This article by Jennifer Tan (left, Director, Research & Products, Equities & Fixed Income, at the Singapore Exchange) was published in SGX's kopi-C: the Company brew series on 11 August 2017. The article is republished with permission.
Veteran banker Chang Yeh Hong, the Executive Chairman of Nordic Group Ltd, is an unflinching voice of prudence and objectivity.
The Bachelor of Arts in Economics graduate from the National University of Singapore completed the Business Financial Management Programme with UK's Manchester Business School in 1995, and the International Executive Management Programme at INSEAD Fontainebleau, France, in 1998.
Nordic has a current market capitalisation of about S$165 million. In the 2017 year-to-date, its shares have generated a total return of 71.3%, outperforming the benchmark Straits Times Index's (STI) 17.9% and the broader FTSE ST All-Share Index's 17.0%.
Between FY2012 and FY2016, the company was able to grow its net profits at a compounded annual rate of 48%, largely because it diversified its geographical and currency exposure risks.
"Back in 2011, we foresaw the downturn in the oil and gas sector. The company was not in good shape then - 80% of our revenues came from Chinese shipyards, and we had a very high exposure to the US dollar," Chang recalled.
Our M&A strategy revolves around at least one area of familiarity - either the target acquisition has the same customer footprint and a new product or service, or there is a different customer footprint, with the same product or service.
- Chang Yeh Hong
"That was a double whammy."
He focused on building alternative income streams and removing key risks.
In 2011, Nordic acquired a scaffolding company - Multiheight Scaffolding - that gave it a foothold in the petrochemical sector.
"Oil majors like Exxon, Chevron and Shell use scaffolding structures for their petrochemical complexes on Jurong Island, and entry barriers are naturally high, because safety concerns are always paramount," he noted.
"With this acquisition, we converted our cost and revenue bases to Singapore dollars, which became a natural hedge. We also moved into the downstream oil segment, which was faring better than upstream."
Nordic continued its acquisition spree to lay the foundations for growth. In 2015, it bought the Austin Energy Group, an insulation and fireproofing services specialist. This marked its entry into pharmaceuticals - a new industry segment.
Earlier this year, it added Ensure Engineering to its stable, cementing its expertise in the petrochemicals sector and opening up new revenue streams from Singapore's National Environment Agency and PUB, the national water agency.
The acquisition of the engineering services firm will also provide Nordic with a more stable income source, as almost all its revenues are derived from recurrent maintenance contracts that typically span one to five years.
"Our M&A strategy revolves around at least one area of familiarity - either the target acquisition has the same customer footprint and a new product or service, or there is a different customer footprint, with the same product or service," Chang said.
"This way, we're not exposed to more than one risk at any time, and there's always a safety net to fall back on."
Nordic's acquisitions have contributed profits from day one. "We buy companies not for their assets, but so that the Group's performance as a whole can be sustained. The key criteria we use to assess suitability include processes and systems, overall profits, future cashflows and order books," he added.
Integrating the Group's acquisitions properly is also a priority to reduce future risks. "We need to ensure these companies are aligned with the Group's processes and systems, and the next echelon of leadership is in place, as the owners may want to step aside after the sale is completed."
|♦ For Rainy Days|
No cash, no purchase is another mantra. Every dollar Nordic borrows is backed by a dollar of cash on its balance sheet, to prevent the Group from overleveraging.
"Only when market demand and supply reach an equilibrium, and oil prices return to a level where key players are willing to invest again, will we see a rebound in the upstream cycle."
A Head Start
Have we achieved this target (20% annual growth in earnings) over the last six years? Yes. Do we have enough building blocks to do this for the next few years? I think so."
- Chang Yeh Hong
With these building blocks in place to ensure sustainable expansion over the medium term, Chang and the management team have set their sights on boosting market capitalisation and profits.
"Since our 2010 listing, our market cap has grown more than seven-fold - from S$22 million to S$165 million. We hope to double our market cap again in the next five years," he noted.
Management will also maintain its internal target to grow the Group's earnings by 20% annually. "Have we achieved this target over the last six years? Yes. Do we have enough building blocks to do this for the next few years? I think so."
Nordic, which moved to a semi-annual dividend distribution in 2015, is also maintaining its policy to pay out 40% of net profits as dividends.
And when he's not fine-tuning Nordic's strategies, Chang spends his time keeping abreast of developments in the oil and gas sector.
"Reading widely helps you gain a global perspective on industry trends and sharpens your decision-making processes. This gives you a head start over your peers, and lies at the heart of proactive management," he added.
The 57-year-old is a bundle of energy, eschewing golf for a game of soccer twice a week with school alumni and friends.
We buy companies not for their assets, but so that the Group's performance as a whole can be sustained. The key criteria we use to assess suitability include processes and systems, overall profits, future cashflows and order books.
- Chang Yeh Hong
"Golf is too slow for me right now - I will play golf when I can no longer run and kick the ball!" he grinned.
"I prefer active sports because it hones my reflexes and keeps my mind alert."
Not surprisingly, the father of a daughter, 22, believes in pushing boundaries and persevering to the end. "That's how I grew up - I didn't come from a well-to-do family, but I was willing to work hard to achieve my goals."
"My daughter is born in a different time, but certain values remain the same - I always tell her that the sky is the limit, and whatever she undertakes, she must stretch herself to the max, never give up, and never be afraid of failure," he added.
Integrity is another principle close to Chang's heart. In particular, he emphasises the importance of playing fair when it comes to dealing with customers, partners and staff.
"In the case of an M&A deal, I will always try to pay the fair value of the asset. I don't believe in shortchanging others just to make a quick buck," he said.
"You must be fair and equitable in your dealings with everyone, because your reputation is at stake and can disappear in an instant. This is the only way to build trust, honesty and integrity in an organisation."
|Year ended 31 December (S$ '000)||2016||2015||2014
|Profit before tax||14,677||11,944||9,169||6,686|
|Profit net of tax||12,683||10,505||7,866||6,102|
|Quarter ended 31 March (S$ '000)||1QFY2017||1QFY2016
|Profit before tax||3,452||2,773||24.4%|
|Net profit attributable to equity holders||2,810||2,315||21.3%|
Source: Company data
|Outlook & Risks|
Nordic Group Ltd
Established in 1998, Nordic is a leading supplier of automation system integration solutions, vessel maintenance, repair and overhaul (MRO), precision engineering, scaffolding and insulation services, serving mainly the marine, offshore oil and gas, petrochemical and pharmaceutical industries. Headquartered in Singapore, Nordic currently has two production facilities located in Suzhou, China.
- Designed to meet the demands of vessel automation, the Group's System Integration division offers integrated control and management systems for newly built ships, as well as ships already in operation, but which are in need of upgrades and conversions.
- Under its MRO and Trading division, Nordic provides customers with a dedicated team of consultants who are responsible for any after-sales requests for maintenance, repairs and overhauls as part of its after-sales service.
- The Group's Precision Engineering division designs and builds tooling systems, and provides turnkey production solutions to customers in the marine, oil and gas, aerospace, medical and electronic manufacturing services industries.
- Multiheight Scaffolding Pte Ltd and its subsidiary front the Group's Scaffolding Services division, and is an established leader in metal scaffold works servicing the process, construction and marine industries.
- In June 2015, Nordic acquired the Austin Energy Group, which specialises in comprehensive Insulation Services and Passive Fireproofing Services in the petrochemical, pharmaceutical, marine, as well as oil and gas Industries.
- In April 2017, it also completed the acquisition of Ensure Engineering Pte Ltd, which is principally engaged in providing engineering repairs, maintenance, operations and plant turnaround services for public environment engineering installations, energy installations, marine and offshore industries, manufacturing, as well as oil and petrochemical industries.