Transit Mixed Concrete: Low Liquidity 7.8% yielder

Its been some time since we reviewed new stocks. The market have went down 20% and now have stabilized, but in all honesty its not really the stocks that I would bite.

Perhaps a few years ago I would have bitten Sembcorp and Keppel due to the past write-ups but the more you do things the more you grew a dose of skepticism.

So now I keep watch on some of the little companies around that most folks won’t want to buy. These are perhaps foolish investments to a lot of people.

Current Price: $0.51

Outstanding number of shares: 69 mil

Current Dividend Per Share: $0.035 (6.8%)

Transit Mixed Concrete is a little business in the space of construction and property industry. Their main business is in Concrete Pumping with less in Ready Mixed Concrete and Waste Management.

They just release their half yearly results which can be seen here.

Concrete itself looks like a challenging business that is tied to the cyclical nature of the economic cycle. You need more of it if there are more building and less of it when people build less. It also depends on the supply constraint as well sometimes.

The bulk of the cost comes from transportation which can be a monster. Hence those companies with an advantage in this business is where they are also producing near their main clients, or that they can produce concrete cheap.

If it is a good business we should see much attraction to Pan United.

Concrete Pumping perhaps is a different business that is tied more closely with the building activity in the area of operations.

Competition and Gross Margins

If this is such a good niche business, and its low barriers to entry, given how good the construction sector is in recent times, we should see more entrants entering thus reducing the gross margins.

• 2008: 23.93%
• 2009: 35.45%
• 2010: 32.65%
• 2011: 20.88%
• 2012: 20.35%
• 2013: 20.59%
• 2014: 23.01%
• 2015: 28.35%
• 2016 HY: 29.16%

Gross margins over the past 8 years have shown largely a U shaped trend. Should there be more competition and that transit mixed do not have any advantage, margins should stay largely at 20%, however things have been good.

Below are the EBITDA Margins for the largest segment, which is the concrete pumping segment:

• 2008: 38.68%
• 2009: 48.56%
• 2010: 45.83%
• 2011: 37.44%
• 2012: 33.89%
• 2013: 33.52%
• 2014: 36.61%
• 2015: 41.96%

The concrete pumping div does show the same pattern as overall gross margins.

The only conclusion I draw is that with more competition the data didn’t show a clear weakness in any advantage they have.

Cost Control

Usually the two largest part of the cost other than the per unit expenses are the administrative expenses, and the capital expenditure.

Admin Expense as a % to Rev:

• 2008: 9.34%
• 2009: 8.59%
• 2010: 8.18%
• 2011: 10.78%
• 2012: 9.68%
• 2013: 8.84%
• 2014: 7.91%
• 2015: 8.73%
• 2016 HY: 6.61%

Very interesting business. Administrative Expenses stay largely controlled as revenue increases based on business.

Capex as a % to Rev:

• 2008: 8.91%
• 2009: 25.1%
• 2010: 10.41%
• 2011: 16.71%
• 2012: 20.42%
• 2013: 11.02%
• 2014: 8.18%
• 2015: 4.08%
• 2016 HY: 9.15%

Notice that in 2009, 2011, and 2012 there have been more capex. It could be part of the recent better cash flow situation is due very much to lower capex.

The Capex to Depreciation Ratio:

• 2008: 97.04%
• 2009: 335%
• 2010: 115%
• 2011: 134%
• 2012: 156%
• 2013: 88%
• 2014: 71%
• 2015: 37%
• 2016 HY: 90%

The years of 2009 to 2012 saw an increase in capex. Much of this might be to build up capacity since in 2010 they are operating at full capacity.

The meaningful depreciation are as follows:

• Plant and Machine: 5-10 yrs
• Office equipment: 5-10 yrs
• Motor Vehicles: 5-10 yrs
• Trucks and mixers: 5-10 yrs
• Concrete pumps: 10 yrs
• Renovation and electrical installations: 1-5 yrs

It would seem that Transit build up much capacity to handle recent upsurge in demand, and these would still last them some time. The good point is that revenue have been trending up, yet the capex after the initial investment do not need to always scale up.

I guess at some point they will need to replenish, so the cash flow we will need to factor in 4-5 years of massive replacements.

Not sure about this but perhaps talking to management will shed some light here.

Major Concrete Pumping Projects

I would have thought its a pretty cyclical business. However, it seems that their fortunes are more tied to the general construction climate of Singapore.

What kind of projects do they do? Here are the concrete pumping projects:

2010:

• MRT Circle Line
• MRT Downtown Line
• MBS
• Resorts World Sentosa
• Marina Bay Financial Centre
• Jurong Island Petrochemical Hubs
• Various condominium projects

2011:

• MRT Circle Line
• MRT Downtown Line
• Loyang Offshore
• Tanjong Kling Warehouse
• Marina Bay Financial Centre
• Jurong Island Petrochemical Hubs
• Various condominium projects

2012:

• Marina Coastal Expressway
• Specialist Shopping Centre
• Asia Square Tower Two
• Connexion Mediplex
• Changi Business Park
• Various condominium projects

2013:

• South Beach Mixed Development
• SUTD Project @Changi South
• MRT Depot @Tuas West Extension
• Ng Teng Fong General Hospital
• Mediapolis @One North
• MRT DTL3 Sungei Road Station

2014:

• Tanjong Pagar Centre
• Mapletree Business City 2
• MRT Downtown Line 3 C937, C922, C931

2015:

• Tanjong Pagar Centre
• Mapletree Business City 2
• Changi Terminal 4
• SLNG Terminal (P3)
• Duo Residences mixed development

If we rate by projects, it seems recent years there are LESS projects, gross margins for 2011 to 2014 was lower, and the capital expenditure was higher in 2009 to 2012.

The more I look at it the more I drew the conclusion that Transit Mixed got higher value contracts, able to keep their cost controlled, and have invested upfront and now require less capex for this cycle. Hence profits are better.

It will be interesting to see if that, we will come a case in 1998 to 2002 when the construction sector is absolute phish.

If we think lesser HDB flats and condominiums is going to be bad for Transit Mixed then perhaps we are looking at it the wrong way, judging by the projects they engaged with.

In the earlier years in 2010 and 2011, there were at least condominium projects while in latter years there were much focus on public and private non residential projects.

With less of the public projects, the profits have gone down. So much of the value depends on whether there will be a robust development in public projects.

The challenge in the future is that after 2017 there don’t seem to have a clear pipeline for industrial spaces, some office spaces and retail spaces, while we know there are going to be MRT Projects, Changi Terminal Projects, Port Projects and redevelopment of existing buildings.

Dividends and Cash Flow

Earnings wise, Transit mixed hasn’t shown a consistent set of earnings, however, their dividend payout ratio have been good at 40% upwards.

The dividends paid out shows prudence fin that they tend to pay out from free cash flow, even with some years where dividend exceeds free cash flow.

If we tie everything together, that is, the historical set of projects, the nature of public to private projects, we might see years where there are less projects, there are upcoming years of more maintenance capital expenditure.

While this year the dividend is forecast to be $0.04, with a 61% rise in dividends, I do not see evidence that this payout is a conservative payout to buy into.

This means that at the purchase price of $0.51, I do expect in the future for transit mixed to pay out less than $0.04.

The share price of Transit Mixed Concrete have risen from $0.30 in 2011 to $0.51.

Even at 1.4 mil which is $0.02 dividend, the dividend yield at $0.30 is a respectable 6.7%.

Liquidity

The top 20 share holders owned 90% of Transit Mixed. If you wanna get in it is difficult to buy. If you wanna get out when there are bad earnings, you may not be pleased with the price you are paying for. Top 3 share holders own 70% of the company.

Summary

This is as much as I know now. Which acts as a good starting point to understand more about this company. The big investors will shunned this company because the total market cap is just SG$ 35 mil. $100,000 will make you the Top 20 share holders haha!

I like that the cost is controlled and we do not see increase competition for such a lucrative industry. Generally the business have no debt with only lease obligations. The inventory and receivables scale with the revenue as well.

There is a certain level of predictability since we know that there will be infrastructure projects, and redevelopment works. However, I am not comfortable buying at a price where it has already factored in forward looking increasing earnings and cash flow, which might not have taken into consideration that earnings can head down if there are less projects.

For such a business, there comes a time when the earnings go down due to lesser work to be done, and thus the share price would go down accordingly.

If they are still the well run ship as they are now, they should still pay a decent dividend. Perhaps 5-6%.

That should be a good return to wait with the ramp up in future infrastructure works the call option to propel a higher dividend yield and capital appreciation.

Always seek to understand the business, buy with conservative reward and let the upside take care of itself.

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