E&E - Charts & Valuation

Historical chart, 1994 - 2008

Historical low - 30/01/1995: US$0.451

Historical high - 29/09/1997: US$3.799

Unconditional offer to minority shareholders by Kingboard during its acquisition of E&E in 2004: US$2.85.

Stock price plunged below major trend lines during the crash in Sep-Oct 2008. ='(

1-year chart, 2008*

*Up to 26 Nov, 2008

Recent low - 30/10/2008 : US$0.810
Recent high - 13/04/2007 : US$2.674

During the year, Kingboard has acquired a total of 679,000 E&E shares at an average price of US$1.423 (with the bulk of transactions in October), raising its total interest in E&E to over 71%.

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Basic Share data

Number of shares in issue as at 30/09/08: 178.9m (excluding treasury shares)
Free-float: 18.8% (ie. 33.6m shares)

Last traded price as at 26/11/2008: US$0.870
Market capitalization: US$155.6m

(As at 30/09/2008, cash per share: US$0.392m, NTA per share: US$2.04)

My Valuation

Using PE ratio

Current PE (based on FY2007 fully diluted EPS): 4.51

Current PE (based on YTD 3QFY2008 fully diluted EPS): 4.15

Assuming PE of 8, base on YTD 3QFY2008 fully diluted EPS, price = US$1.677

Using Gordan's Dividend Discount Model

Dividend yield (based on dividend of US cents 20.5 paid in FY2007): 23.6%

(Interim 8.0 US cents + Final 4.5 US cents + Special 8.0 US cents)

If divdend rate = 12.5 US cents per share, dividend yield: 14.4%.

Number of years to recover investment through dividends: ~ 7

Assuming dividend rate at 12.5 US cents with 0% growth rate and required rate of 9%,
Price = US$1.389 (very conservatively, I would add.)

Why I like E&E?

I mentioned in my previous post that I like the stock mainly because of its generous divdends.
Here, I shall attempt to further justify my liking.

Earning Prospects and Growth

E&E survived and remained profitable during the Asian financial crisis in 1997, burst of dot-com bubble in 2000 as well as the outbreak of the second gulf war and SARS in 2003. This track record provides assurance that the company is strong enough to withstand turbulent times.

Although current credit crisis may soften market demand for PCB, healthy long-term outlook is supported by the growing importance of technology in our daily lives (eg. computers, laptops, handphones, etc). The postive long-term outlook is further bolstered by consumers' demand for higher speed, lighter weight, more functions and better performance for new electronics products as well as shortening of product life cycle. As one of the world's top PCB players , E&E is likely to benefit from the trend.

However, increasing competition and volatility in the prices of raw material pose challenges to its profitability, as evident in the lower profit margins in the recent years (average profit margin: FY1991 - 1999: 14.5% vs FY2000 - 2007: 10.6%). The problem is partially mitigated by E&E's close association with Kingboard Group, which allows E&E to enjoy preferential access to developemental capabilities and competitive pricing for raw materials. In addition, the Group is striving to improve profitability by shifting its product mix towards higher layer-count PCBs and is currently building a new plant to focus on HDI.

Admittedly, as someone unfamiliar with the development of electronics and technology, I do wonder what is the likelihood of PCB being substituted by something newer, cheaper and better, say, nanotechnology?

Financial Health

The Group has a strong balance sheet as at 30 September 2008. Cash and bank balances amounted to US$70.2m against total borrowings of US$180.0m. This translated to a net gearing of 29.5% which I think is a comfortable level.

A total of US$89.4m was generated from operations over the 9-month period. According to Note 7 in its latest results announcement (3Q FY2008), "the solid financial strength was driven by earnings growth and effective management of our cash conversion cycle".

Management

In my opinion, the Group has shown a proven record of strong operating cashflow and its management has exercised prudence by not over-relying on financial leverage to expand growth.

It is noted Kingboard has acquired a total of 679,000 shares of E&E at an average price of US$1.423 from the period April to Oct 2008. This, in a way, conveys the confidence of the directors in the company. However, the series of transaction has raised the deemed interest of Kingboard in E&E to over 71%. What is the probability of E&E taken private?

I've roughly looked at the historical financial performance of Kingboard Chemical Holdings Ltd. and find that the management has done a good job in increasing shareholders' value. Since E&E is the subsidiary of Kingboard and has owners of Kingboard on its board, I'm inclined to believe the performance of E&E will not be too far off the mark of Kingboard's.

E&E - Dividend Analysis, FY2000 - FY2007

I like this stock because of its good dividend. Its average dividend yield over the recent years is a decent 8.9%.

Since the Group started paying dividends in 1995, its dividend payout ranged between 34-55% until FY2002. Excluding the outliers, the dividend payout has increased to the 60-70% region in the recent years. It is therefore, reasonable to assume that the management will keep its dividend payout about two-third of its profit.

Gross dividend has been increasing over the years except for FY2002. During that year, gross dividend declined only 23.3% compared to 53.8% drop in net profit. As the Group aims to maintain a "consistent dividend policy", dividend payout surge during years in which earnings growth were lower (FY2002, FY2003 and FY2007).

In the Chairman Statement of its 2007 Annual Report, the dividend was recommended after "having considered the Group's continued ability on free cash flow generation and their (the Directors') confidence in the corporate performance going forward." This is a heartening statement, in my opinion.

Someone has suggested that the high dividend may be attributed to the needs of E&E' s parent company. I am not sure of Kingboard's financial health and will have to find out. I also do not know under the current corporate structure, how E&E will be affected should the financial health of its parent company deteriorates.

It is noted that E&E's dividends were fully supported by its strong operating cashflow. Since its listing in 1994, the Group has generated positive net cashflow from operating activities every year. I believe the consistent dividend policy has also helped the management in being prudent with its uses of cash.

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Updated on 26 Nov 2008:

Health Check - Kingboard Chemical Holdings

A check with the latest Interim Report 2008 of Kingboard Chemical Holdings shows that its profit attributable to equity holders of the Company (excludes exceptional item) rose 35% to HK$1.76b for the 6 months ended 30 June 2008.

In addition, its cash holding stood at HK$5.4b against total debt of HK$11.3b, of which HK$2.9b is due within 1 year. Current ratio was about 1.56, net gearing about 29.2% and interest coverage ratio at 13.8 times. Net cash from operating activities for the six months totaled to HK$1.0b.

E&E - Financial Ratios Analysis, FY2000 - FY2007

Liquidity ratios

I think the company had done a fairly good job in maintaining liquidity though it should be noted that the ratios are trending down. I would prefer to see the current ratio at around 1.5 and quick ratio above 1.

Debt ratios

Gearing has increased over time but was still kept at comfortable level. It would be good to see the interest coverage ratio going higher, say 7 times.

Efficiency Ratios

Fairly consistent over the years

Return on Equity (using DuPont Model)


Personally, I do not view E&E as a growth company. Profit margin has undergone erosion during the period in review as the PCB industry has grown increasingly competitive. Asset turnover was affected by rapid expansion with below-expection performance of new plants. The impetus for increasing ROE can only come from higher equity multiplier, which essentially means higher liabilities for the company.

E&E - P&L Analysis, FY2000 - 2007

Revenue
By business sector
The computer & peripheral was the largest market segment for the Group in FY2006, accounting about 42% of total turnover. Next in line were communication & network sector, followed by consumer electronics, with revenue contribution of 26% and 13% respectively. Automotive accounted for 9% and the rest were categoried under others.

By geographical sector
China has been the Group's largest and one of its fastest growing market. Its sales went up from US$82.4m in FY2003 to US$291.3m in FY2007. Share of China's contribution in FY2007 was 51% of the overall sales compared to 34% in FY2003. Together with Southeast Asia (20% of FY2007 turnover) and other Asian countries, the contribution of Asia market grew to 75% in FY2007 (See chart below).

Turnover breakdown by geographical segments: FY2000 vs. FY2007

On the other hand, the share of Europe and America decreased to 18% and 6% respectively in FY2007.

By layer count
While the sales of 2 to 6 layered PCBs consistently contributed about 70% of revenue, the management hopes to improve its profitability by shifting its product mix towards more sophisticated products, such as the higher layer count PCBs and HDI. The Group deems HDI to be a key growth drivers in years to come.

Historical performance
Business of the Group follows the cyclical nature of the PCB industry and is very much affected by the boom and bust of the technology sector.



FY2002: Demand for PCB remained weak after the burst of the dot.com bubble. In addition, excessive global PCB production capacity also resulted in the erosion ASP (weighted ASP of PCB products dropped by 15.7% during 1H FY2002).

FY2003: Economic prospect was dampened by the outbreak of Iraq war (the 2nd Gulf War) and SARS. At the same time, ASP continued to be under pressure. ASP of 8-layer and above PCBs dropped 26.2%, leading to decline in overall ASP of 20.1% during the year.

FY2006: sales of 6-layer and above products decreased despite a modest growth in the 2- and 4-layer PCBs. As a result of the change in product mix to lower layer count business, ASP declined by about 4.2% on y-o-y comparison.

Profitability
Based on data available (FY2001 - 2007), growth of gross profit has been erratic due to business cycle as well as fluctuations in raw material prices and average selling prices of PCBs. Average annual growth rate of gross profit was 4.3% with average gross profit margin at 22.1%.

Total operating expenses grew about 9.6% on average but its share over turnover has declined to below 10% in the recent years.



Despite the problems in FY2002 and FY2003, the Group remained profitable. Nonetheless, earning growth was far from smooth.

With the recovery of demand towards the end of FY2003, the Group's was operating at about 90% of its capacity. Hence, capex for FY2004 was increased to to US$92.2m (FY2003: US$22.9m, + 301.8%) to ramp up production capacity.

As a result, finance cost surged 202.0% in FY2005 as bank borrowings increased. (Nevertheless, interest coverage and net gearing ratio remains comfortable at 16.1 and 35.2% respectively.) Slow down in the earning growth in FY2005 was also affected by an exceptional items of US$1.7m (of which, $1.4m was redundancy payment made to streamline the Group's Hong Kong plant and US$0.3m was for non-recurrent professional fees related to the takeover offer made by Kingboard) as well as increased of effective tax rate from 7.3% to 10.2%.

The Group was operating near full capacity utilization in FY2006. Besides expanding production capacity, it also set up a new plant to focus on the more sophisticated and higher value-added HDI PCBs to improve profitability.

In FY2007, the Group's gross margin and profitability were adversely affected as its new plants in Kaiping experienced a longer than expected learning curve and low manufacturing yield on complex product categories. The management took rigorous measures including strengthening management and workforce as well as process and product capabilities to improve production yield. Losses at the Kaiping plants have been narrowing since.

According to the recent research report by CIMB, E&E intends to delay the commencement of its new HDI plant amid the current economic slowdown.



Notes:
(1) Reporting currency was changed from SGD to USD in FY2003
(2) End of financial year was changed from 30 June to 31 Dec in FY2006

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Updated on 26 Nov 2008:

Further Number Crunching on Earning Growth
If historical performance is of any indication, average growth rate of profit attributable to equity holders of the Company:
FY1991 - FY2007 (16 years): 19.3%
FY2000 - FY2007 (7 years): 15.2%

The above figures should be read with care as growth rate of FY2004 was boosted to 186% after negative growth of 54% and 42% in FY2002 and FY2003 respectively. Excluding these 3 years, the average growth rate will look as below:
FY1991 - FY2007 (13 years): 16.9%
FY2000 - FY2007 (4 years): 4.3%

UOB i-Account

Monthly average balance: $3,000
Fall below fee: $7.50
Monthly fee: $2

Based on the above, annual fee for maintaining account = $24
Current interest rate for amount first $15,000: 0.35%
In order to fully offset annual fee of $24, monthly average balance to be maintained = $6,857.15

Where to Park Cash?

It is widely advocated that we should maintain at least 3 - 6 months of liquidity (some say 6 - 12 months. For the even more conservative ones, 12 - 36 months). Some options where cash can be parked:

1. Savings or current accounts
Currently, most banks are offering interest rate of less than 0.5% for amount less than $10,000. However, it pays to do a little research. For example, Maybank is offering 1.08% for its iSavvy savings account. The catch is that this account can be only operated through internet, mobile banking and ATM cards. Service charges are applicable for over the counter transactions.

Higher interest rates can also achieved for monthly savings accounts such as POSB MySavings and OCBC Monthly Savings account.

2. Time deposits
For research on best deals: http://singapore-fixed-deposits.com/wordpress/

3. Money Market Fund

Money used for investment purposes may be kept with Money Market Fund which is less risky than normal unit trusts and incurs no sales charge. Rates are usually better than normal fixed deposits.

4. Singapore Government Securities (SGS)

SGS can be bought and sold over the counters at banks with a Debt Securities Account. The minimum sum required for investment is $1,000. Investment in T-bills can also be made with Phillip POEMS account.

Prices and yields can be monitor from https://secure.sgs.gov.sg/apps/goto/?app=dailyPrices

Interests, discounts as well as capital capitals derived from SGS are tax-exempted for Singapore residents.

Tying the Knot? Thrash Out the Money Issues First

This is an article by Lorna Tan in the 'Invest' section on The Sunday Times dated 2 November 2008. I personally do not find the article useful except for the last part on CPF nomination. Nevertheless, I shall summarise it here and address some of the points based on my current subjective assessments. I may come back to this post and add on to the list of concerns as and when I thought of any, or simply update on my thoughts on the various issues highlighted.

Establishing financial goals
How many children? How kind of lifestyle? When do you plan to retire?

Children - probably 2 (plus/minus 1)?
Lifestyle - a simple and comfortable lifestyle focusing on basic needs is good enough.
Retirement - no concrete plan for retirement yet.
I think the interest of a fixed deposit with principal amount of $2 million should provide a sufficiently comfortable lifestyle for 2 retirees in current time.

Say, interest rate at 0.875% p.a - This yields interest of $17,500 per year which translates to $1,458.33 per month (Together with CPF savings of, say $300 per month, each person will have an allowance of about $1,000 per month).

Savings and spending strategy
Draw up household budget and decide on bill-paying responsibilities.

Knowing your combined financial worth
Calculate your combined wealth. Develop family cash flow and balance sheet.

Very important!

Setting up a fund for emergencies
About 6 - 12 months of mortgage payment and household running expenses (in case of illness or loss of job).

Say, $1,500 for mortgage payment + $1,000 for household income (without children and allowance for parents) that should roughly be $25,000 in joint-account fixed deposit.

Handling of monthly household expenses
The article advocated allocation of the job to the more conservative party.

Maintaining separate banking accounts
Self-explanatory.

To be managed separately.

Deciding on contribution to the joint account
Percentage of individual's monthly account for equity sake.

Taking disposable income as 100%,
20% for joint account for joint expenses + savings + investment
20% for parents (both sides)

Handling increases in earning power
Form some kind of common understanding or broad agreement so that such situation will not pose a point of contention when arises in the future.

Planning to buy a house
How much of your pay should you be saving towards the down payment for the house? Where will the savings be held? How is the mortgage going to be financed - via CPF and cash and in what proportion?

Preferably, all mortgage to be paid via CPF - that is about 20% - 21% of total gross income of each individual. Early repayment should be considered after setting aside sufficient amount for emergencies and investment.

Edit: 16 Jan 09
Key Factors to Consider for Housing Loans
* Affordability
* Duration of repayment
* Interest rate
* Consequences of non-payment

Handling the investment of the joint savings
The article advocated the more financially savvy person, and not necessarily the same person handling the household expenses as he/she may be too risk adverse.

To be considered only after setting aside sufficient emergency fund. Some options are regular investment in diversified unit trusts, Singapore government bonds, exchange-traded fund, structured deposits and gold-savings account.

Reviewing your existing insurance policies
Add your spouse as your insurance beneficiary. Mortgage-reducing term assurance plan which protects the surviving spouse by paying up a portion or all of the remaining housing loan in the event of a partner's untimely death.

Updating your CPF nomination
CPF nomination will be revoked upon marriage. If you do not submit a new nomination, your CPF savings will be distributed according to the Intestate Succession Act, which decides who receives your assets should you die.

If you do not have any children but one or both of your parents are alive, then your spouse gets half of your assets, while the reminder goes to your parent(s). If you have children, your spouse gets half of your assets, and your children will share the reminder equally.

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Edit: 19 Jan 09

On a separate issue, interesting blog posts on "Budgeting for Baby - The First Year" by Panzer.
Part 1
Part 2
Part 3

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Financial Planning for Your Marriage by Wilfred Ling

http://www.wilfredling.com/content/view/553/9/