Share investment turns sour

  • The company invested S$4m in HK-listed Crosstec recently, which saw an 84% decline in price on 11 Jan
  • While the losses could be recouped, we believe Econ’s investment mandate and strategy should be tightened significantly
  • We downgrade the stock to a HOLD, with a TP of S$0.28 as we raise our WACC to 11.8% to reflect the uncertainty caused by this development

Investment Thesis:

Investment of surplus cash goes wrong.
 Econ recently invested c.S$4.0m of its idle working capital into 11,800,000 units of shares of Crosstec Group Holdings Inc (3893 HK), an interior design solutions company listed on the Hong Kong Stock Exchange. On 11 Jan, Crosstec saw an 84% decline in its share price to HKD 0.38, which implies a potential investment loss of over S$3.2m for the company, equal to c.118% of FY22F net earnings.

Reconsideration of investment mandate needed
. While the company stated that the investment was intended to improve the yield on idle cash through dividends and share price appreciation, the investment of the majority of its idle cash into a single, loss-making, small-cap company is a riskier decision than one would expect. In our view, the company should re-consider its investment mandate and strategy.

Wait for further clarity before focusing back on core business; downgrade to HOLD.
 We believe that the growth prospects for Econ’s core nursing home business remain intact but we prefer to wait for more clarity on the company’s plans for its investment strategy before turning positive. Our DCF-based TP is lowered to S$0.28 with a higher WACC of 11.8%, reflecting heightened uncertainty and risk in the company’s financials stemming from this development. Note that the investment of S$4m represents 10% of its forecast shareholder equity (Mar 22).

Valuation:
Downgrade to HOLD with TP of S$0.28,
 based on DCF valuation with a WACC of 11.8% and a terminal growth rate of 1%.

Key Risks to Our View:
Lower-than-expected occupancy rates could affect the company’s core business, while continued risky investments could also cloud the company’s outlook.