Wee Hur first caught my eye when I decided to play around with Benjamin’s Graham Net-Net filter after reading Deep Value Investing by Jeroen Bos. If you haven’t read this book, I highly recommend it! It features a lot of case studies where the author applied net-net filter and his thought process behind the investment. At first glance, Wee Hur wouldn’t interest you at all just by looking at its share price. To me, it’s good news because it means that most people overlook this company simply by visual filter alone!
For a start, here’s an interesting point: While share price has gone nowhere from 2011-2016, market cap has grown from S$182m in 2011(S$0.28 as at 14 Mar 2011) to S$239m(S$0.26 as at 26 May 2016).
Without further ado, let’s dive right in!
- Current Asset Heavy, Fixed Asset Light
- Skin In The Game
- Prudent Management
For a start, Wee Hur has consistently been net-net positive and it’s net-net/share is more than it’s current share price! If you have read about the net-net concept before, this means that current assets alone can cover all liabilities. Essentially, every other part of the business is free. I finally get what it means to “profit when you buy”.
Current Asset Heavy, Fixed Asset Light
Another reason why I like Wee Hur is because it is current asset heavy and fixed asset light. I see them as a cockroach because they simply won’t die so easily! When markets are bad, they shrink. When markets are good, they expand. This is a business that can survive in harsh market conditions, and thrive when the market picks up the pace again! What boils down in this investment is patience, and I’m willing to wait.
Skin In The Game
Mr Goh Yeow Lian, Managing Director and Co-founder of Wee Hur, has an effective 43.48% stake in Wee Hur. I really like it because when management has skin in the game, they would think twice before making rash decisions that may not benefit shareholders.
They have been in the business for over 35 years and have seen property markets rise and fall. Truly, “With small companies, it’s all about management.” Wee Hur’s mission statement is “Prudence in our ways.” Over the years, we have seen examples of how Mr Goh applies this mission statement in his business decisions. I had to dig around a little bit before I could find the background story of Mr Goh and wasn’t disappointed by Wee Hur’s humble beginnings and Mr Goh’s story!
“Amazing as it sounds for a company that operates in a highly cyclical industry, Wee Hur has never had a loss-making year. Mr Goh explained that Wee Hur has avoided tendering at ‘suicide prices’ just to secure work. It has also been selective of clients to avoid problems collecting payment.” – SharesInv 2009 Article
“Wee Hur tenders sensibly, instead of at ‘suicide prices’ just to secure work. And it would look for jobs only with clients that are deemed to be credit-worthy.” & “In scouting for landback in recent times, Wee Hur has turned away from several potential buys because the market prices didn’t made sense to it.” – NextInsight 2011 Article
“But the group is not exactly rushing into overseas projects, choosing instead to be prudent and cautious. “We will rest for a while until this (Australian) project is stabilised.” – BusinessTimes 2014 Article
- Lumpy Earnings
- Reliance On Property Market Cycle
In some years, there are many projects and in other years, there are very little. It becomes challenging to forecast future earnings of Wee Hur because size and frequency of projects cannot be forecasted. Earnings also tend to be lumpy in nature as earnings are recognised only upon TOP which could take 1-2 years. The combination of factors makes it slightly more challenging to make any forecasts about Wee Hur compared to companies in other industries. Having lumpy earnings will also affect some financial ratios used to evaluate the company, and one such example is the P/E ratio. (Use average P/E instead)
Reliance On Property Market Cycle
Property markets are known to be cyclical in nature and Wee Hur being in this field of business, has no choice but to adapt to it. Because of the reliance on the property market cycle, projects taken up by Wee Hur in a particular year can either be very high or very low depending on the cycle. In the next section, under Opportunities, I will talk more about how Wee Hur is trying to overcome this over-reliance on the property market cycle.
From Cyclical To Stability (Australia)
As the property market in Singapore begin to get more saturated with properties, Wee Hur eventually scoured overseas for investment opportunities. Not only is moving out of Singapore a significant move, it also marks a turning point in their business as they begin to focus on creating stable source of recurring income. All eyes are on this segment of the business, Dormitory. While we cannot be certain how much of an impact this segment will become, we remain hopeful with the words of Mr Goh who says “Upon completion and with a healthy occupancy rate, the student accommodation can contribute a significant recurring income to the Group.”
That’s not all. The student accommodation is only Plot 1 of 3 lands acquired in Brisbane. “The remaining two plots of land are still in their planning stages for residential development with commercial spaces at the lower floors. We target to obtain approval from the relevant authority for the proposed development by this year.” – Annual Report 2015
We’ll just have to wait and see how everything pans out!
- Poor Occupancy Rate
- Persisting Weakness In The Property Market
Poor Occupancy Rate
One of the major concerns going forward will be occupancy rate of Wee Hur’s Dormitories. “Our 60%-owned Tuas View Dormitory received the TOP for its Phase 2 in February 2015 and since has
been in full operation. Its occupancy is approximately 79% as at end-March 2016. Since commencement of Phase 1 operation in August 2014, we have been facing difficulties to attain the desired occupancy level and rental rates. We expect the challenges to fill the beds at desired rates to persist as the tumbling oil price has taken its toll on the marine and offshore industry with many companies in these sectors cutting headcount. Moreover, competition will be even stiffer with two new dormitories in the vicinity, together offering more than 20,000 beds, coming into operation in the second quarter of 2016. Nonetheless, we will continue our effort to improve the occupancy rate at desired rental” – Annual Report 2015
Oversupply of beds and a cut in manpower, a double-whammy indeed. We will have to see how Mr Goh plays this one out if he’s serious about going into Dormitories because what happens here, could happen in Brisbane as well albeit with lesser impact since students don’t just get cut off suddenly.
Persisting Weakness In The Property Market
Persisting weakness in the property market will negatively affect Wee Hur in the long-run. I’m glad Mr Goh saw that coming and thought about the importance of having a stable and recurring source of income from the Dormitory business segment.
Wee Hur is quite an unloved and overlooked stock that is trading at net-net level which its peers are not able to achieve. The Goh family has been in the business for 35 years and they have been showing prudence in their management decisions. Their financial position allows them to carefully consider decisions to protect margins rather than boosting revenue at the expense of having a lower margin. “With small companies, it’s all about management.” Having so many years of experience in the trade alongside with the high vested interest of 43.48%, Mr Goh gives me a sense of assurance that he will continue to lead the company to greater heights with it’s mission statement: “Prudence in our ways.”