Deep-dive 2021-18: Pico Far East
Pico Far East (752 HK) is one of the largest service providers for the global exhibitions and events industry. Organisers hire Pico to decorate and set up exhibition booths for major events taking place in Asia and beyond.
The majority of revenues, at around 77%, comes from the exhibition and event business. The remainder comes from building interior designs of museums, theme parks, physical signage for brands such as Costa Coffee, Dairy Queen, KFC and Yoshinoya as well event management.
The Chia family founded Pico in Singapore in 1969. Younger brother Lawrence Chia took over in 1994, moving to Hong Kong, where he oversaw the Chinese business. Today, roughly half of revenues come from Greater China, where Pico has major production facilities and relationships with many large companies.
The exhibition & event business has been hit hard by COVID-19, especially outside of mainland China as travel has been restricted. But Pico has remained profitable throughout the pandemic and has net cash of almost HK$600 million as an extra margin of safety. Lawrence is surprisingly forthright about the challenges facing the exhibition business, saying that a recovery will be gradual and that Pico will have to adapt to the world as it is.
A few acquisitions since 2017 has made Pico more tech-savvy, though it remains to be seen whether these acquisitions will ultimately become profitable. Throughout the pandemic, Pico has used its new capabilities to manage online events and hold physical events in ways that keep visitors and audiences safe.
I am personally more bullish than most on recovery from COVID-19. Several countries such as Sweden have achieved a high degree of natural immunity and vaccination. And seemingly moved on from the pandemic. While cross-border travel will take longer to recover, it will likely happen sooner or later.
Assuming a close-to-full recovery from COVID-19 by FY2024, the upside to intrinsic value is likely +86% against 11x 2024e EPS of HK$0.21/share, plus an additional 27% in accumulated dividends. The key catalyst would then be a recovery from COVID-19.
It’s also worth mentioning that Lawrence Chia purchased shares on the open market in 2019 and 2020 at around HK$2-2.5/share at close to twice the current share price. Hong Kong activist investor David Webb is also a major shareholder at 5%.
The risks to look out for include a prolonged recovery from COVID-19, the potential for poor acquisitions and strong family control.
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hi Michael, thanks for the great writeup. enjoyed it as usual. the management seems to be capable and as you pointed, they have brand name and scale. but wondering are these factors strong enough to give them a strong moat? they are like very good sub-contractor for customers but someone with capital and the intensity could compete with them and gave them a good run for their money? As it is an order-book based business, they have to rebuild the entire orderbook each year. Just playing the devil's advocate to better understand how strong is the investment case.
Another nice recovery stock, thank you!
Please could you clarify how you’re treating deferred consideration in valuation/ model?
I’d normally add a conservative eat if future deferred consideration to EV and then ignore its effects in the P&l whether write ups/down or sometimes one sees this in the minorities line.
It would be v interesting to know whether the global events giants (relx, Informa) are priced for a return to pre-Covid revenue/profits. Maybe the market thinks the whole sector is screwed in which case this is more of a sector bet than an idiosyncratic one.