Stock went up 16% on Friday...from you buying? :) I think P/E is close to 7 now.
I have a learning question since I'm new to microcaps-- who are the marginal buyers?
For large caps, the price discovery machine is well-oiled. Analysts publish targets, index funds rebalance, quant funds screen for factor exposure, activist investors push for changes. So the market is usually good at finding and correcting mispricings. But for the S$50m Catalist-listed Singapore construction subcontractors, who are "discovering" the correct price and chipping in? Us? :)
Just wondering what are the mechanisms for price to go up for this type of stocks.
Yeah, I was buying some indeed. The P/E is now 9 on the last 12 months, or 5x when just taking the last 6 months annualized and subtracting the cash which is like 2x earnings.
Your question on marginal buyers is a very good one. In general, here’s what happens if all goes well for a great microcap.
When a company that is not known by anyone starts posting great results and high growth (>30%), smart investors will start to notice it and buy some of it. There’s thousands of investors looking for companies and some will find the company.
It then will post some more good results, and will start to be clearly undervalued. Like, say a company just posted 4m H1 net income… In 6 months, if they do that again, it will be 7x earnings, and then more investors will see it…
This can drive up a stock price and make it get noticed. People pay attention to well performing stocks. This can lead a small stock to expand its P/E multiple quickly to 15, 20, 25x as would be expected from a growth stock…
At that time, the stock is typically 100m+ or 200m+ market cap, and specialty microcap funds start checking it out. Some insiders may have taken profits making it more liquid which also helps.
This kind of happened with Huationg the other day. It did a financing at 60 cent and the institutional investors it talked to liked it so much that the stock is now at 82 ct just from getting more known…
Then, if the company keeps delivering results, more and more mainstream (less specialized) family offices or institutional investors will pick it up. They are used to paying 20x P/E multiple and if it grows, they are happy to pay more… Then the stock becomes mainstream and gets added to small indices.
This whole sequence is what has been happening with OKP, Soilbuild and Huationg. It’s kind of interesting that some of them are 2x or 3x, and they are not even expensive now, trading like 12-13x P/E or something…
To your point though, all of this takes time to go through the different steps, and it can fall apart when the company posts weak results ….
Thanks for the detailed explanation! I'll write this down :) I suppose that's why you advocate adding to winners on this type of stocks-- because if price keeps going up that means the stock is "graduating" to the next stage of discovery, which unlocks new demand sources. Unlike larger caps where mean reversion may be more dominant.
That's right although the main reason is that when something is small but works very well, it has the potential to keep winning for a very long time. Adding customers, opening new markets, improving capabilities... and we can't be selling those too early
To your point, a rising price also adds new sources, and in many cases it also improves liquidity. The higher market cap, higher liquidity and longer track record all pull in more investors
I'm not focused on front running that sort of growing crowd though. If there is a company that does well and is cheap, but nobody cares about it, Im also happy to own it.
Something like BSH or Tellus in the portfolio ... They are so small they won't trade at 10x earnings any time soon. But I'm equally happy to own those.
A good investment is proven by future cashflows, rather than counting on others to come to buy it from us at 10x sales
What you said makes a lot of sense. It's easier for smaller companies to grow and if they do well they can grow for a longer time.
On the other hand micro companies are also riskier. This reminds me of venture capital. Most small companies stay small or die. The few that graduate pay for the rest.
You run a pretty diversified book with a lot of smaller positions, which looks a bit like VC— spread the bets, let the winners compound, accept that some won't work out.
But VC funds with good selection still only hit on maybe 5-10% of their picks. The model works because the winners are 10-50x, not because the hit rate is high.
In micro-cap equities the upside is real but more compressed, maybe 3-5x on a winner rather than 50x. So the math requires a much higher hit rate to work.
Hi Floe - curious if you have some colour surrounding the 10m-share capital raise in december? Understand it was to fund NWC. Seems a bit of an odd choice to dilute at such a low share price when they could have funded it through borrowing? Thanks
Hi Ollie, this was because they wanted more institutional ownership of their shares. They raised this capital at a small premium to the share price at that time. To your question - their motivation was getting seen by institutional investors:
Interesting read, Floe - thanks and love your work. One question - you mention the CEO change and what you think is driving it - any evidence for that or just a hunch?
Great write up, Floe!
Stock went up 16% on Friday...from you buying? :) I think P/E is close to 7 now.
I have a learning question since I'm new to microcaps-- who are the marginal buyers?
For large caps, the price discovery machine is well-oiled. Analysts publish targets, index funds rebalance, quant funds screen for factor exposure, activist investors push for changes. So the market is usually good at finding and correcting mispricings. But for the S$50m Catalist-listed Singapore construction subcontractors, who are "discovering" the correct price and chipping in? Us? :)
Just wondering what are the mechanisms for price to go up for this type of stocks.
Hey Tash! Thanks so much for the kind words
Yeah, I was buying some indeed. The P/E is now 9 on the last 12 months, or 5x when just taking the last 6 months annualized and subtracting the cash which is like 2x earnings.
Your question on marginal buyers is a very good one. In general, here’s what happens if all goes well for a great microcap.
When a company that is not known by anyone starts posting great results and high growth (>30%), smart investors will start to notice it and buy some of it. There’s thousands of investors looking for companies and some will find the company.
It then will post some more good results, and will start to be clearly undervalued. Like, say a company just posted 4m H1 net income… In 6 months, if they do that again, it will be 7x earnings, and then more investors will see it…
This can drive up a stock price and make it get noticed. People pay attention to well performing stocks. This can lead a small stock to expand its P/E multiple quickly to 15, 20, 25x as would be expected from a growth stock…
At that time, the stock is typically 100m+ or 200m+ market cap, and specialty microcap funds start checking it out. Some insiders may have taken profits making it more liquid which also helps.
This kind of happened with Huationg the other day. It did a financing at 60 cent and the institutional investors it talked to liked it so much that the stock is now at 82 ct just from getting more known…
Then, if the company keeps delivering results, more and more mainstream (less specialized) family offices or institutional investors will pick it up. They are used to paying 20x P/E multiple and if it grows, they are happy to pay more… Then the stock becomes mainstream and gets added to small indices.
This whole sequence is what has been happening with OKP, Soilbuild and Huationg. It’s kind of interesting that some of them are 2x or 3x, and they are not even expensive now, trading like 12-13x P/E or something…
To your point though, all of this takes time to go through the different steps, and it can fall apart when the company posts weak results ….
Thanks for the detailed explanation! I'll write this down :) I suppose that's why you advocate adding to winners on this type of stocks-- because if price keeps going up that means the stock is "graduating" to the next stage of discovery, which unlocks new demand sources. Unlike larger caps where mean reversion may be more dominant.
That's right although the main reason is that when something is small but works very well, it has the potential to keep winning for a very long time. Adding customers, opening new markets, improving capabilities... and we can't be selling those too early
To your point, a rising price also adds new sources, and in many cases it also improves liquidity. The higher market cap, higher liquidity and longer track record all pull in more investors
I'm not focused on front running that sort of growing crowd though. If there is a company that does well and is cheap, but nobody cares about it, Im also happy to own it.
Something like BSH or Tellus in the portfolio ... They are so small they won't trade at 10x earnings any time soon. But I'm equally happy to own those.
A good investment is proven by future cashflows, rather than counting on others to come to buy it from us at 10x sales
What you said makes a lot of sense. It's easier for smaller companies to grow and if they do well they can grow for a longer time.
On the other hand micro companies are also riskier. This reminds me of venture capital. Most small companies stay small or die. The few that graduate pay for the rest.
You run a pretty diversified book with a lot of smaller positions, which looks a bit like VC— spread the bets, let the winners compound, accept that some won't work out.
But VC funds with good selection still only hit on maybe 5-10% of their picks. The model works because the winners are 10-50x, not because the hit rate is high.
In micro-cap equities the upside is real but more compressed, maybe 3-5x on a winner rather than 50x. So the math requires a much higher hit rate to work.
I guess that’s why selection skill is crucial.
Exactly! That's why it's important to realise quickly when you're wrong/right and cut or add accordingly
Hey, You say Lincotrade has been growing very well since IPO. The stock chart at first glance doesn't really seem to relfect that imo ;).
Let's say the whole AI bubble burst somehow, how bad would that affect Lincotrade's data center revenue?
I also have a hard time putting the rightfull P/E on this company because there's the aspect of cyclicality in construction.
Hi Phil, good day! Thank you for the thoughtful question. I’m writing IPO there, but to your point, I should write RTO instead…
Lincotrade went public in August 2022 by buying the shares of a shell company. The ugly chart is from the shell. :-)
So they came to the stock market in late 2022 and then had growth as follows as below.
Putting a multiple on construction/AI stocks is difficult indeed, but I do see both trends continuing still for years in Singapore
Data center I think is ~30% of the business this year and represents a big part of their ~50% growth but not all of it.
FY24: (Jul 23-Jun 24): 68 mSGD revenue
FY25: (Jul 24-Jun 25): 74 mSGD revenue
FY26H1: (Jul 23-Dec 26): 53 mSGD revenue
Hi Floe - curious if you have some colour surrounding the 10m-share capital raise in december? Understand it was to fund NWC. Seems a bit of an odd choice to dilute at such a low share price when they could have funded it through borrowing? Thanks
Hi Ollie, this was because they wanted more institutional ownership of their shares. They raised this capital at a small premium to the share price at that time. To your question - their motivation was getting seen by institutional investors:
Understood - thank you for the swift response!
You’re welcome! :)
"Currently, we are still waiting for the relevant authorities to approve our Temporary
Occupation Permit application for the Tuas Factory" : maybe a little risk here?
Hi Jay, sorry I missed this question earlier. This has meanwhile been approved.
Thanks - new subscriber and this was a good read. Time for more DD before the SG market opens.
Thank you & welcome, Henry
Interesting read, Floe - thanks and love your work. One question - you mention the CEO change and what you think is driving it - any evidence for that or just a hunch?
Thank you! That's just a hunch.
I was happy to read that the more commercial person is taking the lead rather than the other way around though.
"Do some work on this company before investing rather than just diving in based on what a stranger on the internet thinks though. "
God damn. This hit hard 😪
😄
Why are your revenue numbers different from the one in audited finacials of the company?
Hey variant, it's because Im using callendar years instead of their Jun-Jun fiscal years