Saturday, 8 May 2021


This happens from time to time. Companies would make an investment, and suddenly that long-ignored pick turns out to be a big winner. So big in fact that it causes an existential crisis for the parent company.

Yahoo CEO Jerry Yang and unheralded schoolteacher named Jack Ma had a chat in 2005. Then Yahoo pumped in $1 billion for a stake in Jack's humorously named e-commerce firm. Seven years later, that 40% stake was worth $14 billion.

Combined with Yahoo's other winning investments, they were worth more than Yahoo's market cap of $20 billion back in 2012. On a market capitalisation basis alone, Yahoo's actual businesses can be had for free.

Another example. South African media company Naspers paid $32 million in 2001 for a 46.5% stake in another hilariously named Chinese internet upstart. That stake is worth $221 billion in 2021. 

The investment in Tencent actually transformed Naspers into an investment firm. In 2021, Naspers' market cap was at a $30 billion discount compared to the value of its stake in Tencent alone. 

In theory, the market was disregarding not just the value of Naspers' other investments and businesses, but also its own stake in Tencent.

These are extreme examples, but they are illustrative nonetheless. Because we view these occurrences as transformational events for the company. 

What's long ignored is now being paid attention to. The number crunchers will pull out their SPM-era calculators and try to divine the right valuation of the parent company with the winning investment. 

Selangor Dredging Bhd (SDRED) - a company whose name is a nod to its past as a tin miner - has a 31% stake in Singapore-listed Fortress Minerals Ltd. Fortress has a concession to mine iron ore on 526 hectares of land in the no-nonsense-named Bukit Besi in Dungun, Terengganu.

The Bukit Besi mining rights were acquired in 2016. Recently, Fortress had acquired a second iron ore mining site in Pahang.


Read Fortress's latest earnings disclosure presentation here

Iron ore has torn an opening in the space-time continuum this year. China's economic boom has stoked up demand, and the fear of a supply disruption has stoked up iron ore prices further.

The ramifications for Fortress and SDRED are immediate. Without belaboring a simple point, it's this : Fortress benefits from the commodity supercycle angle, it makes more money from iron ore sales, and the more money it makes, the higher its dividend contribution to SDRED. 

Market sentiment has been driving up Fortress's valuations due to the aforementioned benefits. Hence the value of SDRED's stake in Fortress has similarly ballooned.
Fortress made record earnings in FY21 and announced a S$0.01 per share dividend. It paid out RM4.8 million in dividends to SDRED. Revenues grew 84% on a year-on-year basis, while profit-after-tax jumped by 180%.

So what did this all do to Fortress's share price? Take a look.

In 2021, the stock is up 136%. As of last Friday (7 May 2021), it carries a market capitalisation of S$355 million, or just over RM1.1 billion. It currently carries a TTM P/E ratio of 14 times. Not too bad considering the huge price rally.

SDRED's stake in Fortress alone is now worth RM341 million. It represents 99% of SDRED's market cap of RM345 million based on last Friday's closing.

What can be deduced here? The most simplistic ones are :

1) SDRED's shares correlate closely with Fortress's (of course)

2) SDRED is a beneficiary of Fortress's improved fortunes (of course)

3) These companies (the investee company and the investor, which has other businesses too) have now become explicit proxies to iron ore's price trajectory.

 Fortress VS SDRED stock price trajectory, year-to-date

Naturally, the market likes any or all commodity supercycle proxies, so much so that Fortress is outperforming SDRED's shares. But the net effect is that SDRED's 31% stake alone is worth as much as SDRED's current market cap.

Now, technically speaking, SDRED's entire businesses - of which it has quite a few - can be had for free.

SDRED carries a net asset value of RM1.95 per share based on its latest quarterly filing for the period ended 31 December 2020. It's a big premium to the stock's 81 sen closing price last Friday, but for obvious reasons : it's a property developer going through some lean times, and at the same time its hotel business is bleeding red.

But for the life of us, we can hardly recall another instance when a property developer with prime assets technically fetches zero valuation, if only because the distortive effect of the Fortress investment relative to SDRED's market cap right now.

There's some landbank in Penang. They even have exposure to developments in Singapore.

As a developer of more premium property offerings, they have a track record of maximising the use of small acres for low-density exclusive condos. Better margins there, but then again there's a dearth of premium buyers out there.

There are some issues with SDRED. It's an under-the-radar developer, and a fairly small one. Its landbank is small. Launches tend to be few and far between, and to undertake new ones, it may need to participate in joint ventures (like in Singapore). It swung into losses in FY2020 as the sector suffered from the pandemic's disruption.

The stock is not liquid, and until very recently it did not see much trading attention. 

The correlation between SDRED and Fortress can be a double edged sword. If the commodity supercycle story turns out to be short-lived, the resultant downturn in sentiment and earnings for iron ore miners may likely be severe.

And yet it now has an investment that is turning into a big winner. So big that the stake dwarfs its actual day-to-day business.

Sunday, 25 April 2021


Link to tweet

I spent some time last week answering all sorts of questions on Twitter, reproduced here following multiple requests.

They are meant to be brief and I have nothing else to add other than : thank you for the thoughtful questions. I hope you found the replies helpful.

In sequential order, I've divided the responses into different topics : 

1) Personal

2) Price-Volume Analysis

3) Advice for Beginners

4) Developing the Right Mindset

5) Crypto & Unit Trusts

6) Market Opinions & Strategy






A lot of our TradeOfTheWeek case studies utilises price-volume analysis

 Some breakout-type trades documented in this blog.. they are powerful stuff


Here's an example of a knife trade, one of our core specialties



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And last but not least....