I am by no means an adventurer.

In Value Investing there is a common adage to look for value where few dare to go. This makes complete sense as the place(s) that few dare to go are usually the ones that have seen the most carnage and destruction of value. It is also usually when prices are most beaten down that one can find the best bargains. This train of thought should be, and most of the time it is, evident to all investors but one (especially those inexperienced) can never escape this sense of fear that causes an investor to sink his roots in the ground and embrace the warmth of inertia.

This is why I propose another strategy- go where few are able to go.

Recently, I bought some lots of Transit-Mixed Concrete (SGX: 570) for two of my portfolios because I believe that the recent announcement of the URA masterplan means that the number (and value) of construction projects in Singapore over the next two decades are going to be huge*. Of course, TMC is not a huge player in the market- their revenues as a percentage of the value of construction projects in Singapore in any given year is small but my expectation is that the value of construction projects will mean that TMC will also be kept busy (and profitable).

That’s from the revenue point of view. Operationally, TMC has used very little debt and has high returns on capital (approx. 15%). One of the reasons for that is that TMC returns a fair bit of its free cash flow as dividends to investors and this is precisely the reason I’m taking a position in TMC. I’m essentially taking the view that TMC can maintain its costs while seeing an increase in revenues which in turn will allow a higher operational cash flow and eventually lead to higher dividends (more than the current 2 cents per share).

What’s the downside? TMC is a very illiquid stock- management (CEO Chua Eng Him and Founding Member and Director Yap Boh Lim) and the Wee family (through Kheng Leong Company Pte Ltd) collectively own some 70% of the company. This makes for low trading volumes and wide bid-ask spreads which are basically no-nos for anyone managing serious money and traders who scalp for a living.

However, that’s not a bad thing for the retail investor who’s patient enough. Forget the easy capital gains! Forget the quick buck! Sit back and enjoy the 5+% dividend with a chance of upward appreciation. This is what Warren Buffett meant when to think of stocks as equity bonds** and while concrete pumping (TMC’s core profit driver) may be a cyclical business, I believe the future macro environment will be in its favour for some time to come.

Let’s see what happens.

*HDB has released a record number of flats (more than 25,000) this year too.
**Of course Warren Buffett was referring to equities that have such strong moats that their revenues and earnings are more predictable than companies that operate in a cyclical environment.

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