Follow Up Stock Analysis on Two Companies: WBL and Straits Trading

My writing intention is to raise market participants awareness on Straits Trading and WBL. This article is meant to get the reader to have better idea of how much both stocks should be worth. I am regretful if there is some degree of deviations from actual results due to unforeseen future circumstances. You, the reader, have your own responsibility to perform due diligent before you make a decision to buy stock. If you have any opinion or clarification on this piece of article, you are welcome to email me at tonydelpiero10@hotmail.com

Straits Trading Co. Ltd. refers to STC. There are a lot of developments occurring in the past three months. I will list events in order according to the date and offer each opinion of the effects of these events. WBL announced the CEOs resignation on the SGX bulletin board at 7 November 2012. The ex-CEO did a good job on the automotive division whereby car loans were offered on spot, if I read correctly on the article of The Edge few months ago. He took the task to trim WBL size by selling many subsidiaries. Today, he has not improved the WBL share price over few years. The WBL shareholders are likely to have no problem with his resignation. Till today, there is no CEO. A good appointment of group CEO can be one of these catalysts on the WBL share price. Looking at the current business model and its net assets, a new CEO should be the one who can enhance the profitability of automotive division, which is the top earner for WBL, and support the rest of the subsidiaries. I think Puffersoft Labs, which was acquired by WBL in early 2011, is good addition to WBL as it is involved with cloud computing technology that is about to be commercialized. Today, cloud computing is at infant stage of technology lifecycle, meaning that developers and users of cloud computing are still figuring out how to make use of it with the aim of cost reduction, and enhancement of qualitative factors. Two listed technologies firms, which significant interests own by WBL, are seeing turnaround on their profitability. They can manage themselves well. Few days after the CEOs resignation, the year end 2012 result was published. Over 10 years, WBL has steadily grown the revenue, which is impressive feat. However, its gross profit is almost flat for the last 8 years. It is probably acceptable for given its business model where it has no moat. It is notable to have its net assets to grow well. Based on this result, the valuation remains the same, leaving sufficient margin of safety for its given current market price. WBL is quite conservative firm as it consistently pay dividend no less than $0.10 per share per year by virtue of dual dividend per share in a year. It is likely to continue as it is able to generate profit that is used to service such dividend payout expectation. On 26 November 2012, STC did two stunning announcements on the SGX bulletin board. Firstly, it announced that it has strategic alliance with Far East Orchard (FEO) and Far East Hospitality (FEH) Trust on Rendezvous Hotel, which is entire hospitality division of STC. The strategic alliance consists of: 1. 2. 3. There is joint venture between STC and FEO, whereby both of them own 50% each of three Rendezvous hotels located in Australia. STC will receive cash payment for 50% interest from FEO. A hospitality management company will be created by STC and FEO where STC and FEO will have 20% and 80% interest. For that 20% interest, STC will pay in cash to FEO. Rendezvous Grand Hotel Singapore and Rendezvous Gallery Singapore will be managed by FEH.

Looking past 3 years, STC performance in hospitality division is unsatisfactory. The strategic alliance is very aggressive move. It makes sense to tap the expertise from FEO and FEH. With respect to first and second point, by logic, STC may receive positive net cash payment from FEO. That may affect the year end 2012 profitability of STC. Point 3 may be cheaper option for STC rather than managing its own. Rendezvous recently send memberships to STC shareholders as one of these ways to improve hospitality revenue. Secondly, it announced that it will acquire WBL shares from Aberdeen and Third Avenue Management LLC either by cash payment for $3.41 per share or by share exchange (one WBL share for 1.07 STC share). It is yet another bold and aggressive move. The former offer option does not make sense. The latter offer option is much more appealing. I personally endorsed this move because it will definitely unlock WBLs hidden value. It is another catalyst to improve WBLs share price as well as STCs share price. Some of WBL shareholders may not like such offer because of lower profitability made by STC as compared to that of WBL. I think it is incorrect judgment to make on the basis of absolute profitability by single entity. It is because they

have different businesses except property division. WBL and STC used to be two of seven sisters owned by OCBC. Tencity Group acquires STC in 2008. Although it is currently restructuring STC, it is not in rush to change everything. It is considered to be patient actions. With less reliance on the profit driver of hospitality and an increase in WBL interest, whoever behind STC determines the strategic direction of STC, most likely to be Ms Chew, is quite aggressive to improve the fortunes of STC. In terms of strategic rationale discussed by undergraduate and postgraduate-level management classes, STC is considered as portfolio manager just like Berkshire Hathaway. With no CEO in WBL, STC is likely to be the one determining the choice of CEO to run WBL. In January 2013, the STC shareholders approved the resolution to acquire significant additional portion of WBL shares. In few days later, Aberdeen exchanged its WBL shares (about 7.47% of total outstanding WBL shares) for STC shares. Third Avenue Management LLC also exchanged its WBL shares (about 16.10% of total outstanding WBL shares) for STC shares. Now, STC will have about 40.58% (=6.42%+10.59%+7.47%+16.10%) direct and deemed interest in WBL. In this case, in accordance to Singapore Financial Reporting Standard (SFRS), the STC accountant has to increase the amount of Investment in Associate because 40%+ interest in WBL qualify WBL as STCs associate rather than STCs subsidiary that will allow STC to add WBL net assets line by line. Given my sufficient understanding in SFRS, FRS 103 computation will show the value of higher than $254m. It will appear in 1Q 2013 financial statement of STC, which will be published in around May 2013. Such post-acquisition WBL profits will improve STCs net assets, all other things equal. I urge STC to buy additional 10% interest of WBL at open market price rather than $3.41, which does not deserve to WBL shareholders. The valuation on the basis of asset power will be much more attractive because with more than 50% interest in WBL, STC can add all WBLs net assets to STCs net assets line by line as a consequence of treating WBL as STC subsidiary. It is possible that in few years later, STC, with sufficient cash, will be able to buy the remainder of WBL shares. It may happen who knows. With portfolio manager style and shareholder friendliness, STCs future is getting better and better with unique STC shareholders as well as WBLs future with its unique WBL shareholders (I attended both STC and WBL AGMs). Given my observation, Mr Norman Ip, current WBL chairman, has impressive education qualification and used to work for STC. He has appropriately fulfilled the role of chairman described by the best practice of corporate governance. Based on above written analysis, I place the buy recommendation on STC and WBL shares. Disclosure: I have long position in STC and WBL shares.