Thelloy Development Group Limited

Thelloy (‘Group’) provides building construction services, repairs/maintenance/alterations/additions (‘RMAA’) services, and modular integrated construction services in Hong Kong as the main contractor.

The group has several crucial construction licenses to execute projects for public works, housing authority, buildings department, etc. that confer competitive advantages.

It experienced severe declines of 70% in revenues, however, in the six months to September due to the pandemic as customers suspended construction work, and suppliers suspended delivery of materials.

The group reported TTM revenues of $297m (2019: $537m), which was down from a peak of $912m in 2018. TTM ebitda was $18m (2019: $31m) and net profits were $4m (2019: $13m).

It reported cash balances, in excess of working capital requirements and debt, of $41m. It has committed $44.1m, however, towards a 49% interest in a joint venture (with external financing) to redevelop a 13-storey industrial building to a 23-storey building, which will likely bring in additional rental income. Even otherwise, its liquidity position is satisfactory.

The stock currently sells for $152m, which is at a premium to tangible equity of $132m and appears pricey for a group that posted such disastrous recent results.

Examining the record of the last six years reveals average profits of $24m, and similar average free cash flows. This yields over 15% at market, and 18% on tangible assets, which isn’t unsatisfactory.

The key question is whether the group can return to average profitability. We don’t see a reason it can’t - considering potential demand and the group’s competitive strengths.

Though the current results are poor, the Hong Kong government is committed to large expenditures on infrastructure and public housing. We’ve covered this with other construction companies on this blog. (See: Wecon https://analyzingbargainstocks.blogspot.com/2020/10/wecon-holdings.html, Sam Woo https://analyzingbargainstocks.blogspot.com/2020/12/sam-woo-construction-group-limited.html, and Chinney Group https://analyzingbargainstocks.blogspot.com/2020/11/chinney-alliance-group-limited.html)

The group has the capacity to generate $24m/year and can earn more with additional rental income (see above), and savings on office costs arising from office space it acquired in 2019 for $91m – the latter also reflects management’s optimism on the group’s prospects.

In addition, management have paid out average annual dividends of $24m in normal years, though this was cut in 2020 along with the interim dividend.

Overall, we think this stock is depressed relative to its earnings power – it isn’t as cheap as many stocks we’ve covered on this blog, but it passes our minimum investment tests.