SI Research: Second Chance Properties – Will There Be Another Chance?

Singapore’s Presidential Election is around the corner, should there be more than one eligible contender, as incumbent President Tony Tan’s term ends on 31 August 2017. With the 2017 Presidential Election being reserved for Malay candidates, doors were shut on potential candidates of other races leaving them with much disappointment.

While the Singapore Presidential Election would not be a global hot topic like the 2016 US Presidential Election, the three presidential hopefuls have made local headlines over the past month. The first application was submitted by Mohamed Salleh Marican on 23 August 2017.

second chance boss

Leaving other media sources to cover the big event, we take a look at Singapore Exchange-listed Second Chance Properties (Second Chance), which was founded and is currently being helmed by Mr Salleh as the chief executive officer.

The Business

Second Chance, as the name suggests, was a restart of Mr Salleh’s tailoring business in 1975, which failed after four months. Although the group’s beginning was in the tailoring business, Mr Salleh subsequently overcame great challenges and ventured into the jewellery and property businesses.

Today, the group operates four main business segments namely, Apparel, Gold, Properties and Securities. Revenue of $16 million from the gold business made up 40.8 percent of total revenue in FY16 while the properties business was the major contributor to the group’s net profit at $5.9 million.

Although the presidential race has yet to begin, Mr Salleh already has a First Lady, a Malay women’s traditional clothing brand which enjoys much success locally and across the causeway.

Financial Performance

(Source: Shares Investment)

(Source: Shares Investment)

Over the past few years, Second Chance’s financial performance has not been too stellar. FY16 net profit fell to $7 million, less than half that of FY13, even after the latter excluded one-off revaluation gains of $42.9 million. For 9M17, the seemingly higher net profit of $8.6 million was a result of profit on disposal of securities, while operating income for the nine months was only 68.5 percent that of FY16.

Far from its heyday, Second Chance businesses have been hit from multiple directions. The apparel business continues to be negatively affected by the growth of online shopping channels, in particular from foreign competitors which typically offer lower priced goods. Revenue from the group’s Malaysian operations suffered due to the closure of 13 retail shops since the end of FY16 as well as the weakening Malaysian Ringgit and intense competition.

The property business also did not fare any better due to the loss of rental income on account of sale of two investment properties coupled with lower rentals received on some lease renewals.

Low Float

Float refers to the number of shares available for trading in the open market of a particular company. It is calculated by subtracting closely-held shares from a firm’s total outstanding shares. Shares of a company with a small float will generally be more volatile partly due to having limited liquidity and wider bid-ask spread. As such, institutional investors seldom invest in low-float stocks.

Currently, Second Chance has a float of only 18.6 percent, with a majority of 67.6 percent owned by Mr Salleh. While the low float and high individual ownership sets the stage for a potential privatisation bid, the likelihood is not that high and also dependent on the outcome of Mr Salleh’s recent endeavour.

Though the group’s share buyback mandate, with a prescribed limit of 10 percent, started on 29 December 2016, buyback volume has been low with a total of 6.5 million shares or 0.9 percent of the total outstanding shares being purchased to date.

Given Second Chance’s currently depressed share price and weakened performance, the low float is a negative factor for shareholders unless investor sentiment improves.

Valuations

At its closing price of $0.26 on 25 August 2017, Second Chance was valued at 22 times trailing 12 months price-to-earnings (P/E) ratio and 0.7 times price-to-book (P/B) ratio. The current P/E valuation matches the retail sector average while the P/B is in line with the average of the property and construction sector.

In terms of dividends, Second Chance paid out $0.002 per share for FY16, a steep decline from $0.0355 for FY15, representing a dividend yield of only 0.8 percent.

In view of the current valuations as well as the businesses limited potential, Second Chance’s shares are unlikely to be given another chance by investors. However, should Mr Salleh manage to obtain the Certificate of Eligibility and proceed to emerge as the next President of Singapore, it could result in a share price rally due to the psychological biasness of retail investors.