An exciting company visit -SEAFCO
Below is my full report to you on the first of several company visits I had in Bangkok duirng the first part of July '05.
But first some "housekeeping’so to be clear where I stand:
As you all know, last month I decided to expand the currently running model portfolio and so got back to a more diversified approach. This after the to date spectacular performance of my Ticon pick. It was never my intention late last year to for a prolonged period only be exposed to a single stock, no matter how exciting. Yet, I then singled out Ticon, again, due to:
1) My very strong conviction then and now on the exciting Ticon story.
2) Some reservation that the SET performance might turn out to be boring or bearish, especially beyond last February’s Thai general election.It’s a market of stocks, not a stock market.
While I did not state that I was Thai stock market bearish, I made my own strategy very clear by writing here more about Ticon, since last October, than all other stocks combined. Ticon was and remains a fine example of a medium sized undervalued company whose stock trades relatively well, yet whose fundamentals are not well explained by the local broker community. There are many more and today I here review for us Seafco, which is one of the latest stock selections, to my current model portfolio. While I recently moved Ticon back to a “strong buy view”, and it remains so, I have as of last month decided to go beyond this single selection and now include 3 other stock picks. The primary driver of this has been the SET sell-off during the end of the second quarter. Not a more cautious view on Ticon. Clearly select other shares now deserve a closer look as I feel the market is back to a select “bargains go begging” level. While I just visited Ticon again and here re-iterate my very positive view. Last week I decided to take a closer look in person at two of my recent favorable new selections, namely PTL and SEAFCO. Below is a review of what I learned. Both firmly remain on my “long term buy” list and so no changes are here announced regarding the model portfolio.
SEAFCO (4.36) Here is a deep foundation specialist which I identify as a solid Thailand infrastructure play -with very low financial gearing.
“I am confident that with the existing potential and future growth, Seafco will be able to achieve beyond expectation over the next 5 years.” Mr. Narong Thasnanipan, President of Seafco. Seafco is yet another neat smaller cap company which is nevertheless the clear leader in what it does; namely bore piling for foundations on large real estate and infrastructure projects -in and around the Bangkok metropolitan area. This company commands a 36% market-share and has been in business for 31 years. A family run business for three decades where the owners still own some 45% of the shares outstanding. The company went public last September at 4 Baht per share. Since then their backlog has doubled from around 330 million Baht at the time of the IPO, to currently 700 million Baht. The backlog has therefore doubled in size over the past 9 months. Seafco is one of the best ranked deep foundation specialist established in 1974. It has been consolidating state of the art technology, sophisticated equipment and engineering professionals with innovative techniques. It provides cost effective total solutions for foundations problems, basement constructions and development of underground facilities. It constructs small and large diameter bored piles with safe loads in excess of 1000 tones as well as barrettes up to over 60 meters deep. For more basic information on Seafco see their web site at http://www.seafco.co.th Their e-mail is seafco@seafco.co.th Page 57 of the year 2004 annual report shows no loans from any banks or any finance companies! And this was confirmed by management. The only slight leverage are some favorable lease terms (1% for 3 years) on 4 new machines they recently acquired from Japan. The lease amount is shown as “hire purchase contracts” and for the amount of only 5.17 Million Baht. The terms and conditions were “so favorable, we could not pass this up”. On the same page 57 of their latest annual report, saving and fixed deposits are shown at 45 million Baht. One attractive cost saving feature is that SEAFCO services all its own bore piling equipment and this with pride; it so saves the otherwise expensive upkeep on this heavy equipment. New depreciation expense is not going to be significant as other older equipment has just now been fully depreciated. Below are just three examples of projects most recently awarded: 2) A large parking structure for a major Hospital in the Bangkok are. (280 Million Baht). 3) The large, now empty land plot, in front of the old Ambassador Hotel on Sukhumvit road. Grand Assets is the project owner. (This is a 69 million Baht contract.) Here are some examples of past projects awarded and completed: Baiyoke Tower 1, Thammasat Library Building Don Muang Tollway Extension, Rama IX Flyower, The Sathorn complex project known as Q.House Lumpini, owner is Quality Houses Public Company. The metropolitan rapid transit authority. Rajavej Hospital Co. Ltd. Silom Precious Tower. Phuket Fantasea Co. Ltd. The other meaningful change since last year is that SEAFCO expects more and more of its future revenues to come from Thailand’s announced mega infrastructure projects. Currently about 30% of revenues come from such mega-projects but this is expected to increase to 50% of the total, by the second half of next year.
About 10% of total contract amounts on most infrastructure projects, is for pilling. Moreover, bore piling is always the first phase in any construction job. This piling only takes about 2-3 months to complete, so the turnover per job is rapid and so far less risky to a contractor as compared to longer term projects. While some projects (I am thinking mostly private ones here) may not get finished in the end, pilling is always the first one to get completed and so getting paid for the piling is rarely an issue at all. The gross profit margin on mega government infrastructure projects is less then the around 16%-17% or so, on the private ones. However the total spending on these government projects is so huge (1.7 trillion Baht) so net earnings are expected to increase meaningfully over the next few years. Usually concrete makes up of 60 % to 65 % of the cost of bore piling with steel around 30 to 35 %. Bore piling is different then direct piling. SEAFCO only does bore piling. The price of diesel fuel (their core energy cost) makes-up about 9 % of total costs -and the company is very happy with the new floating diesel price as this now reduces uncertainty. The company has around 450 workers besides 150 office staff, or a total of 600. The company passed a resolution on July 7 2004, to issue 5 million warrants to the directors and employees. Each warrant has a right to purchase 1 common share at 5 Baht each, within 3 years. (Expiring in October of year 2007). These warrants are currently “out of the money” and besides not a significant amount. So not much share dilution expected down the road as there are some 210 million shares outstanding. The par value is 1 Baht.
Valuation and earnings estimate The current stated book value is right around 3 Baht per share, the return on equity for the past couple of years was a steady and impressive 26 %. The average dividend yield for the construction sector as a whole is shown at 2.34 %, Seafco’s dividend yield on the current stock price is 4.8 %.
Seafco’s stock so currently trades at half the sector’s p/e average’ and yet yields double the sectors dividend rate. This company has very low financial leverage besides commands a leading market position, in a critically important sector of construction work. I note again how discounted smaller capitalizes stocks trade on the SET. I note again (at the risk of being redundant) that this company has a very short time to completion time period, so its business seems allot less outside risk prone to price and other variations -this as compared to other construction companies. In mature developed markets like in the US, I think this company would command a premium to the sector p/e.With some guidance my net after tax, earnings estimate for this year is around 98 million Baht, or 0.47 Baht per share. Hence this year’s 2005 p/e for Seafco is right around 9.4. This is a significant discount to the construction sector as a whole as the construction average p/e for this year is around 19. Part of the reason for this high average industry p/e is due to (more then a few announcing) earnings shortfalls of late, due primarily to sharp material price increases over the past 12-18 months. Most notably the price of energy and steel. Seafco has shown to be much shielded from these raw material variances.
This company earned 35 million Baht in the year 2003 and 81 million last year -and so has seen significant earnings momentum over the last 3 years. Due to this years’ higher energy costs, rising minimum wage levels and a transition to more infrastructure projects the company’s margins are, by a small amount, pressured downwards. on the other hand the total revenues are expected to increase and so more then make-up for this. This most notably due to the heavy infrastructure spending to come which the Thaksin government has much spelled-out recently. Seafco is bound to benefit from this, as noted.
While there is some earnings seasonality expected with a company like Seafco (i.e. less foundation work being able to be done during the rainy season), my view is that long term investors accumulating the stock now should be well rewarded going into next year. Hence I would rate this selection as a long term buy, besides a deserved key model portfolio selection going into year 2006. I think next year (and beyond), for now, looks like double digit earnings increases to well over 110 million Baht, or EPS of say 0.57. With a p/e of say 12-13 during the next market upturn I can see a Seafco stock price around 7 Baht, sometime next year. This would represent a 60% increase from the current market price of 4.36. This on top of the 0.25 to 0.30 Baht dividend I think Seafco will pay over the next 12 months. The dividend recently paid for last year’s operation, was 0.20 Baht per share.
Ticon and PTL are the other two companies I visited last week, and so will shortly update them here as well. Both remain key selections and no changes are forthcoming. Ticon remains the core single largest holding with a strong buy rating, all in my view. Best Regards, Paul A. Renaud.
