related business, I believe the capex should be much lower in the upcoming years now that the move to Pixel Red and the move of the high volume print business to Malaysia have been completed. The year 2015 showed much lower capex of $7.5 million (2014: $28.7m), which is below the depreciation charge of $9.0 million for 2015. In 2016, capex was just $2.8m, far below the $9.1m charge for depreciation and amortization. Note that the depreciation charge jumped 29% in 2015 from $7.0 million in 2014 to $9.0 million, due to the heavy investments made in PP&E. If capex going forward can approximate depreciation charges, Teckwah should be able to generate a lot of cash if their business does not deteriorate.

Revenue profile

Teckwah has been able to develop the non-print side of the business at a solid rate since 2007, which is the earliest year that I’ve been able to get data for. The print side of the business has seen a slight decline in revenue, but this does seem to have stabilized. In 2016, 56% of revenue was print and 44% non-print.

Print revenue vs non-print revenue:

The non-print side of the business is clearly the better part and it is encouraging that Teckwah has been able to grow here. Non-print also requires much less capital expenditures.

I believe part of the cheap valuation of the company has to do with investors viewing Teckwah as a company that is purely in the print business. The facts are that Teckwah has been successfully diversifying from their traditional print business for years and is now also offering a host of other, higher margin services to its customers. The company offers many training programs to expand the skill set of its employees to make sure they are prepared for the changing nature of the business. Investors have not given Teckwah much credit for these non-print operations yet. That could change if the company continues to increase the non-print side of the business in the future and these higher margin services are translated into higher profits and dividends.

Most of Teckwah’s business comes from Singapore, which accounted for almost 62% of revenue in 2016. China was in second place with 27%. Teckwah does have some customer concentration. One large customer accounted for 24% of revenue in 2016 (2015: 22%). Losing this customer would probably have a large impact on Teckwah’s profitability.

Insider ownership

Thomas Chua is the chairman and managing director of Teckwah Industrial Corporation. He seems to be a fairly influential man in Singapore, holding a position as a Nominated Member of Parliament. These parliament members are appointed by a special committee and are not affiliated to any political party. Mr. Chua also served as president of the Singapore Chinese Chamber of Commerce and Industry and Singapore’s Committee on the Future Economy, in the area of corporate innovation.

Mr. Chua’s personal stake in Teckwah is small with a personal interest of just 1.9 million shares and a deemed interest of 1.6 million shares. Thomas Chua’s father, Mr. Chua Seng Tek, held a much larger stake of 69.8 million shares or 29.9% of the outstanding shares. Mr. Chua Seng Tek passed away in 2015. I don’t know who is the beneficiary of the shares held by Chua Seng Tek Holdings, I guess his wife?

I don’t think Thomas Chua’s small personal stake is a big deal in this case. The Chua family should still hold almost 30% of the outstanding shares and he should be motivated to look after that stake. At some date in the future that ownership could also transfer to him.

Another board member, Mr. Lee Chee Sit, has a deemed interest in 26.2 million shares.

Cash position, debt & dividends

Teckwah has taken on some debt to finance the heavy capex of the last few years. At the end of 2014 the company had bank loans of $25m. The company has since paid this down to $12.6m currently, using the strong free cash flow that it is generating.

Teckwah has $42.4m in cash, so it still has a net cash position of $29.8m. For 2016, a total dividend of 2.0 cents was paid, in the three years before, the dividend was 1.5 cents per share. The current dividend gives an investor a 4.2% yield at the current share price. The company’s cash position should continue to strengthen, which should enable them to increase dividends in the next few years.

Teckwah has been pretty conservative from a financial standpoint, so perhaps they will not increase the dividend payout until the debt has been (almost) repaid. In 2007 the company did pay a total dividend of almost $12m (~5 cents per share), so I think they will return excess cash to shareholders in the end. I don’t believe Teckwah is a cash hoarder like some other companies listed on the Singapore and Hong Kong exchanges.

Conclusion

Teckwah Industrial Corporation is the type of investment that seems to pop up in Singapore on a regular basis: a large discount to book value, a low P/E ratio and solid cash generation. I’ve had a number of successful investments in companies like this (PNE Industries, LantroVision, AP Oil) and a few that have not done that much (Nam Lee Pressed Metal). A dividend increase or a large special dividend could ultimately act as a catalyst for Teckwah, but perhaps something else happens that makes the market like Teckwah a little more, maybe an acquisition. Also, I’ve noticed on a few occasions (AP Oil, Nam Lee) that an analyst report on a particular company often creates sudden investor demand in sleepy stocks like this.

It is impossible for me to predict which companies will do well and which will turn out to be “value traps”, as some investors like to call them. All the companies that have done well for me in Singapore have at one point been called value traps by other investors. Teckwah is a company that fits this mold as well. My solution to that problem has always been to diversify: find a bunch of these companies and keep positions relatively small. It’s not the most exciting way to invest, but it has worked for me.

I think Teckwah is worth at least book value and probably a bit more. As a quick sanity check: if the company were to trade at 10x earnings and we then add the net cash (~$30m), we already get to a figure ($167m) that exceeds the current book value of $147m. I don’t think this valuation is aggressive. Teckwah seems to be a relatively stable performer and the earnings numbers for the last couple of years don’t seem to be outliers, but rather the result of the successful effort of increasing the higher margin non-print side of the business.

Update December 2018: position sold

I have recently sold my Teckwah shares. Results have been fairly disappointing over the last few quarters. Revenues have declined slightly while operating costs have slightly increased, resulting in a ~22% decline in profit (net income was $8.2m) for the nine month period ended September 30. The company still looks somewhat attractive at a market cap of ~$106m SGD (at a share price of $0.455). Book value is ~$153m and there is $29m in cash on the balance sheet.

My reasons for selling are the decline of the results amid a tougher operating environment for the company, combined with the fact that the more attractive logistics segment has also struggled a bit. The logistics business showed a revenue decline of 2.5%. I had hoped that this business would be able to continue to grow and become a larger part of the total pie, but it is now showing some signs of weakness as well. Teckwah still does not look expensive to me by any means, but I need more than a decent discount to book value and some excess cash to make me interested at this point. There is a relatively large group of Asian companies that have similar characteristics.

Update October, 2020: Teckwah acquired

Teckwah is in the process of being taken private by Clementine Investments, an entity that was formed by the company’s Chairman. The offer announcement and press release can be found here. Shareholders will receive $0.65 SGD per share. The offer came soon after an activist called Quarz Investments called on Teckwah in July, 2020 to return more capital to shareholders.

I’ve now made the post publicly available.

Disclosure: the author was long Teckwah Industrial Corporation (SGX:561) at the time of publication.