T T J HOLDINGS LIMITED [K1Q.SI] - Fundamental Analysis (PART 2)

This article is the continuation of the analysis on a company that is publicly listed on SGX. The first part of the analysis can be accessed via this link. If you are reading this, it is assumed that you would have basic financial knowledge and is familiar with concepts of fundamental analysis. If you have any thoughts; spotted any mistakes made; or wish to ask questions, please feel free to leave a comment.

Fundamental Analysis

In order for the intrinsic value calculated in part 1 to be reliable, further analysis of how the company is able to continue delivering results in alignment with its past performance is required. This article will be looking at the Business and Financial aspects of TTJ. 

Business Aspect

The business model of TTJ is fairly simple to understand. Its main businesses are in Structural Steel business and Dormitory business. Structural Steel business contributed to 85.6% of TTJ's revenue while Dormitory business contributed 13.4%. 93% of its revenue is from Singapore while the rest are from Malaysia (6.9%) and India (0.1%). Having the main bulk of revenue generated in Singapore subjects TTJ to lesser foreign exchange (forex) rate risks. Call me bias, but I feel that SGD is the best managed and the strongest currency in the whole of South East Asia in terms of country fundamentals. So not diversifying into other countries is not really an issue here. Less forex risk equals to less earnings volatility.

While Dormitory business was reported to have grown since the previous FY, growth was attributed to rising chargeable rental, which is subjected to changes and unpredictable conditions of the economy. In my view, I would much rather TTJ focus on its origins and roots, which is Structural steel fabrication where their true expertise and experience lies. Although branching into Dormitory business might compliment its original business and offer additional contribution to revenue, the core business concept of running a Dormitory business is very different from Structural Steel. However, since this business segment forms only a small part and is making profits, there is no real cause for concern at the moment.

Structural steel fabrication is the provision of highly sophisticated structural steel solutions used in diverse industries ranging from commercial building construction and offshore oil and gas to industrial plants as well as in iconic landmarks such as the Orchard Gateway bridge, the SuperTrees and OCBC Skyway at Gardens by the Bay, The Helix at Marina Bay, Pinnacle@Duxton, Henderson Waves, the Supreme Court and Changi Airport Terminals 2 and 3, amongst others. One of TTJ's most significant recent contract wins was the contract to supply, fabricate, and install superstructure steel structure works for Tanjong Pagar Centre, a landmark project set to be the tallest building in Singapore at 290 metres. Its order book stood at SGD119.0 million as at 20 October 2014. More information on the other contracts won can be found in the Chairman's message from 2014's Annual Report. 

What is so important about this information is that most of the projects are awarded by the government and we all know that the Singapore Government is a trustworthy paymaster who is not going to default anytime soon. This increases the reliability of the future earnings as receivables are less likely to be written off and payment period can be expected to be prompt. Additionally, being in the good books of the government and having the ability to win government contracts speaks for TTJ's future prospects as well as the quality of the works they produced. 

In terms of entry barrier, the steel industry does not exactly have the highest business moat, but it is not an easy business to replicate either. I do not find meaning in comparing companies within the same industry as each company has its own strength and weaknesses, and their own method of conducting business. To compare companies within the same industry does not shed anymore light on a good business than analysing its financials alone. Should a competitor be much better than TTJ, it would have been filtered out by my preliminary screening and have its figures analysed already.

The raw materials to produce steel is iron, by mass the most common elements on Earth. So raw material cost would not be as volatile compared to other metals and cost of goods sold should not fluctuate as much, which is a good thing for estimating future cash flows.

Management Aspect

Being in business since 1981 and having a chairman and managing director who is with the group for almost 40 years is quite reassuring. All of the mentioned directors and executive directors have been with the group since it was listed in 2010. They have proven themselves capable to produced the results that was analysed in part 1. Therefore, I have faith in the company's continued prosperity as long as the leader is unchanged. 

What should be of concern to investors about this aspect is whether the management is candid with shareholders. However, the best time to judge this is when things goes south and faults need to be found. So until performance start to suffer, it would be difficult to determine whether the chairman is honest enough to reveal what really went wrong with the business. Generally, I think that TTJ has done fairly okay in communicating with shareholders. It has maintained an active web presence to update shareholders on the latest announcements. However, I have to add that one would need to check in on the website every now and then to find out about the latest updates. It would have been much better if TTJ offered email notification to shareholders like some companies provide. 

The next thing to consider is whether the management is able to resist industrial imperative, the urge to follow what peers are doing and jumping into anything that is profitable. From the Chairman's message alone, it is very difficult to determine if the decision making of the board is imperative resistant. The best way to judge management is actually to be employed in the company and working directly with the management team. This aspect is highly subjective and is prone to perspective bias. Therefore, personally I don't have the experience nor qualification to judge and would just go along with my gut feelings, supported by the numbers in the annual reports.

Conclusion

I believe that TTJ Holdings is able to continue performing up to its past performance standards based on its nature of business, business model, established reputation, outlook of Singapore's development, and its competent management team. This substantiates the intrinsic value that was derived based on estimation. As long as investors are willing to hold this company for the long term, it is my believe that the value of this company will eventually be correctly reflected by the market.

Thank You for reading part 2, part 1 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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