foo chek heng n suay wei 7.14L-R: Koyo CEO Foo Chek Heng and his son, executive director Foo Suay Wei.
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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: 

Price S$0.061
P/E (ttm) 7.8x
EV/EBIT 3.7x (est $6M excess cash versus $14.9M net cash)
P/B (mrq) 0.66x
ROE (TTM) 8.4%


THE STORY

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

There's currently no evidence or indication from SGX that the management or insiders themselves are manipulating the share price.

On 18 Jan 2016, the company bought back 6,300,000 shares @ about S$0.099 for a total of $630K. That's about 3.3% of outstanding shares.

On 19 Jan 2016, independent director Serena Lee purchased 800,000 shares and raised her stake from zero to about 0.42% of outstanding.

On 20 Jan 2016, Serena Lee again bought another 700,000 shares, raising her stake from 0.42% to 0.78%. A quick check shows that if Serena does not sell any shares from this point on, she should be one of the top 20 largest shareholders of the company. To my knowledge, Serena did not own any shares of the company since at least 2011.

Current price is one of the lowest since 15 months back and my valuation work shows that the company would be worth at minimum S$0.07 and its intrinsic value should be closer to S$0.10.

Some brokerages have instituted trading restrictions on the company after the "Trade with Caution Alert" by SGX, causing the share price to remain depressed even after crashing significantly.

The company has a relatively long operating history, is in sound financial condition and I can reasonably expect it to continue turning in respectable results in the next 5-10 years.

KEY RISKS

The 2 main risks I observe are:

1. Accounting issues and/or 
2. Share manipulation.

If an analyst bought it even at such low prices, any one of these materializing may mean a disastrous investment result. No amount of margin of safety can save an analyst from a fraudulent financial statement and a management that lacks integrity.

So far, there's no indication or evidence of such risks materializing (yet). Also, the share buybacks from the company and an independent director provide some level of comfort.

 

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.

Disclosure:

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.

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Comments  

#5 Adam 2016-02-11 10:59
MD Foo Chek Heng is invited for lim kopi session with CAD.


The Board of Directors of Koyo International Limited (the “Company”) wishes to announce that the Company was informed on 10 February 2016 by its Managing Director Mr. Foo Chek Heng, that he is being investigated by the Monetary Authority of Singapore (the “Authority”) and
Commercial Affairs Department (“CAD”) of the Singapore Police Force for possible offences under section 197 of the Securities and Futures Act (Cap. 289).
The Board was informed that Mr. Foo was interviewed by the Authority and CAD and has also handed over his travel documents as well as certain devices and documents to them.
The Board was informed by Mr Foo that he disputes the allegation by the Authority and CAD, and that he will cooperate fully with the Authority and CAD in their investigation.
The Board of Directors wish to emphasise that the business and operations of the Company are not affected in any way by this investigation and will continue as normal.
The Company will monitor the progress of the investigation and will make such further
announcement(s) as appropriate.

http://infopub.sgx.com/FileOpen/Annoucement%20Info%20Regarding%20Managing%20Director.ashx?App=Announcement&FileID=389044
+1 #4 Secretinvestors 2016-02-02 22:57
Quoting Pixel:
Hmm....sure lots of cash in Koyo. That is true but why the dividend payout so stingy so far? As for stock ideas, Best World has loads of cash too, and its business is highly cash generative. What do yyou think?


Hi Pixel, I previously hold Best World too and sold it few months back (too early though, at between 25-30cts) to release some cash for other opportunities when the stock market tanked. You may want take a look at their geographical segments across a few years as well as management's compensation.

Regarding Koyo, yes dividends aren't very high despite the liquid balance sheet. My intention for the purchase was not so much to collect dividends though. Just feel it is worth much more as a business than the current price provided by the market with some possible catalysts to close the price-value gap. I may be dead wrong about this but I think the potential reward justifies the risk.

Thanks!
#3 Pixel 2016-02-02 12:08
Hmm....sure lots of cash in Koyo. That is true but why the dividend payout so stingy so far? As for stock ideas, Best World has loads of cash too, and its business is highly cash generative. What do yyou think?
#2 Secretinvestors 2016-01-31 23:39
Hi Pixel, agree that there are some bargains around currently. Perhaps you can share some of the bargains you uncovered and we can discuss more about it?

Regarding Koyo, I believe there's many ways (P/E is one of them of course) to rationalize whether the shares of the company are undervalued or not. You may want to have a quick look at their balance sheet and/or cash flows and decide whether there are other sources of undervaluation. Taking into consideration all these factors and viewed as a whole, my opinion is that the shares of Koyo is clearly undervalued.

Have a great week ahead!

Quoting Pixel:
Thank you Secret Investors for highlighting this stock. imho the share price is still overvalued at PE of 8X. Despite the share buyback by company and ID, shouldn't we wait for a lower price level? And that's assuming we don't have other bargains to buy.Which is not the case currently as the bear market is offering lots of solid counters at lelong prices!.
#1 Pixel 2016-01-31 08:39
Thank you Secret Investors for highlighting this stock. imho the share price is still overvalued at PE of 8X. Despite the share buyback by company and ID, shouldn't we wait for a lower price level? And that's assuming we don't have other bargains to buy.Which is not the case currently as the bear market is offering lots of solid counters at lelong prices!.

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