Book : Oil – The Long Goodbye

The September/October 2009 of FP Foreign Policy Magazine ran a coverage on the oil issue. For those who are interested in oil industry, it’s a must read. It contains an article written by Daniel Yergin outlining the future of oil industry and many interesting articles. From what I grasped from this issue, demand for oil from China and India is still strong going forward. Oil price rally could be seen again in 2012 when demand rises in tandem with economic recovery. Although OPEC’s spare capacity is currently at 6.6 mmbpd, it could be gone within 5 years. New exploration and production will take more time and money to bring it on stream as oil is discovered in a deeper water or harsher terrain.

Another topic in this magazine I find it interesting is the political tension between Russia and EU countries. Several european countries rely on gas from Russia thus are at the mercy of Russia. New pipelines from Caspian sea called Nabucco is proposed to build across several countries such as Turkey in order to lessen the Russian political power. However, Russia does not want to loose grip on its control and therefore pushes for an alternative pipline and exert its power once more on the countries where the Nabucco pipeline traverses. It’s interesting to see how the finale will be.

Central Plaza Hotel (CENTEL)

Of recent, the management of CENTEL unveiled its ambitious plan to become the No.1 in the hotel business in Thailand in the next 5 years. It aims to generate 14,000 MB in total revenue with equal contribution from hotel and quick service restaurant (QSR) business. Last year its total revenue was about 8,200 MB of which 3,360 MB from hotel, 4,660 MB from QSR and the remaining from miscellaneous fee.

 To date, it owns 9 hotels, partially owns 3 hotels and manages 7 hotels. In addition, it also has 25% stake in CTARAF, a property fund. To achieve its goal in the next 5 years, it plans to expand its hotel network to 77 hotels with a focus on increasing number of hotels it manages to 65. Centara International Management (CIM), established last year, will be responsible to spearhead in hotel management business. Last year income from hotel management amounted to 44 MB. CENTEL forcasts it will collect 77MB in hotel management fee this year and 196 MB in 2011.

Currently, it has 2 hotels under development, one in Pattaya and one in Phuket. Centara Grand Mirage Beach Resort Pattaya will be officially opened in Nov 2009 (soft launch in Sep 2009). While Centara Grand Beach Resort Phuket will be opened in 2010. These two hotels are developed as a theme hotel targeting MICE sector. After completion of this 2 hotels, it will not have major development. Management expects to generate 2,000 MB cash flow in 2011.  Annually, the maintenance CAPEX for hotel is approx 4% of revenue and 300 MB for QSR business. This implies it will have free cash flow of over 1,000 MB per year.

Also in the pipeline is its expansion into budget hotel which will compete head-to-head with the incumbent Ibis chain operating by ERAWAN.  CENTEL targets to finalize the plan next year.

That is all said for the future of CENTEL’s hotel business. It’s now up to the management team to navigate through all sorts of difficulties threatening local tourism industry. At the time of drafting this article, CENTEL has a market capitalisation of 5,600 MB. If you believe the hospitality industry is recovering and will reach normalcy next year, CENTEL is in a strong position to reap the benefit in the long term.

ME : Today

It was a mixed feeling today a year ago when I was on board Thai Airways flight bound to Perth to take on a new challenge. It reminded me of a 3 year period residing in Singapore and be far away from family and friends. For Perth, I imagined that it would be even more challenging as I knew only one friend in Perth and he was the one recommending me here.  Yes, I miss my family, my friends and everything about Thailand. Yet, I would regret if I didn’t accept this offer. For whatever the future will be, I consider this is the bonus of my life to gain exposure in a different working environment and live in a beautiful city, Perth.

Today also marks the first day I am going to invest in Australia Share Market as my trading port has been created. I reckon opportunities are abound and I hope I succeed in this new arena.

ME : Silver Cup Badminton Doubles Tournament

This weekend my friend and I participated in Men’s Doubles Divsion 3 in the Silver Cup Tournament held in Perth. There were 3 groups in our division and each group consisted of 5 teams. The winner of each group would qualify to the semi-final round. For this tournament, we played only 2 sets and to 21 points.

The first match almost went to our way. We led in the first set for most of the time until we were ahead at 19-17. Then we lose our control and lose the set by 20-21. Second set started in the same way until we reached 19 points but the opponent fought back to tie at 19-19. This time we managed to stay calm and converted the next 2 points to win the set by 21-19.

The second match was supposed to be an easy game when we raced in the first set to 19-15. For some reasons, we did not push hard enough and we lose 19-21. The sencond set went the same way. We led almost all of the game and then we lose grip at the final minute. We lose 20-21.

After 1 draw and 1 lost, we must win our third match to keep our chance alive. We did win with hard fight by 21-17 and 21-16.

Our last opponent was a father and 8-year old son team. We did not take so long to beat them 21-9 and 21-8.

However that wasn’t enough to send us through to semifinal. We were second in the group. And now I just look forward to the next tournament in Novemeber.

GLOW ENERGY PLC (GLOW)

Glow Energy (GLOW), listed on Stock Exchange of Thailand, is one of the largest private electricity generators and providers of industrial utilities (electricity and steam) in Thailand. Its core business involves operation of IPP and cogeneration facilities (under SPP), producing and selling electricity to EGAT as well as electricity and steam to Industrial Customers in the Map Ta Phut Industrial Estate in Rayong Province. As of 30 Jun 2009, it had a total generating capacity of 1860 MW of electricity and 967 tons per hour of steam.

By end of 2011, its electricity and steam generation capacity will be boosted up to 2977 MW and 1087 tons per hour respectively, thanks to its three green field projects under construction at present with total CAPEX of 31,300 MB. Summary of these new projects are exhibited in table below.

No.	Project	CAPEX (MB)	Start Date	Electricity (MW)	Steam (tph)
1	Cogen coal plant	7,000	Dec 2009	115	-
2	Cogen gas plant	16,000	Sep 2011	342	120
3	IPP coal plant (65%)	8,300	Nov 2011	660	-
	Total	31,300		1,117	120

 

Barring any construction interruption as a consequence of protesting at Map Ta Phut on 9 Sep 2009, GLOW’s future prospect is remarkable thanks to its electricity generation capacity increase of 60%.

As future stream of income and profit from its three new plants is not disclosed, valuation by means of discounted cashflow method is not possible. However, the company does give some clues in its future earnings as presented in its First Half of 2009 Results Presentation (downloaded from www.glow.co.th). Below is how I derived its earnings in 2012 (the first full year of operations of three new plants).

As shown in Slide 22, GLOW aims to maintain the DSCR to not lesser than 1.6 times. DSCR is simply the EBITDA/(Principal + interest + financial charge). In addition, it will cap its loan repayment at 6,000 MB per year for cogeneration business (as shown in Slide 26). While the IPP business principal repayment level is approx USD 20 million. If interest paid is known, EBITDA and can be calculated.

In order to ascertain the amount of interest paid, gross debt must be known first. On slide 25, GLOW plans to raise debt in the amount of 9,000MB and 7,000MB in 2010 and 2011 to finance its expansion. As of 30 Jun 2009, the company had long term debt of 42,000MB. From 2H2009-2011, it will repay 9,600MB of principal (shown in slide 20 and 21 and assume exchange rate of 35 Baht/USD). Therefore estimated long term debt level in 2012 would be 48,400MB. Assuming the cost of borrowing of 6%p.a., annual interest payment would be approx 2,900MB.

Given the minimum DSCR of 1.6x, EBITDA in 2012 = 1.6 x (6,000+(20×35)+2,900) = 15,360MB.

Annual depreciation charge for its existing facilities amounted to approx 2,500MB. Assuming 20 year linear depreciation for its new investment, total depreciation charge would be approx 4,100MB per year. This leads to a profit before tax of 8,360MB. If we raise the DSCR to 1.8x, profit before tax would be 10,280MB. For comparison, GLOW’s profit before tax in 2008 and 2007was 3,850MB and 5,116MB respectively. (Note that its investment in new plants receives BOI privilege and hence tax-free while this privilege for some of its existing facilities was already expired. Therefore profit after tax will be difficult to estimate as its future effective tax rate is unknown. For the recent quarter, its effective tax rate is about 10%).

As of 4 Sep 2009, its Market Cap stood at almost 46,000MB. Given the level of future earnings, the company looks attractive to me. By simple earnings multiple of 10, its Market Cap in 2012 would be in the range of 70,000-90,000MB, an upside potential of 50%-95%. Along the way until all new plants are up and running, shareholders can count on dividend yield of about 5-6%. If next week protest does not materially affect the construction of its new electricity plants and the management could bring new capacity on line on time and on budget, the company would worth much more than its current level and long term investors would reap benefit once more. Time will tell. 

Charoen Pokphand Foods (CPF) – Kitchen of the World (1)

Charoen Pokphand Foods Public Company Limited (CPF), listed on Thailand Stock Exchange, is one of the key businesses under the behemoth Charoen Pokphand conglomerate. Its main business involves in animal Feed, Farm and Food (Triple Fs for short as I would like to call). Of recent, its Food business aggressively expands into RTE (Ready-to-eat) by creating CP brand for its RTE products and opening its own retail distribution channel, CP Freshmart. Although revenue contribution from RTE is still a meager of less than 3% of total revenue, the management has a firm plan to grow this business for the next 3-5 years, aiming to achieve 10,000 MB sales. As a result, revenue proportion among Triple Fs will be more balanced (at one third each) and profit margin will be less fluctuated (Farm business has unpredictable profit margin while Feed (government regulated price) and Food has more stable profit margin).

A quick look at its Market Cap on Friday 28 Aug 2009 which stood at 44,000 MB caught my interest as CPF’s stake in CPALL is approximately 20,000 MB – and still growing (CPF’s equity interest in CPALL is about 25%). It implies that the market prices CPF’s Triple Fs at 24,000 MB or so which seems too low to me. Last year (2008), Triple Fs generates sales of 156,000 MB and net profit of about 3,000 MB. It managed to grow sales at the rate of 13% CAGR for the past 10 years, though net profit fluctuated. For the first half of 2009, sales remained flat while net profit skyrocketed to almost 4,000 MB thanks to lower cost of raw material and high meat price. However, whether this high profit margin can be sustained is still questionable.

As CPF gears to become Kitchen of the World, it’s interesting to see how this “Star” business (processed food and RTE products) will shift the business landscape of CPF in the next 5 years.

Book : The Big Fella, The Rise and Rise of BHP Billiton

If you want to know history of the largest miner in the world today, BHP Billiton, this is the book for you. It’s just recently launched in Australia. The authors bring you back to 1883 when BHP was found on the Broken-Backed Hill near the New South Wales and South Australia border. It merged with Billiton, a South African mining company, in 2001 and emerged as BHP Billiton as known today. In fact, the merging creates two companies, BHP Billiton Limited based in Melbourne and BHP Billiton Plc based in London, with identical board and management teams.

Around mid 2008, it commenced a take-over bid for Rio Tinto, also one of the largest miner having several operations in the vicinity of BHP Billiton. If successful, the combined entity would stand shoulder-to-shoulder to big corporates in the world. However, the deal didn’t go through as the commodity price collapsed around the end of 2008.  Yet, in May 2009, BHP Billiton and Rio Tinto started the process to merge its iron ore operation in Pilbara, Western Australia. It’s still too early to predict if the proposal will go through due to objection from China and EU for its monopolistic nature in iron ore trade.

I am interested in BHP Billiton (largest listed company in Australia). It operates in large, long-life and low cost mining and petroleum assets. No doubt, its resources would supply an insatiable demand from rising economy like China. This 518-page book is a good start to getting to know more of the company.

From WA : Australia LNG Play

Australia, sitting on huge gas reserves, is the world sixth largest LNG exporter with current annual shipment of 15.0 Mtpa. Given that it is a politically stable country and located closed to energy hunger nations, Asia, it draws in an influx of foreign investment funds to develop LNG plants from conventional natural gas and unconventional coal-seam gas. If all the developments on the drawing boards come true, Australia will leap frog to the second largest LNG exporter in 2015 with expected annual shipment of 57.5 Mtpa, chasing the No.1 Qatar (expected annual shipment of 78.0 Mtpa in 2015). To date, there are only 2 operating LNG projects in Australia, the North West Shelf project operated by Woodside (owned by a joint venture formed by Woodside, Chevron, BP, Shell, BHP Billition, Mitsubishi/Mitsui and CNOOC) and Darwin LNG project operated by ConocoPhillips.

The international major oil and gas companies such as BG, Chevron, ConocoPhillips, Petronas and Shell are ramping up their stakes in natural gas and coal seam gas assets by partnering up with Australian companies such as Origin Energy and Santos. Table below shows the planned LNG development projects.

Project	Company	Expected Start	Estimated Budget
North West Shelf redevelopment	Woodside, BHP Billiton, BP, Chevron, Shell, Japan Australia LNG	2013	USD 5.1m
Australia Pacific LNG (coal seam gas)	Origin Energy, ConocoPhillips	2014-2015	AUD 35bn
Curtis (coal seam gas)	BG Group	Late 2013	AUD 8bn
Gladstone LNG (coal seam gas)	Santos, Petronas	2014	AUD 7.7bn
Gorgon	Chevron, Shell, ExxonMobil	2014	USD 50bn
Ichthys	Inpex, Total	2015	USD 20bn
PNG LNG	ExxonMobil, Oil Search, Santos, Nippon Oil	2013-2014	USD 12.5bn
Pluto Train 1	Woodside, Tokyo Gas, Kansai Electric	Late 2010	USD 12bn
Shell Australia LNG (coal seam gas)	Shell, Arrow Energy	2014-2015	USD 35bn
Wheatstone	Chevron	2015	USD 30bn

 

LNG developments require enormous CAPEX (in the amount of billions dollars). In order to get a green light to start the development, the project must be able to secure long term buy contract. At present, Japan is the largest LNG importing country accounting for about 40% of the world’s imports. Undoubtedly when economic downturn takes toll and hence, dragging with it, the oil price, it becomes even more difficult to pin down buyers. In addition, as can be seen from the above table, almost all LNG supplies will flood the market in 2016 therefore it is very crucial at this stage to secure a contract at the right price. The most advanced projects are Pluto Train 1 which is due to complete in late 2010 and people start talking about development of Pluto Train 2. Who will come as the winners will be unveiled in the near future.

ME : Future Star WA Badminton Tournament

Last weekend I entered my second badminton tournament in WA. The results were mixed for two categories I entered, Men Single and Men Double.

For Men Single, I managed to enter semi-final for Division 3. My first two opponents didn’t give me much trouble. I cruised pass them 21-11 and 21-10 (1 set match). My next opponent for the round robin stage didn’t turn up and that made me top of the group (there were 8 groups in my category) and automatically qualified for quater-final round. By luck once more, my opponent didn’t show up and without losing any sweat I went through to semi-final. In semi-final, I lose to young chap 21-10 as he was more consistent.

For Men Double, I lose all 3 round robin matches. No excuse as all opponents were stronger. 55555.

It was a good fun and offered chance to see top players played in division 1. I hope I can do better next year

Thai Nakarin Hospital (TNH)

Thai Nakarin Hospital (TNH) is a 214-bed hospital situated along Bangna-Trad Road, Eastern Bangkok, listed in Thailand’s sister market, MAI. Its operating performance has been outstanding as its revenue jumped from about 500MB to 1,000 MB and net profit skyrocketed from 37.5MB to 128 MB over the period of 6 years from 2002-2008. Returns on Equity (ROE) and Returns on Asset (ROA) are improving over the last 3 years. Last fiscal year (2008), its ROA stood at 30%. Over the past 3 years, it has managed to maintain Gross Profit Margin at the level of 30%. In term of cashflow measure, it eked out CROIC in the north of 30% in 2007 and 2008.

With such outstanding operating record, it usually draws in competition. However, thanks to its location which is closed to Suvarnabhumi Airport and expansion of the population in its vicinity, demand in healthcare provision will likely rise steadily and definitely will benefit TNH. In addition, as it is gearing towards high-end services by opening specialty centers such as heart center and recently, holistic cancer center, number of patients both inpatient and outpatient is poised to rise in tandem with its growing reputation and superior services.

By taking a long term view, I ran a ruler over TNH’s intrinsic value by using discounted cash flow method. My assumption is 12% growth rate of free cash flow over the next 10 years then dropping to a steady rate of 5% for the second decade through rising in capacity utilization rate and service fees. I further assumed a discount rate of 12%. In 2008, the free cash flow generated from hospital operation is 116 MB. The sum of the present value of the free cash flow for the next 20 years is calculated as shown in the table below.

	FY	Growth	FCF (MB)	Discount	PV (MB)
0	2008		116.0
1	2009	12%	129.9	12%	116.0
2	2010	12%	145.5	12%	116.0
3	2011	12%	163.0	12%	116.0
4	2012	12%	182.5	12%	116.0
5	2013	12%	204.4	12%	116.0
6	2014	12%	229.0	12%	116.0
7	2015	12%	256.4	12%	116.0
8	2016	12%	287.2	12%	116.0
9	2017	12%	321.7	12%	116.0
10	2018	12%	360.3	12%	116.0
11	2019	5%	378.3	12%	108.8
12	2020	5%	397.2	12%	102.0
13	2021	5%	417.1	12%	95.6
14	2022	5%	437.9	12%	89.6
15	2023	5%	459.8	12%	84.0
16	2024	5%	482.8	12%	78.8
17	2025	5%	506.9	12%	73.8
18	2026	5%	532.3	12%	69.2
19	2027	5%	558.9	12%	64.9
20	2028	5%	586.9	12%	60.8
				Total PV	1987.4

Adding the net cash position of 15 MB, the estimated intrinsic value is approximately 2,000 MB or an equivalent of about 11 Baht per share. At the last trading price of 7.85 Baht (10 July 2009), the margin of safety is calculated to be 30%.

Depending on what side of the coin you are looking at, the short term impact from economic malaise might yet provide another opportunity for long term investors who seek for value in his investment.