The share price of Sendai has dropped from the peak of RM1.40 about 20
months ago to 49.5 sen now, for a loss of 65% in less than 2 years as
shown in the share price movement of Sendai below. Is it a good time to
bottom fishing now?
Let us refer to the Golden Rule, the sure win investment strategy propagated in i3investor to see if Sendai is worth investing at this price.
The Table above shows there is increasing revenue as well as profit for two consecutive quarters for Sendai. Earnings per share, EPS, increased from second quarter 2018 from 1.38 sen to 1.68 sen in third quarter and then to 2.51 sen in the final quarter 2018. Annualizing the final quarter results using the Golden Rule gives EPS of 10.24 sen. Further using a PE of 10, according to the Golden Rule, Sendai share price should worth RM1.02 apiece.
Yes, the quarterly earnings, with the last one reported 2 months ago, increase as well as valuation shows Sendai meets the Golden Rule perfectly. But how come the share price of Sendai refuses to go up to close to RM1.02, and instead it drops and continues to drop?
It is obvious that there is no smart money going after it. Those institutions investors who are savvy and have no interest in it.
Most retail investors have not much knowledge in the language of the business; how to evaluate the performance and the risks of a business by reading financial statements, or even care to learn about it. At most, they only look at the earnings in very simplistic way, the EPS without looking deeper into what those earnings mean. Few looks at the balance sheet to have a grasp of the financial health of the company. Yet, rarely anyone look at the cash flows statement, arguably the most important of the three major financial statements.
The cash flows statement tells us how much cash a company is able to generate from its operating, investing and financing activities. It tells us if the company earns what it said it earns.
Table 1 below shows that Sendai has been making profit for the last 5 years, except for the year 2016 when they incurred a huge loss of RM274m, worsen by an impairment loss of RM102m from an investment. However, its net cash flows from operations (NCFFO) were far from satisfactory. For example, in 2018, net profit was RM74.7m, but there was a deficiency in NCFFO of RM92.5m, even after adding back the non-cash depreciation of PPE of RM58m. The worst was in 2015 when Sendai purportedly made a net profit of RM61.5m, it had to fork out cash of RM250m in the year.
Table 1: Cash flows from operating activities and free cash flows of Sendai
Why are the NCFFO so poor?
In the last 5 years from 2014 to 2018, Sendai’s revenue grows by 70%, from RM1 billion to RM1.71 billion. On the other hand, inventories grow by 142%, while Trade account and other receivable and amount due from customers grow at an alarming 208%, way above the growth in revenue. To put that into perspective, it takes the company more than 400 days to collect its outstanding debts. The jump in Inventories and Receivables was particularly alarming from 2016 to 2018. This seriously and adversely affecting the cash flows of the company, with huge amount of cash tied up as working capitals for the operation. Being a construction company, it also casts some doubts on whether some of these Receivables are subject to disputes and if they are collectable.
As the company getting more jobs, it had to spend a total of RM475m in purchasing property, plant and equipment in the last 5 years to fund this growth as shown in the cash flows from investing activities. As a result, free cash flows (FCF) were negative every year, without any exception. The company did not even earn enough cash to fund capital expenses each year. The worst was in 2015, with a negative FCF of a whopping RM416m due to the poor NCFFO and high capital expenses. FCF for 2018 was bad too with a negative of RM153m. For the last 5 years, Sendai was bleeding cash and had to find RM777m cash from somewhere to fund its operations and its growth, but apparently did not yield positive results.
Where did the management of Sendai find cash to plug those holes?
Over the last 5 years, Sendai has a net drawdown about RM666m of loan from banks to fund its operations as shown in the statement cash flows from financing activities. As a result, its total debts have increased by about the same magnitude as shown in the balance sheet. Besides, it sold off some of its investment securities and unit trust funds amounting about RM147m as shown in the statement cash flows for investing activities over the years. In year 2017, it attempted to place out its shares to the public, but only RM6.7m was received as shown in the statement of cash flows from financing activities.
Sendai is an established construction company specializes in steel structures design and construction. It has its footprint all over the world in Abu Dhabi, Dubai, India, Qatar, UAE, and Singapore, Thailand, Philippines, Indonesia, and Hong Kong. Its turnover and job in hand is in the billions Ringgit. It appears to have made some profit. However, its cash flows are in dire straits. I wonder how it could survive any more with such serious cash flows problems. Its financial health is also in dire straits now as shown in its balance sheet analysis, and hence banks would be reluctant to lend more money.
In my opinion, Sendai has to carry out some rights issues or shares placements very soon in order to survive and keep its doors open.
Success in investing is not so easy as just to follow some simplistic rule. If something is so simple, it is unlikely one can make extra-ordinary return from it. Worse, one might lose his pants being deceived by the illusive ”earnings”.
Revenue is vanity. Profit is sanity. Cash is reality.
If you are keen to learn about the language of business in order to avoid losing big from listening to rumours and touting of stocks by interested parties but have a better chance of earning satisfactory return to build long-term wealth safely but surely from the stock market, you may contact me at
ckc13invest@gmail.com
KC Chong
Let us refer to the Golden Rule, the sure win investment strategy propagated in i3investor to see if Sendai is worth investing at this price.
|
Date
|
Financial
|
No.
|
Financial
|
Revenue
|
PBT (RM,000)
|
Net Profit
|
EPS (Cent)
|
|
Year
|
Quarter
|
(RM,000)
|
(RM,000)
|
||||
|
28-Feb-19
|
31-Dec-18
|
4
|
31-Dec-18
|
492,496
|
23,855
|
19,586
|
2.51
|
|
29-Nov-18
|
31-Dec-18
|
3
|
30-Sep-18
|
432,206
|
16,371
|
13,136
|
1.68
|
|
28-Aug-18
|
31-Dec-18
|
2
|
30-Jun-18
|
389,772
|
8,847
|
10,753
|
1.38
|
The Table above shows there is increasing revenue as well as profit for two consecutive quarters for Sendai. Earnings per share, EPS, increased from second quarter 2018 from 1.38 sen to 1.68 sen in third quarter and then to 2.51 sen in the final quarter 2018. Annualizing the final quarter results using the Golden Rule gives EPS of 10.24 sen. Further using a PE of 10, according to the Golden Rule, Sendai share price should worth RM1.02 apiece.
Yes, the quarterly earnings, with the last one reported 2 months ago, increase as well as valuation shows Sendai meets the Golden Rule perfectly. But how come the share price of Sendai refuses to go up to close to RM1.02, and instead it drops and continues to drop?
It is obvious that there is no smart money going after it. Those institutions investors who are savvy and have no interest in it.
Most retail investors have not much knowledge in the language of the business; how to evaluate the performance and the risks of a business by reading financial statements, or even care to learn about it. At most, they only look at the earnings in very simplistic way, the EPS without looking deeper into what those earnings mean. Few looks at the balance sheet to have a grasp of the financial health of the company. Yet, rarely anyone look at the cash flows statement, arguably the most important of the three major financial statements.
The cash flows statement tells us how much cash a company is able to generate from its operating, investing and financing activities. It tells us if the company earns what it said it earns.
Table 1 below shows that Sendai has been making profit for the last 5 years, except for the year 2016 when they incurred a huge loss of RM274m, worsen by an impairment loss of RM102m from an investment. However, its net cash flows from operations (NCFFO) were far from satisfactory. For example, in 2018, net profit was RM74.7m, but there was a deficiency in NCFFO of RM92.5m, even after adding back the non-cash depreciation of PPE of RM58m. The worst was in 2015 when Sendai purportedly made a net profit of RM61.5m, it had to fork out cash of RM250m in the year.
Table 1: Cash flows from operating activities and free cash flows of Sendai
|
Year |
2018
|
2017
|
2016
|
2015
|
2014
|
Total
|
|
Net Profit |
74727
|
87066
|
-274089
|
61549
|
36315
|
-14432
|
|
NCFFO |
-92548
|
71590
|
-87040
|
-249533
|
52063
|
-305468
|
|
Purchase PPE |
-61815
|
-85073
|
-61883
|
-166458
|
-100209
|
-475438
|
|
Sales of PPE |
1079
|
832
|
781
|
378
|
925
|
3995
|
|
Free Cash Flows |
-153284
|
-12651
|
-148142
|
-415613
|
-47221
|
-776911
|
In the last 5 years from 2014 to 2018, Sendai’s revenue grows by 70%, from RM1 billion to RM1.71 billion. On the other hand, inventories grow by 142%, while Trade account and other receivable and amount due from customers grow at an alarming 208%, way above the growth in revenue. To put that into perspective, it takes the company more than 400 days to collect its outstanding debts. The jump in Inventories and Receivables was particularly alarming from 2016 to 2018. This seriously and adversely affecting the cash flows of the company, with huge amount of cash tied up as working capitals for the operation. Being a construction company, it also casts some doubts on whether some of these Receivables are subject to disputes and if they are collectable.
As the company getting more jobs, it had to spend a total of RM475m in purchasing property, plant and equipment in the last 5 years to fund this growth as shown in the cash flows from investing activities. As a result, free cash flows (FCF) were negative every year, without any exception. The company did not even earn enough cash to fund capital expenses each year. The worst was in 2015, with a negative FCF of a whopping RM416m due to the poor NCFFO and high capital expenses. FCF for 2018 was bad too with a negative of RM153m. For the last 5 years, Sendai was bleeding cash and had to find RM777m cash from somewhere to fund its operations and its growth, but apparently did not yield positive results.
Where did the management of Sendai find cash to plug those holes?
Over the last 5 years, Sendai has a net drawdown about RM666m of loan from banks to fund its operations as shown in the statement cash flows from financing activities. As a result, its total debts have increased by about the same magnitude as shown in the balance sheet. Besides, it sold off some of its investment securities and unit trust funds amounting about RM147m as shown in the statement cash flows for investing activities over the years. In year 2017, it attempted to place out its shares to the public, but only RM6.7m was received as shown in the statement of cash flows from financing activities.
Sendai is an established construction company specializes in steel structures design and construction. It has its footprint all over the world in Abu Dhabi, Dubai, India, Qatar, UAE, and Singapore, Thailand, Philippines, Indonesia, and Hong Kong. Its turnover and job in hand is in the billions Ringgit. It appears to have made some profit. However, its cash flows are in dire straits. I wonder how it could survive any more with such serious cash flows problems. Its financial health is also in dire straits now as shown in its balance sheet analysis, and hence banks would be reluctant to lend more money.
In my opinion, Sendai has to carry out some rights issues or shares placements very soon in order to survive and keep its doors open.
Success in investing is not so easy as just to follow some simplistic rule. If something is so simple, it is unlikely one can make extra-ordinary return from it. Worse, one might lose his pants being deceived by the illusive ”earnings”.
Revenue is vanity. Profit is sanity. Cash is reality.
If you are keen to learn about the language of business in order to avoid losing big from listening to rumours and touting of stocks by interested parties but have a better chance of earning satisfactory return to build long-term wealth safely but surely from the stock market, you may contact me at
ckc13invest@gmail.com
KC Chong
https://klse.i3investor.com/blogs/kcchongnz/202651.jsp
