Koyo International (5OC.SI) - Is It Worth The Risk?
Koyo International (company website) has been listed on the SGX Catalist since 2009 and its principal activities broadly consists of four core segments, namely:
• Mechanical and Electrical engineering services
• Supply of renewable energy and green products for building services
• Property development and construction
• Supply of construction materials and ancillary services
The company has been operating since the 1980s.
As of 1H2015, it has S$42.2M (vs S$20M revenue for 2014) worth of contracts on hand with completion dates between 2015 and 2021. I'm not going to talk much about it here - readers can understand more and judge for themselves by reading the annual reports or visiting the company website.
I'll keep this analysis simple without delving too much into the specifics. Some basic metrics are as follows:
|3.7x (est $6M excess cash versus $14.9M net cash)
Over the past 1-2 years, for largely unknown reasons, the share price skyrocketed from around S$0.05 all the way to a high of S$0.40. Readers of my blog would have known that I bought into its shares a couple of years back and sold it for a decent profit. More details here.
On 15 Jan 2016, SGX released a statement and urged caution when dealing with Koyo International's shares as >30% of the trading was done by the same group buying and selling among themselves.
When the market reopened the next trading day (18 Jan 2016), the share price crashed >80% to about S$0.05 and subsequently recovered to the S$0.055-S$0.065 range.
SUMMARY OF INVESTMENT THESIS
CONCLUSION AND SOME THOUGHTS
At S$0.40, Koyo International was clearly expensive and a purchase at that point would certainly prove reckless. At the same time, a price of S$0.056 clearly undervalues the company and absent the 2 key risks coming true, a purchase should turn out profitable.
Does being slapped with a "Trade with Caution" alert by SGX warrant a significant sell-down to huge undervaluation territory? It really depends. Security selection requires a skillful balance between the facts of the past and possibilities of the future. The future is uncertain and as investors, we always have to take and manage risk.
The risks mentioned above are very real but the fact is that there are currently little evidence that it will happen. An investor always have to deal with probabilities and as of now, my own judgement (I may be dead wrong) tells me that the risk to reward ratio is largely skewed to my advantage.
To be sure, if any of the risks mentioned turn out to be true, it is sensible to sell the stock (even at a loss). Before that, one can only control his/her risk by first understanding them and then diversifying adequately as well as sizing such positions appropriately so that it will not inflict mortal damage to the portfolio as a whole.
Interestingly, this situation bears some resemblance to that of Avi-Tech Electronics which is listed in the SGX Watchlist due to 3 consecutive years of pre-tax losses. The share price got hammered so badly that a purchase (do refer to my write-up here) made just last year would have reaped respectable results and dividends for the aggressive investor.
Let me know what are your thoughts.
Long Koyo International (5OC.SI)
Note: Disclaimer applies. Not a recommendation to buy or sell.
This article is republished from http://secretinvestors.blogspot.sg/ with permission.