Monday, November 18, 2013

Invested in Singapore-Based Boardroom Limited

Please read the disclaimer here: Enjoy the article, bitches!

I recently purchased stock in Boardroom Limited, a Singapore-based company for 0.63 Singapore Dollar (SGD) per share. The company is listed on the Singapore stock exchange with the stock code B10. Boardroom limited provides business solutions, corporate secretarial and shareholder services to its clients. The company earns very high returns on tangible assets and is currently trading at a reasonable valuation of 13.33 times earnings. The company also has a solid dividend yield of 5.08%. In times when the market is fairly valued, it’s especially good to have sources of income to build up your cash hoard to take advantage of future downturns.  
Background story (feel free to skip): Now I live in a city in Malaysia called Johor Bahru which is just a bridge away from Singapore. As a kid, my homeboys and I hated Singapore because we thought that Singaporeans were kiasu (afraid of losing). To quote Thorin Oakenshield from the hobbit: “I was never more wrong in my life.” Apparently having the kiasu spirit resulted in the creation of many ultra-productive companies in Singapore. As an admirer of superlative ability, I must say that being kiasu is a respectable trait when it comes to business.

While the company’s return on average assets (ROA) and return on average equity (ROE) of 7.60% and 12.21% respectively for the year ended June 30, 2013 is decent, it’s nowhere near the level that would get you hard or wet. However, Boardroom Limited generates tremendous returns on tangible assets (ROTA). For the year ended June 30, 2013, the company achieved ROTA of 27.59%. If you add amortization of customer relationships back to profits, the ROTA goes up further to 31.53%. As at June 30, 2013, the company had SGD 102.01 million in total assets of which SGD 72.98 million is made up of intangible assets such as goodwill and customer relationships.

Side note: Yes, certain intangible assets such as software are related to the company’s ongoing operations and we need to take into account those intangible assets and related charges to earnings when calculating ROTA.

Now I know that some of you may be thinking that its guys like me with their assumptions and fancy mathematics that cause shit like Enron to happen. But please let me explain. I’m judging Boardroom as a cash cow so intangible assets like goodwill and customer relationships shouldn’t matter as it just represents investments made in the past and are not employed in the day-to-day operations. It is tangible assets like accounts receivable and plant, property & equipment that the company has to tie up its cash in or reinvest in. Therefore, it’s the ROTA that determines the company’s ability to throw off cash to shareholders. For example: An asset-intensive company like a car manufacturer has limited ability to pay out dividends as it needs to continuously reinvest a lot of its profits in  plant and equipment.

I’m not discarding the conventional ROA and ROE ratios when judging a company’s performance. They’re very important when it comes to evaluating management’s ability to allocate capital, especially when the company is still aggressively expanding. While Boardroom’s management doesn’t have Peter Lynch’s or Warren Buffett’s mad skills when it comes to capital allocation, they’re still doing alright.

As an added bonus, Boardroom’s geographical exposures are just the thing I really need to manage my portfolio’s concentration risk. The following is the geographical breakdown of the company’s profit before tax: Singapore 31%, Malaysia 15.7%, Hong Kong 4.8%, China -7.5%, Australia 56%. This is awesome for me as I currently have a large exposure to the United States.

At the end of the day, I think Boardroom will fit well in my portfolio as an excellent cash generator which will help me fund many of my future investments. Thank you for reading and may the breasts of your cash cows never run dry.

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