Business Overview
Established in 1981 and listed on the Mainboard of the Singapore Stock Exchange on 1 April 2010, T T J Holdings Limited [K1Q.SI] is one of the largest structural steel fabricators in Singapore.
The Group has two core businesses comprising its Structural Steel business and Dormitory business.Crunching Numbers
First of all, this company has scored full marks for my 4 criteria filter (the criteria are listed on the top right hand corner of this post). Second, it is trading way below its intrinsic value, calculated using adjusted Free Cash Flow (FCF) discount model, with a margin of safety of more than 30%. Additionally, although not a significant indicator, it is trading at 0.98 times book value (previous traded price of $0.335 on 29 Dec 2014). This article will be touching on the Financial and Value aspects of TTJ.All calculations used FCF as the real profit instead of relying on reported net profit. Deviations of FCF from reported profit was less than 50%, signifying that earnings reported has minimal accounting gimmicks.
FCF is derived from the cash flow statement: [Operating Cash Flows before Changes in Working Capital] (ignoring changes in working capital), factoring all tax and interest expenses, and deducting an estimated capital expenditure (CapEx). CapEx is used in place of [Depreciation and Amortization] because it is a closer estimate of what the company really needs to maintain itself.
I have derived CapEx by taking the 5 year average of [Purchase of property, plant and equipment] adding back [Proceeds from disposal of property, plant and equipment], and obtaining a percentage figure against a 5 year average of [Equity]. So CapEx per year is obtained by taking this percentage figure and multiplying by that year's equity. This sum is then deducted from the Operating Cash Flow for that year's FCF.
Table 1
5 yr Avg Growth Rate/Avg ROE
Growth rate was calculated using the formula: [Plough Back Ratio] times [Return on Equity (ROE)] and ignoring FY2009 since I'm only looking at 5 years' results. Aside from 2010, the company has been paying dividend on an average of 11.2% of average FCF (plough back ratio of 88.8%). Average ROE is 17.3%. Based on these figures, the average growth rate of TTJ was 15.4%.My benchmark for growth rate was set to be above 5%. As companies cannot be expected to grow at high growth rates forever, the average economic growth of Singapore should be the benchmark of this criterion for all companies operating in Singapore. As long as the company is growing more than Singapore's economic growth, it should be doing well (figures obtained from http://www.tradingeconomics.com/singapore/gdp-growth).
The benchmark for ROE is 15%, because it will take about 5 years to recover any investment at this rate of return, ignoring inflation. Since I'm looking to double my investment in 5 years, 15% is the appropriate benchmark to set for filtering out less attractive companies.
Table 2
Total Liability to Equity Ratio
This is calculated by taking the latest Financial Year's (FY2014) Total Liability divided by the Equity. TTJ's ratio was 24.6% while my benchmark was set to below 50%. This signifies that TTJ has very little debt and hence lesser risk of going bankrupt. This benchmark means that for every 1 part of debt, there are at least 2 parts of equity to cover for it.Table 3
Positive FCF
As seen from the Table 1, TTJ has positive FCF for all FYs. This criterion is critical as there is no reason to risk paying for a company that has made losses. Although past performances does not guarantee future results, I would rather choose companies that has proved to turn a profit every year, than one that has made losses before. My benchmark for this criterion is to have no negative FCF at all for the past 5 years.Intrinsic Value
The intrinsic value of TTJ of SGD0.51 is calculated using a modified FCF Discounted Model. I have made some modifications to the academic formula to increase the accuracy of my final figures.Table 4
To make this bridging discount more accurate, I've added a decay factor to consider the effect of time on accuracy, so that older performance would have lesser weight on future performances. For example, in FY2009, the FCF was SGD14.7mil and SGD7.5mil in FY2010, the rate of change was -15.33% and the discount factor is set at 50%. Therefore the rate of change that is taken into consideration for the calculation of the bridging discount is actually -7.665% (-15.33% * 50%) so on and so forth.
Table 5
The bridging discount is calculated to be -2.75%. Adding this to the average growth rate of 15.36%, I'll obtain the fast growth of 12.61% for use to estimate FY2015's FCF. Instead of applying this growth rate to calculate FCF over the next 5 years, I feel that linearly sloping this rate to a stable growth of 5% would be closer to reality. From there, future FCF can be more accurately estimated.
Table 6
Rather than using 15% ROE as the discount rate to find present value of the future FCF, I've factored in a conservative inflation rate of 3.12% to be my discount factor. Inflation rate for Singapore is obtained from http://www.tradingeconomics.com/singapore/inflation-cpi
Since I'm expecting to double my money in 5 years, the rate of return that will deliver that expectation after factoring inflation is 18.45%. So that's my discount rate to find present value of future cash flows.
Table 7
From FY5 onwards, I assumed that TTJ would be growing perpetually at 5%, so the present value was obtained using a perpetuity formula and discounted using the discount factor above. Although this may be far from accurate, the effects of distant future values on the intrinsic value is too insignificant to be of concern.
Adding up all present value of future cash flows and dividing the sum by the total number of shares, I will obtain the intrinsic value of SGD0.51 per share. Since the last done price for TTJ was SGD0.335 on 29 Dec 2014, I conclude that it is trading at a 34.4% discount, offering investors a margin of safety of more than 30%.
It is my observation that this company has very low trading volume since it was listed (chart), this could be due to it being a small cap of about SGD120million. Preliminary search on the internet also yielded very little analyst following this company. This presents an opportunity for the price of this company to be undervalued. As trading volume is low, this stock is not suitable for speculators and short term investors who are not ready to hold on for at least 5 years. The validity of the information in this article expires on July 2015 when the company reports its financial results for FY2015.
Thank You for reading part 1, part 2 can be accessed via this link. Please feel free to leave a comment on your thoughts below. If you would like to check out my analysis of other companies, feel free to go to this page: http://fundamentally-invest.blogspot.sg/p/blog-page.html
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