Portfolio review: Q3 2019 review

The five SGX companies in my portfolio reported mixed Q3 2019 results and their share prices have been depressed.These five companies should deliver growth in the future so I’m happy to hold these companies. iFAST and SOG has been the most consistent performers in terms of revenue and net profit growth and it’s a painful reminder to me to focus more on companies with recurring or predictable cash flow.

iFAST

iFAST assets under administration grew 17% year on year but net profit fell 6% because of growth investments as I previously mentioned. Revenue is growing despite market volatility and the company expects slower expense growth in 2020 which is a good thing. Key catalysts in 2020 include the outcome of its bid for a Singapore digital banking license, continued AUA/earnings growth and reduced losses for its China business. I’m not selling unless I see revenue and AUA decline for four consecutive quarters so I’m happy to keep iFAST in the portfolio. Trailing dividend yield is 3%.

Singapore O&G

Singapore O&G (SOG) reported good results with revenue growing 15% but net profit rose only 1% because of weak dermatology results and start-up costs for its new clinics. Excluding dermatology, the other segments are all growing nicely and dermatology results have been improving quarter-on-quarter which is a good sign.

The share price cratered recently after the CEO resigned. The news was disappointing because he has only been with the company for a year. But we have to remember that SOG has an unusual management structure where the CEO owns almost no shares of the company and has limited control. The founding doctors are the largest shareholders and revenue contributors while they take turns every two years to be chairman of the company.  This unusual situation makes the job of the CEO difficult because he has to lead specialists who are older, richer and who have ultimate control over the company. In short, CEO turnover could be a common occurrence for the company.

The founding Doctors should seriously consider taking on the CEO duties on a rotating basis instead of hiring outsiders for the job and/or hiring a COO to help with the daily management duties.  They are already taking on the chairman duties. This is a similar situation to other healthcare specialist companies listed on the SGX (eg. Talkmed) where the CEO tends to be the largest shareholder and the key revenue contributor.

Key catalysts in 2020 include a further recovery in earnings and renewal of employment contracts with key specialists. Based on my calculations, SOG should be able to achieve at least 10% earnings growth for the next five years and is worth at least SGD0.67 per share even if doctor headcount remains constant. There is a risk that SOG could report further impairments for its dermatology segment but I’m happy to hold on even if they do because it shouldn’t affect the long-term outlook of the company. I’ll consider selling if the founding doctors leave the company though. At a SGD0.30 share price, SOG is  trading at 13.5x recurring earnings and 18x TTM earnings if we include the dermatology impairment in Q4 2018. The trailing dividend yield is 5.1%.

Kingsmen

Kingsmen Q3 2019 results were bad with revenue falling 1% and net profit falling 95% year on year. But that’s to be expected given their heavy investments in  their new B2C attractions and NERF business. I find it hard to tell if their NERF Marina Square will be success. Reviews are mixed but the company is regularly posting Facebook updates that their Marina Square attraction is closed for private events. I tried booking a private room for my child’s birthday for a December weekend and was told that all the weekends are almost sold out! I plan to visit their Animal Planet exhibition soon and may post an update. Key catalysts in 2020 include updates on their attractions business and sub-franchisees for NERF. There is a risk that the company could reduce their dividend payout to fund their attractions business. I’ll consider selling if their NERF, Toybox and Animal Planet attractions fail to deliver growth. Trailing dividend yield is 5.6%.

China Aviation Oil

China Aviation Oil  posted decent Q3 2019 results so I won’t write too much here. The Chinese government is trying to cut jet fuel prices to help airlines but this is likely to be a short-term blip in a long-term growth story. The key reason why I bought the stock  is the favourable outlook for the outbound China travel market so earnings should continue growing in 2020. If CAO reports three consecutive quarters of declining net profit, I’ll consider selling.

HRNet

HRNet reported mixed Q3 2019 results. Revenue grew 2% but reported net profit fell 5%. Recurring net profit (excluding mark to market adjustments) actually grew 3%. Gross profit has been hurt by the weak Singapore professional recruitment and flexible staffing market despite improved North Asia results.  Key catalysts in 2020 include a turnaround in Staffline, their loss-making UK associate and a turnaround for the Singapore market. The whole point of their IPO was to expand into the North Asia market to avoid depending so heavily on Singapore so we have to be patient as they execute on this strategy. I bought HRNet because of the North Asia growth story so I’ll consider selling if the North Asia segment stops growing.