Soilbuild Ltd

About Soilbuild Ltd

Soilbuild is an integrated property developer with a development portfolio of mid to high-end residential properties and business space properties for multi-national corporations and SMEs.

With an established track record of more than 30 years, the Group has successfully acquired and developed a range of residential properties mainly in prime urban districts with features that appeal to cosmopolitan buyers

Soilbuild Current Projects


As taken from soilbuild.com

Why Soilbuild?

What I like about Soilbuild is that it is focused on 2 different types of developments: Residential and Commercial. As mentioned in one of my earlier posts, I am neutral on residential property development. By being involved in these 2 different sectors, Soilbuild seeks to remove the cyclical nature of property developers.

Furthermore, what has attracted me to Soilbuild is that it is focusing on reaching $40million in recurring rental income by 2012. Soilbuild's dividend payout is determined by its rental income, of which 50% of recurring income is paid out. This translates to approximately 7 cents/share in 2012 based on current number of shares. Its special dividend payout is determined by sales of its property.

Soilbuild Revenue Recognition

Development properties refer to properties under development for sale.

(a) Unsold development properties
Development properties that are unsold are carried at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less cost to complete the development and selling expenses.

(b) Sold development properties
Revenue and cost on development properties that have been sold are recognised using the percentage of completion method. The percentage of completion is measured by reference to the development costs incurred to date to the estimated total development costs for the development property, which is supported by the physical surveys of construction work completed. When it is probable that the total development costs will exceed the total revenue, the expected loss is recognised as an expense immediately.

The aggregated costs incurred and the profit/loss recognised in each development property that has been sold are compared against progress billings up to the financial year-end. Where costs incurred and recognised profits (less recognised losses) exceed progress billings, the balance is shown as due from customers on development properties, under “trade and other receivables”. Where progress
billings exceed costs incurred plus recognised profits (less recognised losses), the balance is shown as due to customers on development properties, under “trade and other payables”.

Soilbuild Financials

Soilbuild's revenue is mainly driven by 2 businesses - Sale of Development Properties and Rental from Investment Properties.

From 2007 to 2008,
- YOY revenue increased by 125% and 158% for Sale and Rental respectively
- Rental income was at 9,904k
- Operating Profit YOY was 99,901k, up 47%, and 42% of sales
- Operating Profit less FV changes was 74,310k, up 205%, and 31% of sales
- Net Profit was 76,462k, up 46% YOY
- P/E ratio was 4.9
- NAV was 0.69
- ROE was 39%
- FCF was negative

From 2008 to 2009,
- YOY revenue increased by 34% and 49% respectively for Sale and Rental
- Rental Income was 14,770k
- Operating Profit YOY was 111,091k, up 11% from the previous year, and 35% of sales
- Operating Profit less FV changes was 97,614k, up 31% from the previous year, 30% of sales
- Net Profit was up 10% to 84,306k, 26% of sales
- P/E ratio was 2.42
- ROE was 31%
- Positive FCF of 161,922k

Comparison with Other Companies

Ho Bee recorded a record revenue this year, and Net Profit was up 261% YOY. Rental Income was 20,154k, 2% of sales, up 22% YOY, while sales was up 309% at 1.134billion. P/E was at 3.78, and NAV was 2.50. ROE was at 30%, P/B was at 1.04.

Keppel Land's profit was up 11%, however operating profit was down YOY. It was trading at a historical P/E of 14 for FY2009. NAV for Keppel Land was 0.92 for FY2009.
One thing to consider about Keppel Land was that its finance expense was 6% of sales. However, one thing that Keppel Land has going for it is that it has a (1) a huge land bank at Keppel Bay, and (2) it has many high end developments that would bring in the revenue over the next 2 years.

Conclusion

I am still neutral about residential property, with a bias towards the underweight side.

For me, the attractive thing about Soilbuild is that it has a focus developing rental income, and also does property sales. The focus on increasing recurring rental income would eliminate one issue for property developers - that they are cyclical.

One thing for investors to watch out for is that Soilbuild's stock is pretty illiquid. Besides that, as compared to the bigger developers, Soilbuild does not have a huge landbank, and that may cause problems in the future for property sales. What I wish to watch out for is that Soilbuild does not rely solely on recurring rental income.

Novo Group Analysis

I purchased Novo Group on Monday at SGD0.23. Here is the analysis.

Novo Group Background

Novo Group is a Global steel trader that supplies raw materials and steel products to steel mills and end users on long term and consistent basis. We play an active and important role in the supplies of raw materials to the end users by directly sourcing in bulk quantities from major steel mills in the world. We are re-allocating the resources in steel industry from countries with overall cost competitiveness to end users in different key markets who are in need of the relevant resources.

As of 2H FY2010, Novo Group has expanded into the coal industry.

Steel Industry Background

Steel is Iron that is mixed with traces of Carbon, and there are two major families of steel: alloy steels and non-alloy steels. Alloy refers to chemical elements other than carbon added to the iron in accordance with a minimum variable content for each.

Steel is used in the construction of roads, railways, infrastructure and buildings. Besides that, it is used in the manufacturing of household appliances and to a lesser degree, in the manufacturing of cars.

Steel has seen a high demand from China and India, mainly due to the building of infrastructure as they seek to develop at a rapid pace. Despite steel being affected like other commodities during the financial crisis of 2008, prices have increased since the March 09 lows, and are poised to head further north in 2010.

Coal Industry Background

Coal is used mainly as a source of fuel. However, other uses of coal include the smelting of iron ore, and also in the production of gasoline and diesel.

Even with the advent of clean, renewable energy, (and I still think that there is a lot of opportunity in the renewable energy sector), coal still serves as an important commodity to generate electricity. The higher cost of switching to cleaner forms of energy, which would most probably be passed onto consumers, is a main resistance for the change to clean energy. The transport of such commodities over long distances was one of the factors that Warren Buffett bought Burlington Northern.

Novo Group

As of the end of FY2009 YE Apr, Novo Group was a steel trader, serving as a middleman between the end users and the manufacturers. This results in lower margins for the company. Currrently, Novo has intentions to develop a steel processing plant in Tianjin, and has entered the coal industry.


As of FY2009, Net Profit fell 87% YoY, and Operating Profit fell 71% YoY. Although Revenues increased 9% YoY, cost of sales was 91%, up from 86% YoY. This resulted in a lower gross margin, translating in the fall in net profit. Other Operating Expenses was USD1.9million, mainly due to foreign exchange losses. EPS for the year was USD0.0025/share, pricing it at 29x earnings.

As of 1H FY2010, Revenue was down 37.3%, to USD217million. However, cost of sales was 85% of sales, down from 91% of 1H FY2009. Net Profit increased 2688% for 1H2010.

Furthermore, for 1H2010, other operating expenses dropped to 60k from 1,850k, due to no foreign exchange losses recorded. Even if foreign exchange losses were taken out the equation, net profit would still be up 193% due to the higher financing costs in 1H2009.

At the end of 1H2010, the company is in a net cash position of 1.54million, and a leverage of 0.50. Novo has a net asset per share of USD0.07, and an ROE of 14%. P/B ratio was valued at 0.12. Borrowings from the bank was a total of USD983k, all of which are secured and due within the financial year.

Comparison to Noble Group

As compared to Noble's FY2008 YE Dec, Cost of Sales was valued at 96% of sales, and profit margin was at 2% of sales. Noble was trading at 8x earnings, with a P/B ratio of 5.37.

Advantages

1) Novo's Tianjin plant allows it to be involved downstream by processing steel. By increasing its involvment in the supply chain, it allows Novo to obtain higher margins.

2) Novo has a Joint Venture with Oscar Maritime via Eastern Bulk Pte Ltd. This allows Novo control over shipping, and bring down shipping costs.

3) Novo has entered the coal trading business, and this utilises the same delivery system as steel. This would result in economies of scale, which may increase profit margins

4) For a company dealing with supply chain, it has low leverage. Furthermore, it has a 339.4 credit facility, of which 48.4million was utilized.

Disadvantages

1) Novo has a short history, it being established in 2005.

2) Novo does not own mines, therefore it is still dependent on its suppliers for raw materials.

3) Novo is vulnerable to fluctuations in steel and coal prices. A decrease in these prices will hurt the bottom line, as seen from 1Q2010.

4) Steel tends to be a cyclical industry

Conclusion

Novo is still a small company. However with increased earnings still to come due to forecasted higher margins, as well as it being undervalued to other competitors, there is still upside for Novo.

Jobless Recovery

With the economic indicators showing signs of recovery, albeit slower than expected, I will try to provide some information on a jobless recovery.

What is a jobless recovery?

As the name suggests, a jobless recovery is one where the economic indicators (such as GDP, increased consumer purchases etc.) are improving, but the unemployment rate remains just as high.

Why would a jobless recovery occur?

During the downturn, companies need to cut costs. One way of cutting costs is to reduce the number of people on payroll. Once the economy turns around, the company receives more orders / generates more profit. In order to handle the increased output, companies would require more manpower and thus would hire more people. Sounds right? Pretty much.

However, in some upturns, where economic times are on an uptrend, but the future is still uncertain, employees are more reluctant to hire new workers because should the prospect of a double dip recession come true, they would incur more expenses as many of the workers are hired on a contract. These workers may then be paid for doing absolutely nothing, hurting the company's bottom line. Should the worker be fired, the company would incur firing costs and hiring cost when the recession is over.

Companies are also reluctant to hire temporary workers, because of the training cost involved. Furthermore, there is no guarantee the worker would want to stay on, and by hiring another temporary worker, it would incur the same training costs again.

Why is a jobless recovery such a gloomy prospect?

In countries with a socialist structure, high unemployment rates put a strain on the government finances, as the unemployed would be entitled to unemployment benefits.

Even in Singapore, high unemployment rates would be an issue. Once a member of a family is unemployed, the discretionary income of a family drops. Spending is decreased, resulting in businesses suffering due to lower revenues. This translates into a need for businesses to cut costs, of which one method is to reduce its payroll expenses, further decreasing the discretionary income of families. This turns into a vicious cycle.

Recovery from a jobless recovery

The recovery needs to be to focused on job creation, as well as the sustaining the economy. Right now, the moves made in the US in order to provide credit to small businesses are right ones, because it is these small businesses that has the ability to create jobs. The bailout saved the banks, but as credit does not flow towards the small businesses, it may put them in trouble. By providing them direct credit as well as tax rebates to encourage them to hire more workers, it would decrease unemployment, causing a recovery in the job sector.

Hope this has enlightened my readers. Most of you should be clear on what a jobless recovery is but I hope this has helped in any way possible.

Once again, please vote on the Toyota poll on the right.

Toyota Poll

In view of the Toyota recall of cars, I have set up a poll on whether you would still consider Toyota when purchasing a car. Hopefully my readers would be able to provide a reply!