Japanese Nuclear Worries Roil Market - Adding to the Portfolio

Stock markets were roiled by concerns over a potential nuclear meltdown in Japan, triggered by the 9.0 Mw earthquake which hit the Sendai region of Japan last Friday. While the initial reaction of global stock markets to the earthquake was relatively muted (in contrast to the hefty declines posted by the Japanese stock market), concerns over the impact of the earthquake on several nuclear power plants sent global stock markets reeling on Tuesday.

Prime Minister Kan's live video telecast today (15 March 2011) did little to comfort the jittery global community, and as the PM revealed that the possibility of nuclear leakage was increasing and that those in a 20km radius around the Fukushima Daiichi nuclear power plant were being evacuated, stock markets in Asia plunged on uncertainty surrounding the situation in Japan. The STI fell by as much as 3.3% as selling intensified on concerns that nuclear power plants in Japan could suffer a meltdown, which would have dire and unthinkable consequences. The Singapore market ended the day 2.8% lower, with losers on the exchange outpacing gainers 610 to 59. 

Taking a step back from the frenzied selling and huge uncertainty, we see the sell-off as a manifestation of uncertainty and fear, rather than a rational adjustment of prices for various assets. The Sendai earthquake will likely cause a series of contractions in the Japanese economy, but will have limited impact on the global economy, given that Japan's contribution to overall growth has largely been discounted. As Japan embarks on its rebuilding process, this should boost economic growth (in a perverse way), and given sufficient time, we can expect the economy to emerge from this crisis on relatively firm footing. This will have some impact on select sectors in the near term, but ultimately should prove to be little threat to the overall growth of the global economy.

A 16% discount in the Japanese stock market over two sessions appears excessive, and it is increasingly tempting to punt the Japanese stock market now. The risk-reward tradeoff certainly appears in favour for those long the market, despite the heightened volatility, especially if a longer-term investment horizon is employed. Nevertheless, we remain unfamiliar with the situation with specific corporate names in the country and will not seek opportunities in that area.

For the local stock market, we think the selloff in blue chip names remains overdone, and we picked up 500 shares of OCBC at $9.115 and 1 lot of WBL Corp today at $3.90. Both are unlikely to face any severe reprecussions of the latest series of problems, and we will be looking to employ more cash should the irrational sell-off continue over the next few days. 

  

WBL continues to streamline operations, sells Applied Engineering

WBL Corp today announced that it has reached a conditional agreement to sell its wholly-owned Applied Engineering Pte Ltd to Advanced Holdings for a cash consideration of $18 million. Applied Engineering specialises in the design and fabrication of process equipment such as pressure vessels, shell & tube heat exchangers and other equipment, and supports the petrochemical, oil and gas industries both in Singapore and the region.

The sale for $18 million looks like a good deal (on WBL's part), given that the book value of Applied Engineering Pte Ltd on WBL's books is only $8.5 million. The sale price is twice of the carrying value, and the proceeds will be in cash, which may be deployed to other parts of the business, or returned to shareholders in the form of a special dividend. $18 million is no paltry sum, especially when there are only about 280 million shares outstanding (assuming full conversion of convertibles and including dilution for ESOS). Currently, there are about 250 million outstanding shares, which means the latest sale represents cash of about $0.072 per share. The company still has a substantial cash horde of $435 million (as of end March 2010), which increases the possibility of a special dividend.

We are hardly worried about the lowered profit contribution from WBL's "Engineering and Distribution" business following the sale, as the segment only contributed earnings of $2.9 million in 1H 2010. Other businesses in the "Engineering and Distribution" segment include Far East Motor (automobile servicing and repair), SPC Wearnes (bottled LPG), Pacific Silica Pty Ltd (silica mining), O’Connor’s (engineering systems), Polytek Engineering (laundry, boiler and washroom equipment and accessories), Wealco Equipment (water jet propulsion) and Welmate (architectural ceiling and partition systems).

While the remaining businesses may not see such generous buyers, it is likely that they may be sold off in the near future as WBL continues to streamline its operations to concentrate on property development and technology.

WBL's 1H '10 profit up 93% to $40 million, declares 5 cent interim dividend

WBL Corp recently announced 1H '10 earnings of $44.4 million ($40.2 million recurring), up from $12 million (after an $8.8 million non-recurring loss) in 1H '09. The company's prefered measure of earnings is operating PATMI (Profit After Tax and Minority Interests), a measure of recurring income to common stockholders.

One-off gains transpired from the disposal of some buildings under Starsauto/Wisma O’Connor’s /Wearnes Electronics Shenyang (+$4.3 million), the provision and disposal of investments under Property Management Co./ Sanguine Microelectronics/Advance Science Lab (+$0.6 million) and the cessation of Starsauto/Kunming Speedling (+$0.8 million). A planned plant closure related to MFLEX's operations in the US resulted in an asset impairment of $1.5 million.

The property business division was the largest PATMI contributor in 1H '10 ($21.2 million), but 2Q '10 profit from property was just $6.5 million, was fewer units were made available for sale in Shanghai and Suzhou. The Chengdu Orchard Villa which was launched in 1Q 10 saw higher sales.

As we have previously highlighted, the Chinese property market has demonstrated speculative tendencies, especially in tier-one cities like Shanghai (where WBL has a presence), and the Chinese government has clamped down on excessive rises in prices by implementing a series of new property regulations. This has had an impact on WBL's Shanghai property sales, but this may also be due to fewer releases of units in response to the Chinese government's actions. Whatever the reason for the drop-off in property revenue, we are glad that our exposure to Chinese property is via a diversified business like WBL's, whose fortunes are not predicated by a strong property market, and can afford to hold its landbank until market conditions improve.

Third Avenue Management LLC nominates WBL director

 SGX-listed WBL Corporation Limited (Wearnes) – an international conglomerate with key businesses in technology, automotive, property and engineering & distribution – today announced the appointment of Benjamin C. Duster, IV, Esquire, as Non-Executive and Non-Independent Director with effect from 19 April 2010.

Mr Duster is currently Executive Managing Director of Watermark Advisors, LLC, a US-based strategic advisory firm specialising in mergers and acquisitions, private capital raises, strategic valuations and financial modeling. Prior to this, he was with Masson & Company, LLC; Wachovia Securities, where he was Managing Director; and Salomon Brothers, where he worked for 16 years. Currently Chairman of the Compensation Committee of Toronto Stock Exchange-listed pulp and paper producer Catalyst Paper Corporation, Mr Duster has also chaired various board committees of companies listed in Canada, New York and Poland. Mr Duster holds a Juris Doctor-MBA from Harvard University and a Bachelor of Arts (cum laude) in Economics from Yale College. He was admitted to the Illinois Bar in 1985 and is a registered representative of the National Association of Securities Dealers.

Mr Ng Ser Miang, Chairman of Wearnes, said, "The Board welcomes Mr Duster, who brings with him a wealth of experience in the legal, corporate finance and corporate strategy & development aspects of many global businesses. His domain knowledge, international perspectives and cross-border network will be added assets to the Group." 

"Mr Duster is nominated by Third Avenue Management LLC, a substantial shareholder of the Company. The Nominating Committee of the Company reviewed his nomination and based on his qualifications and experience, recommended his appointment to the Board of Directors. "

Considering that Third Avenue Management owns 17.47% of WBL Corp, it is a positive indication that the investment firm has nominated a director on board. WBL has a huge asset base, but it may take some experienced "prodding" to realise some of this value.

Strong rebound in March 2010

The portfolio rebounded strongly in March, gaining 4.9% (net of an accrued performance fee of 20% based on a 6% annual targeted return), bringing NAV to $1.023, up 2.3% YTD. In comparison, the STI on a total return basis gained 5.2% in March, and is essentially flat YTD.

On a percentage basis, Best World was the strongest performer, with a 36.2% monthly return. The announcement of expansionary plans in the Phillipines was enough to incite trading in the stock. Renewed investor interest in Jardine Strategic Holdings sent the stock rising 21% for the month, a huge boost to the overall portfolio (JSH is our largest single position in the portfolio). As previously mentioned, we view the underlying businesses as highly attractive in their own right, and the parent holding company simply offers the opportunity to purchase the whole basket at a substantial discount to market value. Another notable performer was Wells Fargo, which gained 14% for the month (also a substantial holding for us). Worries over financial reform in the US appear to have subsided for the moment, and investors are beginning to focus on P/E multiples for bank valuations, instead of book value. Wells Fargo currently trades at a forward PE of 11.3X, which leaves much upside potential based on a PE multiple re-rating alone.

Noble was the chief laggard in the portfolio, as concerns over a director's share sale and uncertainty over the merger of subsidiary Gloucester Coal and Macarthur Coal weighed on stock performance. US coal giant Peabody recently made a takeover offer for Macarthur Coal on the condition that its proposed merger with Gloucester Coal does not go through. At stake for Noble is a near 25% stake in the consolidated Macarthur, which is poised to benefit from steel production in China. While uncertainty still lingers, a second refuted bid by Peabody suggests that Noble has the upper hand, but we will be watching developments closely over the next week or so (Macarthur shareholders vote for the Gloucester-Macarthur merger on 12 April).    

BEST WORLD 36.2%

JARDINE STRATEGIC 21.0%

Hotung Investment Holdings 18.3%

FRASER AND NEAVE 16.9%

WELLS FARGO 14.0%

KEPPELCORP 12.2%

GUOCOLEISURE 8.7%

Capitaland 6.9%

STI ETF 6.1%

CAMBRIDGE 4.5%

SPH 3.0%

CAPITAMALL 1.7%

BERKSHIRE HATH-B 1.3%

ASCENDAS I-TRUST 1.0%

SGX 0.3%

WBL Corp -2.8%

TAT HONG -3.3%

NOBLE GRP -3.5%


$6,000 of new money was added into the portfolio, resulting in the creation of 5865.10 new units on 31 March 2010.

Is the next bubble in Chinese real estate?

The global stock market has largely shrugged off troubles with Greek debt (its too disconnected from most economies, too small and insignificant, and members of the EU will have to bail out Greece before another financial crisis develops), US policy uncertainty (on healthcare and the banking sector), as well as early signs of tightening activity in China. The US recently hit new 18-month highs, with the Dow Jones Industrial rising for 8 consecutive sessions. Despite the moderate levels of optimism displayed by investors in general, we consider it prudent to focus on potential issues which could derail the stock market in the near future.

Unsettling reports out of China

Of particular interest at this juncture is the potential bubble in Chinese real estate, an issue which could have profound backlash on various risk asset classes, Chinese property developers notwithstanding. China's real estate prices rose 10.7% year-on-year in February 2010 (according to the National Bureau of Stastics), following a 9.5% gain in January, fueling worries that Chinese property prices have risen too fast and too furiously. Various "on-the-ground" experiences reflect the increasing bubbly nature of the property frenzy (Real estate: China’s god of fortune, CHINA PROPERTY: Aspiring tycoon makes killing in virtual home sales).

Official statistics of home prices in China are generally not a good reflection of actual on-the-ground conditions, making it difficult to assess the situation. These less-than-accurate growth figures are also difficult to relate to the entire property market, with varying nuances affecting different segments of the market. Generally, various reports suggest that first-tier cities (Shanghai, Beijing, Shenzhen and Guangzhou) are experiencing some semblance of substantial overvaluation, while the problem is less prominent in second-tier cities. Low levels of borrowings (generally, most Chinese buyers pay cash for a majority of their home purchase) are a positive indication, differentiating the Chinese property market from other property bubble crashes in the past (US, Japan) where large levels of mortgage debt were employed. However, "this time is different" is usually inconsequential at the end of the day, whether in the heights of an asset bubble, or in the depths of deep recession.

No one really knows if the property market will collapse, but we want exposure

We admit that we are not in a good position to judge the extent of disconnect between property fundamentals and prices being paid. On the other hand, we continue to believe in the long-term potential of the Chinese economy, which entails some of the best growth potential over the next decade or two, on the back of unparalleled potential consumption and spending power (driven by the continued trend in urbanisation and growing affluence), and Chinese property represents one of the best ways to benefit from this immense long-term trend. Yet, talk of speculative-like property prices in first-tier Chinese cities (and some second-tier ones) is rather unsettling.

Indirect plays

Given the uncertainty over Chinese property, we have incorporated exposure to the Chinese property sector via indirect plays, rather than investing in companies who are wholly-leveraged to the Chinese property market like Yanlord Land. Capitaland is a leading real estate developer in South East Asia with a view on increasing its assets in China over the long term, but retails large amounts of property assets in the region. WBL Corp holds extensive landbank acquired at much lower prices, but has a diversified mix of businesses which include automobile distribution as well as technology manufacturing. F&N is increasing operations in China, but retains its stronghold on the South East Asian drinks market with a dominant market share. None of these companies are expected to collapse in the event of a prolonged downturn in the Chinese property market, but are all well-positioned to benefit from the longer-term growth in this space.

Sold JNJ for WBL

We sold our holdings in Johnson & Johnson (50 shares at $63.40) and purchased another lot of WBL (at $5.05), given our strong conviction on the latter. JNJ probably offers an excellent play on three areas of the healthcare sector - Pharmaceuticals, medical devices and consumer care, but the stock is more fairly valued (at a mid-teen PE and is unlikely to double anytime soon!). Also, the healthy dividend paid each quarter is not extremely attractive to us, especially after being net of tax (30%) and administration fees. We continue to retain some exposure to JNJ via our holding in Buffett's Berkshire Hathaway.

Portfolio flat in February

Our portfolio dipped marginally by 0.3% in February, bringing year-to-date performance (as at end February 2010) to -2.5%. On an NAV basis, the portfolio ended Feb 2010 at $0.975. In comparison, the STI (total return) gained 0.3% in February, but has declined 5% on a year-to-date basis.

Noble Group was the strongest performer, returning 10.1% as sentiment improved on commodity plays while Berkshire Hathaway benefited from the increased liquidity following a 50 for 1 share split. Tat Hong was the worst performer, losing 8.6% as investors discounted a weaker outlook for crane demand and increased costs for the construction sector after announcements of increases in foreign worker levies in the 2010 Singapore budget.

Stock Feb'10 Returns (%) in SGD


NOBLE GRP 10.1%

TAT HONG W130802 9.1%

BERKSHIRE HATH-B 4.8%

CAPITAMALL 4.7%

FRASER AND NEAVE 2.4%

KEPPELCORP 0.5%

SPH 0.3%

JOHNSON & JOHNSON 0.2%

BEST WORLD 0.0%

WBL Corp -0.2%

STI ETF -0.4%

ASCENDAS I-TRUST -0.5%

GUOCOLEISURE -1.6%

Capitaland -2.1%

JARDINE STRATEGIC -3.1%

CAMBRIDGE -3.3%

SGX -3.5%

WELLS FARGO -3.9%

TAT HONG -8.6%

Why WBL Corp

BACKGROUND INFORMATION FROM SGXThe Company was incorporated in 1912, under the name CFF Wearne & Co as a public company. However, it traces its history to a family automotive business in the early 1900s.
WBL Corporation Ltd (“Wearnes”) is a dynamic international group with key activities in Technology Manufacturing, Automotive Distribution and Technology Solutions. Management continues to focus on building the Group’s operational and technical expertise to keep Wearnes in the forefront with the leaders in these areas and to build and sustain shareholder value. Today, Wearnes is ranked among the top 75 companies by market capitalisation on the SGX-ST and has revenues of some S$2 billion with operations in over 10 countries.

While the company's main revenue (and profit) drivers are from technology, the company's substantial landbank in China is of keen interest to us. WBL Corp also has various property assets in Singapore, Malaysia and a sand mine in Australia, all of which have potential for future property development. The company generally trades with low liquidity and suffers from a lack of broker coverage, and thus has a higher potential of being an undervalued stock. Is that really the case? Let's examine the company's underlying assets to find out more:

Outstanding Shares
The company issued $158,427,479 worth of convertible bonds back in April 2009 (at $1 par, convertible at $2.29). As of 31 Dec 2009, there remain 37,117,474 shares to be issued to satisfy the convertible issue, which means that there are 281,924,862 fully diluted shares outstanding (including unissued ESOS). This brings market cap to a manageable $1.4 billion (at today's close).

Brief valuation overview
Last reported NAV per share: $3.34 (price-to-book 1.5X)
Fully diluted NAV per share: $2.89 (price-to-book 1.74X)

Of course, NAV is not a good reflection of WBL's underlying value, considering the many assets (including the huge undeveloped landbank) which are carried at book value. However, based on book value alone, valuations are already not demanding.

Chinese property assets
The company's FY2009 (end Sep 2009) annual report lists the various development properties and undeveloped landbank in five cities in China - Shenyang, Chengdu, Chongqing, Suzhou and Shanghai. To be conservative, we have simply assumed that all WBL's development properties in China are undeveloped land, and have looked at recently transacted land prices as a gauge of valuation.

	Land Area (sqm)	Estimated Price per sqm (RMB)	Estimated Valuation (in RMB)
Shenyang, China	134,432	3000	403,297,200
Chengdu, China	325,864	4000	1,303,456,000
Chongqing, China	51,660	1300	67,157,740
Suzhou, China	133,502	1300	173,552,197
Shanghai, China	213,869	7000	1,497,081,600
Total			3,444,544,737

According to our estimates, the Chinese property assets are worth at least RMB 3.4 billion, or about $706 million. Assuming the stake in Ampwalk (KL) is worth RM550psf, the 2,451 sqm of commercial property adds another $6 million to "development properties" for a total of $712 million. These assets are carried at $258.5 million on the balance sheet (as at 30 Sep 2009).

Listed Equities
WBL Corp owns substantial stakes in three listed companies - Singapore-listed MFS Technology (77%), Nasdaq-listed Multi-Fineline Electronix Inc (58%), and Singapore-listed United Engineers (about 9.2%, classified as available-for-sale non-current financial assets on the balance sheet). As at 25 February 2010, these stakes were collectively worth $614.9 million (based on market value).

Listed Equity investments (as at 25 Feb 2010)
MFS Tech	$113,653,800.00
MULTI-FINELINE ELECTRONIX INC.,	$457,369,208
United Engineers	$43,858,240
	$614,881,248.23

Debt position
Looking at the balance sheet on 31 Dec 2009, WBL's cash and receivables exceed total liabilities by about $75 million.

Other unlisted entities

This consists of all the other major businesses - automotive, construction, the Australian sand mining operations etc. Most of these businesses are profitable but we are not going to attribute any value to them first.

Stock appears undervalued

Based on the market values of the three listed entities and our conservative estimates for the Chinese development properties (including the Ampwalk property in KL), and factoring in net cash of $75 million, we arrive at $1.4 billion, which indicates that we are getting all other businesses (the unlisted entities) for free. Notwithstanding this, the Chinese assets have been valued conservatively (as if they were raw undeveloped land, at slightly lower than market prices), so we are getting the future development potential of the land for free as well. Throw in the long history of the company with a good track record of corporate governance, and we are getting exposure to the lucrative Chinese property market via the guise of an under-researched technology company.

A target price is difficult to derive, but assuming an RNAV of $1.1 billion for the development properties, and another $400 million for the unlisted businesses (according to Kim Eng's estimates), coupled with the $615 million listed equities, we can derive a $7.47 RNAV for WBL Corp.  

New Holding - WBL Corp

Bought 1 lot of WBL Corp at $5.06
Will post more information on the company soon.