SI Research: Swee Hong – Another Multi-bagger Play?

Penny stocks were much in play lately. From Sincap Group to Jiutian Chemical Group, investors keeping watch of the top daily traded counters on the Singapore Exchange would have noticed that penny stocks took more than 10 of the top 20 most traded counters over the last two weeks.

Of course, Rowsley’s $1.9 billion deal with Peter Lim – the billionaire tycoon and owner of Thomson Medical Centre (TMC) – held the spotlight. Even football superstar Cristiano Ronaldo’s visit to TMC after the deal’s announcement continued to spark more tongue-wagging. But one penny stock in particular, which has been on my watch-list, also set off an alert despite no headline-grabbing news.

Read related: 4 Things I Learned From Peter Lim’s Rowsley Deal

Shares of Swee Hong jumped from the low of $0.009 to the high of $0.024 in barely over a month’s time. In percentage terms that would have translated to a 166.7 percent gain in share price! As expected though, most of these penny stocks began to feel the gravity and have fallen back to earth but SH seems to be holding on to its gain rather well, falling only $0.004 to hover at about $0.020.

Why did Swee Hong land in my watch-list? Will its share price see another breakout and trend upwards after this bout of penny stocks rally?

About Swee Hong

Swee Hong is a civil engineering and construction company. The company’s construction engineering services include tunnelling, architectural services, mechanical and electrical engineering, and civil structure construction. In its heyday, Swee Hong has clinched numerous notable projects such as Gardens by the Bay and Changi Ferry Terminal Redevelopment.

But in 2015, the company ran into financial difficulties due to its debt-laden balance sheet compounded with cash-flow problems. The issues were so severe that its suppliers and sub-contractors for the projects at Bukit Brown and Thomson MRT lines halted their operations to demand their overdue monies.

In a move to find a solution, the company proposed a debt restructuring plan to its creditors – United Overseas Bank, Building and Construction Authority and ACL Construction. Although it took a while, under a creditors’ scheme of arrangement (CSRA), Swee Hong has paid off all its debt obligations. The company has also had a change in leadership, after the then-chief executive, Ong Hock Leong, stepped down on bankruptcy order in February 2016.

Landing On My Watchlist

Swee Hong’s effort and commitment to repay its debtors was rather commendable and its change of leadership would have spurred efforts for better cost-rationalisation and more prudent operations.

Owing to these, a financial turnaround is evident in Swee Hong’s result. In its latest 9M17 result, Swee Hong’s revenue rose 76.2 percent to $42.6m due to increased activities of on-going projects. Whilst this might be due to halted operations being restarted, gross margin saw a significant improvement as it rose from four percent in 9M16 to 14.1 percent in 9M17. Correspondingly, Swee Hong made a gross profit of $6 million on its top line compared to just $1 million a year ago.

Meanwhile, in the same period, administrative expenses have fallen dramatically from $13.1 million to just $1.6 million. Swee Hong recorded other gains of $25.7 million in 9M17, due to write-offs pursuant to the CSRA and recorded gains on disposal of a property. As a result of its improvements, Swee Hong returned to a net profit of $30.1 million in 9M17 compared to a net loss of $12.3 million in 9M16. Stripping away the one-off gains, Swee Hong would still have been profitable at $4.4 million.

Balance-sheet wise, Swee Hong has also returned to positive net asset value with the issuance of new shares pursuant to the debt-restructuring. Financial strength has returned to more healthy level as borrowings have been pared down from $22.2 million in FY16 to $5.2 million by 9M17.

Although debt level has dropped significantly, the company’s debt-to-equity ratio stood at 65 percent in 9M17 due to accumulated losses of $43.5 million. Nonetheless going forward, if Swee Hong continues to generate profit and sustain its performance, accumulated losses would dwindle and the debt-to-equity ratio should improve in tandem.

Risks Of Penny Stocks

While Swee Hong has seen considerable improvements in its fundamentals, the market will not sit well with any negative news or ill-fated events (like OKP-PIE work site collapse) for penny stocks like Swee Hong.

High price volatility is also a big risk for investors looking for stability in their investments. As the volume of a penny stock can be small, penny stocks can be easily manipulated by market operators or financial crocodiles. Investors that are risk-averse are strictly advised not to dabble with penny stocks and any interested investor should always do their own due diligence.

That said, despite its enlarged share capital (as a result of CSRA), shares of Swee Hong are still trading at rather low multiples. At the price of $0.020, Swee Hong is trading at a price-to-earnings of only 2.5 times.

Swee Hong also has a sizeable order book of $80.9 million as of 9M17 and any further order wins would be positive for the company and its share price. On the contrary, failure to secure new contracts would create an overhang on its stock price. So in the best scenario, a combination of both sustained performance and order wins would give the stock price a lift. Therefore, investors looking for multi-baggers may keep Swee Hong in their watchlist, but do bear in mind the risks abound.