POSH (PACC)- Initial Assessment

Rosesyrup Research

POSH (PACC)- Initial Assessment 

Call: Sell 

Target Price : 86cents
WATCH OUT for POSH TOMORROW. It might post some significant gain but be prepare to short it afterward.  

Some people might claim that it is undervalued as they usually BASED their reccomendation on the following flawed reasonings:

• Low Ratios Argument.  
  • Yes POSH has got low ratios (Cheap) compared to most smaller firms. But aganist firms of comparable size, POSH has got slightly higher ratio (expensive).
• Industry Leader Argument
  • ​ This is THE MOST common reason I heard from those believers. In fact this is the highlight of the IPO and DBS vickers also applied this in its reccomendation. While it is true that size does matter and provide some comepititve advantage (Economies of scale etc), being market leader also means that there is limited growth opportunity.
• 76% INCREASE in net profit  
  • ​ My opinion is someone trying to window dress his statement. Take a closer look and you will find that the entire 76% increase comes from 138% increased in other operating income!   According to the company: " This increase was due mainly to recognition of gain ON SALE of 5 vessels, upon completion, to a  Joint Venture."
  •     Before we decide on how much faith to put upon this 76% jump in profit, allow me TO SHARE an accounting fact here. In the construction and building (including VESSEL, oil rig building etc) industries, they often adopt a revenue recognition method known as percentage of completion method, which gives them much flexiblity in choosing when to recongnise profit and revenue. In layman term, it means there are lots of window dressing in the construction industry to smooth out performance.
  • The fact that the vessels are sold to JV enable more control over the revenue recongnition schedule. More ROOM FOR WINDOW DRESSING.
  • BECAREFUL ABOUT WHERE YOUR PROFIT COMES FROM!

4 insights giving me the urge to short POSH

1. 8 Years to IPO
   • According to the history from POSH website, POSH started in 2006 and only listed in 2014
   • A common knowledge in the INVESTMENT BANKING sector=> Companies and their financiers often aim to go IPO and CASH out within 3-5 years.
   • 3years or less is usually the case for Tech firms. Most other firms usually listed within 5 years.
   • Those who took more than 5 years before listings are usually weaker or less ATTRACTIVE firms. Reason being these weakers firm can' t sell their shares during economy downturn, when investors all flight to quality. Thus they have to wait and drag till economy recovers and market has better appetitie.
   • Now look at our POSH, which is listed at the start of 2014 when economy just started showing sign of recovery. 
2. Serious oversupply in the industry
   • ​ ​ In case you are not aware of this: before 2007 when the economy is still good and nice, our maritime friends believed that good time last forever and decided to order vessels as if they were free. The consequence is industry wide oversupply and some maritime buddies went BANKRUPT while other started scraping vessels.
   • While economy recovery is expected to increase demand and alleviate the pain in the industry,the serious overcapacity issue means that it going to be some time (Probably years) before the industry can start enjoying growth again.  
3. Expecting a big fall in ROE
   • ​ ​ POSH used proceed from IPO to PAY OFF DEBT ! NOT TO EXPAND! The following is quoted from POSH financial statement:
     • " As per the Company' s SGX announcements on 25th and 29th April 2014, the Company has disbursed  the full amount of estimated net proceeds of US$298.6 million (S$374.8 million) raised from the Initial  PUBLIC Offering to reduce its bank borrowings. As at 30 April 2014, the Group' s OUTSTANDING bank debt  amounted to US$492.4 million."
   • This kind of support one my above claim regarding limited growth opportunity for POSH.
   • Besides that the reduce used of cheap source of funding (DEBT) also means lower ROE.
   • LOW ROE= Avoided by most LONG TERM investors = unsustainable rally, if any.  
4. Dim Prospects

• Our dear DBS VICKER expects  FY15 will be a game changer for POSH and earning to double ! Wow what an expectation. 
• I probably mentioned this before, after Fed completed reeling in its QE, commodity price like OIL will start falling. There is a minimum price (If I remember correctly it was $90) below which those Oil companies would halt new projects.
• No new projects =   no new contracts =   no need for so much vessels = no revenue growth or probably even falling revenue.
• But those capacity POSH possessed cost money to upkeep ! 
• Oh yeah, did I mention POSH has much higher debt as compared to its established peers?

Anyway I did a simple valuation using FCFF model=> 86cents is most I am willing to pay for this counter.