Monday, February 29, 2016

Nordic Group -- A Potential Gem ?

Chanced to come across this stock, Nordic Group, was in 2012 when one of my ex-client, an auntie, asked me for advise about this stock after hearing that the fundamental was good.  A very quiet and thinly traded stock which I have little knowledge about, have no choice but to read through its fundamental as it was my obligation then to provide advice to my ex-clients.  Interestingly, the company was having net profit recovery from FY2011 when it hit the bottom due to the 2008 GFC.  Since then, this stock has been kept in my mind to lookout for in the future.  The first time I bought into this stock was in 2013 at a price of $0.084 and was for trading purpose in which I managed to sold away couple of months later making a good profit. 

I have this strategy fund set up in 2010 mainly to hold stocks with sound fundamental which I will monitor to see whether they could meet the criteria for it to be upgraded to my investment portfolio.  Should they fail to meet the criteria later on (due to negative change in fundamental) or triggering the cut-loss point, I will just part way with it (either with a profit or a loss).  The first stock under this scheme was SembMar which I eventually upgraded to the investment portfolio in 2011.  However, after that none of them make the cut.

Then at around Oct - Nov 2014, after parting off with one of those failed to make the cut, Nordic resurfaced after seeing the management buying up the share between $0.090 - $0.10 and the fundamental also largely improved from 2012, the company also managed to enter net cash position.  The confidence from the management and the sound fundamental managed to convince me to give micro penny stock a bet, so I bought into it at an average price of $0.1072.  After all, at such a "low price", I have practically very little downside.  As I monitor for the company progress, I have managed to receive dividend from it: a 0.5 cents/share final + special dividend for FY2014, a 0.4 cents/share interim dividend of FY2015 and will be receiving a 0.65 cents/share final dividend for FY2015.  In between 2014 till now, I also managed to strategically increased the holding by 3.33% at $0 cost thereby decreasing the holding price to $0.1037.  With FY2015 dividend to be at 1.05 cents/share, that practically translates to a dividend yield of 10.13% (shockingly, only First REIT in my investment portfolio has a higher dividend yield !!!).

In brief, Nordic Group established in 1998 is a company that provides automation systems integration solutions for the marine, and offshore oil and gas industries primarily in China, South Korea, Singapore, and internationally.  It operates through System Integration; Maintenance, Repair and Overhaul (MRO) and Trading; Precision Engineering; and Scaffolding Services segments.  Looking at its latest financial result for FY2015, its revenue increased 11% (vs FY2014) to $80.49M, net profit increased 34% (vs FY2014) to $10.51M, EPS increased 30% (vs FY2014) to $0.0266, NAV increased 12.78% (vs FY2014) to $0.15 and cash increased 8.43% (vs FY2014) to $35.57M giving a net cash of $3.4M (with a total debt of $32.2M).  Though the crashing of the oil price since 2014 has caused O&G companies to take big hit on their earning, Nordic has managed to maintain profitability and has been growing since FY2011 (refer here and here for detail financial stat) as seen from the chart below for the past 5 years.


Nordic being listed in the mainboard, is currently facing the Minimum Trading Price (MTP) requirement but the management has so far resisted a share consolidation approach, instead wanting to use the performance of the company to justify for the stock to be worth at least $0.20.  Furthermore, the company also doing share buyback apart from management increasing their own stakes in support of the stock price.  Such a confident from the management team is definitely not something to be ignored.

So is Nordic a potential gem ? Rationally, it is still not at the moment as it fail to meet some of my criteria, namely, ROE (fail to be at least 20%), Current Ratio (fail to be at least 2.0) and Net Profit Margin (fail to be at least 20%) as shown in the following chart (of financial ratio for the past 5 years). 


However, I do not rule out the possibility that in the future it will be a gem.  Those failed criteria are in fact slowly moving to meet their respective criteria target and the Average Cash Conversion is decreasing for the past 5 years, which is a positive sign.  The way moving forward is for the company to make more quality acquisition (with Austin Energy Group being its latest in 2015), consistently winning contracts and perhaps couple of mega contracts.  Another possibility which I do not rule out is Nordic being acquired by a bigger company since its market capitalization as of now is only $71M with 395,331,000 number of shares floating in the market.  Moreover, once the stock price meets the MTP requirement, that could start to attract funds (in particular mutual funds which are not allowed to invest in stock below MTP) and analysts attention and anything could happen then. 

Investing is all about investing to the future.  Future could be positive or negative as nobody knows at this moment, hence to minimize the downside risk, calculated risk and a margin of safety are needed.  With my holding price at such a low level 0.69x NAV (was 0.93x NAV in 2014 at the time I started buying), an unrealized capital gain of 70.74% (with reference to 26th Feb 2016 closing price of $0.178) and a dividend return of 8.40% so far (excluding the latest 0.65 cents/share), this looks quite a good margin of safety and very tempting to upgrade it to my investment portfolio.  However, I have to resist that as I want to see how the management going to navigate the company to the next level.

Should Nordic be another fail to make the cut again probably due to the management limited capability to move the company to the next level, I will not be disappointed.  Will take the experience and lesson learned to refine my approach further to hunt for the next gem.

Never believe in luck but in learning from mistakes will eventually get it there.




3 comments:

  1. I am vested in Nordic at an average of $0.123 and is delighted that the current management has kept to its promise of paying out at least 40% of profits as dividends. However, its Project Services categories will face headwinds but if it manages to fulfill its order book without any cancellations, then things will look interesting as the management has hinted that they are already on the lookout for another acquisition

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  2. am more than pleased about the dividend payout, in fact i don't expect such a generous dividend as if it is a growth company, it will have to retain as much earning possible to fund their growth. another point wish to rise is after the acquisition of AE Group, their net cash reduced significantly and if they go on another acquisition soon might drag them back to negative cash position again. what i wish to see is probably they build up their net cash first then do the acquisition.

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  3. Revisiting this again now that it has successfully maintained its MTP. Barring any economic and further industry shocks, the management should be able to steer the company forward towards the 30cts mark, with then a PE of around 10. Looking forward to increased contributions from AE and possibly higher dividends.

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