Sapphire 1Q results

Sapphire's 1Q results came out a few days ago but I lacked the time to go through the numbers. I have yet to initiate any position on it, but it remains a very interesting counter still. The primary reasons for wanting to invest is:

1. A turnaround story where a company acquires another business and seeks to forge a new path forward. People, in general, are still slow to react to this change, and hopefully by recognising it early, investors in Sapphire can reap good returns when the financial numbers slowly reflect the new reality of the company. On top of this, I have a personal good feeling towards the CEO, and believe the management has an edge to push the company further.

2. One Belt, One Road initiative. This is possibly the largest macro trend that the world is going to contend with in the next 10,20 or even 30 years. China has enjoyed a period of strong economic growth to become the second largest economy in the world. Going forward, I believe China is on target to not only become the largest economy, but also spreading it soft power and superpower clout globally. In a sense, to the history student in me, China is going where the USSR wanted to go bu never did. However, the difference is that we are not in a Cold War style competition today.

I read a very interesting article by PhillipCapital, and would recommend it. Of course, Sapphire is a proxy to this macro trend, there are many other proxies and this may turn out to be a poor proxy

On to the 1Q results. The numbers were actually not as good as I thought, and one reason was that I had rather high growth expectations from them. This is the first time the company is reporting in RMB, so I translated historical figures to RMB using my best guesstimates.

- 1Q17 revenue was down 9.1% yoy, but gross profit (+7.9% yoy) was up. The company attributed the fall in revenue to timing of on-going construction projects and estimates on their progress, which is a pretty standard answer. So we just have to observe if more contruction revenue is recognised for the rest of FY17.

- EBIT margins came in at 8.4% (FY16:7.7%), which surprisingly was close to my target EBIT margin of 8.5%. However, this is only 1 quarter of results, and I will monitor the EBIT margins closely over the subsequent quarters.

- The company disposed a majority of their discontinued operations, which was the Mining business they were previously in. This allows the company to move on and focus on their core operations, which to me is a good thing. They still retain a small stake in the mining business, so the minority stake would have some impact on the bottom line going forward.

Next the valuation numbers. I kept most of my estimates the same, except for bringing down revenue slightly, and adjusting for the sale of Mancala. I also conducted the DCF in RMB, and converted back to SGD at a rate of 4.9 RMB : 1 SGD. The target price is RMB 1.80, or SGD 0.37. One big reason for the drop from the previous estimate is due to lower revenue projections.

This TP does not present much of an upside from current share prices, so I think I will sit on the sidelines for now and observe further. Taking current share price of SGD 0.32 , Sapphire is trading at around 13x annualised 1Q17 earnings, which is rather fairly/richly valued to me.

One recent development is news of possible tie-ups with SOEs, which is interesting, but not really material presently, hence I would not factor it too much into my thought process now.

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