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Thursday, October 31, 2013

SIM LIAN: "Why I Like This Old And Family-Controlled Business"


Written by The Millennium
Wednesday, 30 October 2013 13:23

My investing style is more of Graham/Schloss and a bit of Buffett. I generally like to invest in assets at a discount than in their earnings potential. I tend to look at old family-controlled companies, with low levels of debts and constant generation of free cash flow. Dividend payments are the norm in such companies as the Board will usually pay out dividends to family members, and minority shareholders will stand to gain as well.

Investing in assets at a discount does not mean simply finding low P/B. There are many more important factors to take into consideration.

I avoid all China companies, and any company making consistent losses.

I recommend books such as The Intelligent Investor (Benjamin Graham), Common Stocks and Uncommon Profits (Philip Fisher), There's Always Something to Do (Peter Cundill), One Up On Wall Street (Peter Lynch).

Learning to ignore the noise and holding steadfast to your investments is also important. After doing research and deploying capital, it is simply a waiting game. This leads me to the point of diversification. There is the need to have adequate capital preservation methods and diversification helps.

Sim Lian's track record. Charts: FT.comI HAVE HELD on to Sim Lian Group shares for about 8 months now. I was initially attracted by its dividend yield and high ROE.

Sim Lian, which has a history of about 35 years, is one of the stronger property developer-cum-contractor companies in Singapore.

Its revenues and net profits have grown with the CAGR of net profits after tax being 31% for the last 7 years.

The company, which now has a market cap of nearly S$1 billion, has been regularly paying dividends and has an average payout ratio of 25% of earnings.

Sim Lian paid out special dividends of 2.5c + 5c (7.5c total) last year (2012) when the EPS hit a high of 24.75 c, resulting in a yield of 8.5%.

However, the dividend for 2013 fell to 4.6 cents due to lower profits, but it is still at a decent yield of 5.2% at the current stock price of 89 cents.

Sim Lian has also amassed a huge cash holding of $343 million, as a result of its generation of free cash flow.

Currently, the company is in slight net debt.

However, due to its purchase of a land parcel at Venture Avenue for $700 million in March 2013 and a freehold building in Australia for $70 million in Sept 2013, the gearing level will increase.

This increased debt level can be paid for by the company's numerous projects such as Waterview, Centrale 8, Parc Vera, Tampines Trilliant, and the recently released-for-sale Hillion Residences attaining TOP in the next few years.

We can thus expect the debt to be paid down with these incoming revenues. There could even be higher dividends for shareholders.

The company stopped offering scrip dividends this year after doing so for the last 2 years. This shows that management is confident of their cash flow and debt level.

Note that the company's controlling Kuik family and management own about 80% of the shares and thus their interest is strongly aligned with minority shareholders.

The high ownership by the Kuiks, however, probably account for the low liquidity of the stock.

Besides Singapore, Sim Lian also has property projects in Malaysia and has ventured into Australia this year. Certainly, the company is trying to expand and seek opportunities.

Sim Lian shares have gained more than 100% since the start of 2012, inclusive of 12.1 cents of dividends. Chart:

Venture Avenue project

This new project is in a good location as it is near Jurong East MRT, Jcube, JEM and Big Box, Jurong Country Club, Westgate, and IMM.

In the vicinity is also the Ng Teng Fong General Hospital which is currently being constructed and will open in 2014.

Low Keng Huat is partnering Genting Singapore to build a hotel in the same area too.

There will be strong traffic and retail options in this Jurong Gateway precinct which is being developed into a bustling hub.

Paya Lebar Square is undergoing construction and is almost fully sold with a decent profit. Venture Avenue is expected to enjoy similar success.

Sim Lian is trading at a rather reasonable price of around 89 cents, which is considerably cheaper than its peers such as Lian Beng, Chip Eng Seng, Yongnam, Wee Hur, and BBR.

Sim Lian also has research coverage by S&P. And these reports indicate bright prospects for the company.

The main risks are the rising cost of construction and materials, and the possibility of rising interest rates.

All companies will be affected, but those with strong fundamentals like Sim Lian will be more resilient and recover faster.

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