Posted by: donmihaihai | November 29, 2007

Trick to get higher valuation.

CEO and owners are alike, both love higher valuation. There are many ways(tricks) to achieve that, somehow not all will work out as plan but well, there won’t be lack of trying for many. Look at a recent example, Singapore Shipping Corp(SSC).

When SSC decided that the shipping cycle had peaked in 2005 and divested all vessels while announced that they will wait for the cycle to drop and in order to purchase vessel at a cheaper price. What an opportunistic vision which does not see to be working at the moment but this is not the key concern here. After the disposal of vessels/associated companies/subsidiaries and separate listing of Cougar thru dividend in specie, SSC was left with a small fleet of car transportation vessels and vessel management business and some associated companies. 

The main point was at Mar 2006, SSC NTA was at $225 million, cash and investment at $205 million. After taking consideration of liabilities cash and investment still stood at around $194 million. In per share basis, SSC NTA at Mar 2006 was around $0.52, Net cash and investment per share at $0.45. During the announcement of FY2006 results and dividend payment of $0.12, SSC closed at $0.495(taken from it website). At that time, SSC was valued at just below NTA and just above Net cash and investment.

One year later, SSC FY2007 results was going nowhere, with a net profit of $13 million, operating profit was only $2.9 million, the rest was from disposal and interest income, etc, SSC announced another $0.12 of dividend. This time SSC share price was sent to a high of $0.58 which value SSC with a market Cap of $253 million. At that time SSC NTA was at $184 million, cash and investment at $168 million and Net cash, investment at $165 million. On per share basis, SSC NTA was $0.42 and Net cash, investment at $0.38. Suddenly, with their small business going nowhere, and with a second time big dividend payout of $0.12, SSC was trading at $0.58(peak) which was 1.4 X NTA and 1.5 X net cash and investment. The valuation became more expensive.

6 months later, during 2nd 2008 results which was going nowhere as well, SSC announced another $0.12 of dividends payout. SSC end today at a share price of $0.50 which also means SSC market Cap is at $218 million. What about SSC equity and Cash/investment amount to? With a shareholder equity of $136 million and Net cash, investment of $118 million. On per share basis, NTA is $0.31 and Net cash, investment is $0.27. Now the valuation is becoming even more expensive as it is trading at 1.6 X NTA and 1.85X net cash and investment.

Here is the trick, just do exactly the opp. of logical way, retail shareholders, speculator and dividend lover will cheer the share price higher which in term value SSC in a much higher valuation(each with their own agenda). And the trick does not end here, let say the share drops $0.12 and end at $0.38 after Ex-dividend, SSC will be trading at 2X NTA and 2.5 X net cash and investment. Doesn’t it sound good? By doing nothing, and pay out cash in bank, SSC is able to trade at a valuation that it cannot dream of when it was operating their full set of businesses. Doing nothing is better than doing something.

How the story end? I don’t know but in a year time, those who cheering and never leave the ship or new comer will wake up and discover that SSC dividend payment will dropped in huge amount. With net cash and investment of about $0.15 after this payment, how many $0.12 can SSC pay out in the future? Maybe the current payment is the last one because the management did say that they intend to buy vessels when the price is cheap and with about $66 million post payment, don’t they need it for future capital expenditure? And I seriously doubt the management opportunistic vision at this moment because with BV of about $80 million which include cash of $66 million, even by gearing up, how big a fleet of vessels can SSC purchase?

How many more tricks does SSC have? I don’t know but why not do a RTO when it becoming a shell company? This way I bet the valuation can even get more expensive.

While I am writing about SSC tricks, I have no idea are they really using any kind of tricks. But what can be seem here is the valuation began with a logical explanation and become more and more speculative along the way.

It is like ppls are paying to get a share water from a tap from a huge tank which has a limited slot for limited ppls, after seeing those who full their bottle full of valuation water, new ppls decided to join the party and buy out the current slot owner at a higher price knowing that thru past experience, an opening and closing of the tap can yield a bottle full of water. Those who do not sell are waiting happily for the next tap opening. While slot owners are happily looking at the valuable water running from the tap but they forget to do a simple thing, checking how much water are in the tank and where they come from. One day they will be wondering why the water stop running while the tap is open.

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Responses

  1. Well, most do cheer when things are going their way. it is what they see as a value play.

    I’m surprised by the price rise really. is there a reason why it should rise? its the same when telechoice or sp reinsurance declare a big div.

  2. Surprise? Maybe.. but think about it using Psychology.. Especially the works of Ivan P. Pavlov, the most well known and being quoted again and again.

    >>>> In a famous study, Pavlov rang a bell each time he gave a dog some food. The dog’s mouth would water when the animal smelled the food. After Pavlov repeated the procedure many times, the dog’s saliva began to flow whenever the animal heard the bell, even if no food appeared. This experiment demonstrated that a reflex–such as the flow of saliva–can become associated with a stimulus other than the one that first produced it–in this case, the sound of a bell instead of the smell of food. The learning process by which a response becomes associated with a new stimulus is called conditioning.

    http://www.a2zpsychology.com/ARTICLES/SCHOOLS_OF_PSYCHOLOGY.HTM

    So those share price movement is not that surprising after all as some follow the “bell” and other act by knowing a ring of “bell” can produce what kind of results.

    Similar experiments were conducts over diff kind of animals but are we diff because we are human. Are human really diff? Some book say human thru evolution changes. But only as recently as last century or so that we live in a world where our life does not depend on reacting instantly to danger or food. For period earlier, those who are slow or weak lost out.


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