Friday, January 29, 2016

Keeping Up With The Joneses

We are early into the year so this is one concept which I wanted to reiterate again to readers on the importance of personal finance and not keeping up with the joneses. This strategy helps me a lot in my personal finance, especially in my younger days when everyone was partying away with their youth and money while I kept a distance to keep my balances in check. I'm glad that it's a habit that keeps me going until today.

Spending money on status symbols and brands has been overly emphasized by the media and society as a symbol of success. The media called this the conspicuous consumption, which means the ability to keep up with whatever is in the trends right now. The lesser the supply of these branded good circulating around, the greater the demand because everyone wants to be the person everyone else looks up to apparently.

I wrote an article last year which redefines the conventional wisdom of success. As a society, we need to have a better sense of understanding of what measures the true wisdom of success. Is becoming a doctor a symbol of success or is it the role they play that makes them a success? Does the car a doctor drives need to be defined differently than what a normal office employee drives? 

The truth is these trapping definition of success weighs aplenty on people's mind that they are willing to pay multiple times the value to get what they want. This leads to the problem of personal finance when you are not disciplined enough and your finances are not able to accommodate to your wants.

The following images you will see below shortly speaks volume to what happens in our everyday's lives. We can be at any of the positions at any point in time but the same thoughts will occur. Just think the last time you see a branded car on the street, do you see the car or do you remember the driver's face? 

Everyone will be in a situation that we will envy the better person because he has more of something but that something has better got to do with something useful, not just branded material stuff.

Which one are you?

Tuesday, January 26, 2016

Why Most Analysts Report Fails To Deliver?‏

Many retail investors are usually not trained or equipped with the right skills to do analysis of a company. Because of this, they don’t usually draw an analysis of companies more in-depth than those analysts working in the sell-side. There may be an exception of one or two who does provide a balance view in their analysis but they are mostly rare. 

Analysts’ reports provide retail investors with an easy access to understand about the background and facts of the company they research in as well as their financial information in a summarized table. Interestingly, what is being focused in the reports by readers are always the analyst' recommendations and their 12 months projections outlook and target. I'd say most of the information and thesis regarding what the analysts put in their financial model and outlook remain valid, so I will not dismiss them straight away. 

There are many investors who lack on their own ability to analyse the companies, tend to rely on these analysts’ reports for their investment decision. This is where the stem of the issues arise. When these people look at the recommendation's buy or sell, they’d think they must be right because they are after all professionals who had more educational background than most of us did. 

These were the problems we had when analysts were calling a consensus buy call on Keppel and everyone believed their story. The problem with these consensus call is none of these reports consider the potential risk the company may be undertaking. In other words, we are talking about projections that may create an illusion of apparent precision, bullishness and when these gets extrapolated 3 to 5 years into the future, we get an intrinsic value or target price that are discerningly “attractive” to the naked retail investors’ eyes. The same problem occurs similarly to banks when everyone was dead sure that rising interest rate environment would benefits the banks without any doubt. Buy DBS. Buy OCBC. Buy UOB.

The duo strength of Berkshire founders, Warren Buffett and Charlie Munger, sums it best when they explain how these analysis could be miskewed when it comes to assumptions and projections. 

“We never look at projections. Projections are put together by people who have an interest in a particular outcome, have a subconscious bias and its apparent precision on the assumptions makes its fallacious. Projections in America are often a lie, although not intentional, but the worst kind because the forecaster often believes them himself.” 

While the above statement may resonates with some of us, it is important to note a proper due diligence of the company and an analysis is still important, as a closer look on hindsight often suggests that the decision process to come up with a certain assumption is the more important aspect of investing, than the result itself. 

For instance, when we consider the growth in earnings when a company launches a new product, have we considered the impact of how a competitor might react to the changes or whether there are cannibalization to the existing product. Have we considered the unexpected in both aspect of systematic and unsystematic risks involved in a particular decision? Often, it is too easy to suggest a biasness in upside because we are an optimistic creature in nature, hence creating an intrinsic target price which points to the upside, not downside. 

I am guilty of this myself, as shown from my first Kingsmen analysis on hindsight and am paying a dear price for it. Obviously, I failed to consider the risks back then which can happen to anyone or to any companies.

The need to understand our own fallacy and weaknesses will resonate with the way we interpret the goodwill of the analysts’ report. They are as fragile as we are and we need to admit that no one in this world are able to predict the movement of a share price accurately most of the time, not a CFA graduate, not even a Nobel Prize winner. We need to be able to identify the main villains that disrupt our decision making and improve on it, for if not we will always be grounded in similar situations despite paying a heavy tuition fees to the market. 

  • Confirmation Bias – People likes assurance and they tend to look for positive things or news that may resonate with the individual. Think about the last time you do a research or analysis on a company you are very interested in (or vested). Were you looking more for positive news on contract wins and management key optimistic outlook or do you consider the risk that comes with it? 

  • Narrow Frame of Mind – Do you look at all angles and consider each prospective objectively? Are you open to constructive feedback and criticism from your fellow investors or peers or are you deep in your own world thinking only you and you can be right. 

  • Emotional Attachment – Are you emotionally too attached in a particular stock and were not able to justify your buy or sell objectively. Some companies may be in your portfolio for 10 years but do you have the ability to cut loss when you need to? These are not easy decisions and if you think they are easy, then it is because you are looking at it on hindsight. 

Now that we know why most analysts are just like us, perhaps we can remind ourselves the next time we read these reports. After all, the fallacy of human's perile is something that makes the market more interesting isn't it?

Saturday, January 23, 2016

A Couple of Thoughts During This Bear Market

I'll pen a quick few thoughts about what I see in the current bear market environment.

Most investors are aware by now that bear markets are part of investing in the stock market. This is partially because one of the more recent and worst bear market condition occurred not too long ago in 2008 so a lot of investors are mentally more prepared for this. Many of them are referencing the GFC crisis as a benchmark to what they are experiencing right now and it's not necessarily a bad thing since the situation back then was pretty bad. For example, I hear many people are awaiting for OCBC to drop to $4 (GFC low) before they are willing to put their money. Whether or not they are right there, at least it is rather conservative.

The above situation also leads me to think that there are a lot of investor's focus on price rather than valuation. Taking a similar example on OCBC, it is somewhat quite different when their price was $4 back then versus $4 today. If you are a believer of fundamental analyst, you would understand what I meant by that. However, if you are a trader, you would probably be looking into that as a major base support line. Again, only hindsight will prove the right one.

During this bear market environment, indexes can also remain oversold longer than most dip buyers could remain solvent. What I thought was a cheap buy could actually be cheaper if I waited longer. This is because in bear markets, short setups often continue to push the price down even during oversold conditions. Perhaps, I would also need to adjust my personal version of margin of safety that are different when markets are in a bull run by discounting them more during this period. That's something that I am still trying to learn.

As academic have taught us, we are also used to using trailing twelve months (TTM) historical earnings to forecast the company's next 5 years earnings. This can be fatal because the past 5 years are probably good times which might not be repeated during uncertain economic conditions. For cyclical companies, it is better to normalized the earnings through the trough and peak to capture the full impact of the cycle. For other companies, it may be good to use conservative earnings during the recessionary period to forecast future earnings. The objective here is to ensure that we are not blinded by optimistic returns without thinking of the downside.

During the current market condition, I also experienced a situation where there are more choices of stocks that appear in my watchlist than before. This is because during bear market, all stocks are not spared and the share price will plunge giving investors plenty of choices to choose from. Do we go with companies that are able to maintain their strong earnings but having their share price not down much? Or do we go with companies that have their earnings battered so badly that their share price followed concurrently (e.g Keppel, SCI)?

Because of the above situation and our limited cash resources, investors are always faced with the one-decision, two-decision and three-decision during bear market as what Charlie Munger have pointed out. I am guilty of that myself.

  • One-decision - This is when you decide to buy a stock when their fundamentals are strong or sell because fundamentals have weaken. This is what a value investor usually does and they usually have the intentions to hold these companies for an infinite period of time.

  • Two-decision - This is when you decide to sell your existing position in favor of another stock that you think will reward you with greater returns in the long run. The decision to sell may or may not be due to fundamentals but more of limited resources to take advantage of the opportunity in the market.

  • Three-decision - This is when you decide to sell your existing position in favor of awaiting for a better entry price for the same existing position because you think the market conditions will push the price lower. This is called a three-decision because you sell and think the price is full, then you have to figure out when to buy back, and in the meantime face the dilemma of whether another opportunity might come up or if you might miss re-buying into the position should the market reverses upwards.

Howard Mark, in his latest memo, wrote this in his article which I really like a lot. He said, Up or down, the market has no special insight which conveys no consistently helpful message. It's not that it's always wrong, it's just that there's no reason to presume it's right.

Thursday, January 21, 2016

AGM (Fraser CenterPoint Trust - FCT) + Q1 FY16 Results‏

This is going to be a rather long post as I’ll be covering both the AGM and Q1 results released this evening. 

I’ve been to FCT AGM 4 out of the last 5 years so I am pretty familiar with many of the faces around. Last year, I attended the AGM for FCOT which was held in the same venue at Alexandra Point. I guess the objective is to find out and hear right from the horses’ mouth some of the issues and prospect regarding the reits. 

The CEO went through some of the performance highlights for FY15 which have been impressive so far in all aspects – increasing DPU, increasing occupancy, increasing NAV, lower gearing and other things. 

Then came next the questions and answers which I thought was pretty useful for those who are interested to know the nitty-gritty like me. 

Questions & Answers 

1.) The first question raised by the shareholder was the increasing presence of today’s e-commerce threat to hard malls shopping. I think this is a valid growing concerns amongst retailers because it is so convenient to purchase things online and much cheaper as well. 

The management agreed that online shopping is a threat in today’s environment but they have so far only represents 5% of the total spending pie. In fact, for the past few years, the numbers have not grown exponentially as what was predicted so there might be some truth about having the shopping experience in an actual mall itself, especially for activities involving the F&B, supermarket, etc. The management also explained that they could in fact use this to their advantage. For e.g the implementation of many supermarkets using the order & collect where shoppers still need to go to the actual mall to collect the goods themselves even though they ordered online. 

2.) The second question is mall specific for Bedok Point mall. As all investors of FCT knows, Bedok point is so far the only underperforming mall in terms of occupancy and NPI, even though they represent the smallest percentage of the overall portfolio. Occupancy has dropped to 84% and shopper traffic has gone down as well and this has brought some concerns that they will soon lose all competitiveness to their rival next door, Bedok Mall – which is owned by CMT. The management conceded that the mall is somewhat struggling so far but they are looking to improve as a destination mall for shoppers. To be honest, it is difficult to do so when all the traffics are directed to the bigger Bedok mall next door. 

The management went into the nitty-gritty of explaining that the first 3 levels are doing well, and it is only the highest 2 levels that are currently struggling as they were being occupied by a gym and school tenants. They could have significantly increase the occupancy rate by providing lower rents but I think that’s not what they are looking for. 

Personally, the impact isn’t felt quite yet because the top 3 malls are performing significantly well but at some point, I think they’ve got to reassess the situation and probably looking to divest the malls to a third party to get the best out of it. 

3.) The third question is also specific to an investment they made to Hektar Reit in Malaysia on whether there are more information about how the reit and their malls are performing. Another shareholder also asked later if it is better for FCT to buy into the assets in Malaysia directly instead of owning exposure through the reits. 

The management replied that DPU was stable and constant in the past 5 years in Ringgit terms, though due to the weakening of the Ringgit in recent times means that they have booked in translation costs due to the exchange. The management also answered that they are holding the exposure as an investment to associate because it is not easy to own an asset in another country directly without a special purpose vehicle. In the case of Hektar, they are indirectly using them as a vehicle to gain exposure to the Malaysian market. 

However, chances to expand beyond the Malaysian market remains slim as they do not have expertise or key players to penetrate the market. The management conceded that Australia remains a more visible option now since their sponsor, FCL has a huge exposure into the Australian market with key know how expertise stationed there.

4.) The fourth question, which I also think is the most important one, is regarding the outlook for the top 3 malls - Causeway Point , Northpoint and Changi City Point.

Causeway Point - There are already a map planned to develop Woodlands as a regional hub by URA in 2020. This will be a massive boost to the mall because you will suddenly have massive office crowd coming to the mall which is already extremely crowded now.

Northpoint - The company is planning to undergo AEI which will commence in March and it will be for a period of 18 months, after which the management is confident of their return on investment. The AEI is commenced now in conjunction with the North Park residences which will complete in 2018. This will bring about massive crowd to the retail component of the malls.

Changi City Point - The ongoing Downtown Line 3 project is underway now and when this is completed, it will bring about massive crowd to the mall as expo will become the main stopover interchange route.

5.) The fifth question is about whether the management will consider the scrip option for dividend given that the trust pays out 100% of distributable income, leaving little to nothing for any expansion or acquisition purpose.

The management replied that they will think about it, but I reckon it will be unlikely given the majority holdings is FCL.

6.) The last question is on the debt profile which is coming due in 2017.

The management responded by saying that they have concluded the refinancing deal and only the documentation is to be finalized. The company will continue to hedge 75% of their cost of borrowings in order to prevent the volatile increase/decrease of interest rate.

Q1 FY16 Results Review

The company also released their Q1 FY16 results this evening so I thought I'll cover that as well.

Net Property Income (NPI) has continued to increase 2% year on year on the back of stronger profile from the top 3 malls. Q1 DPU is at 2.87 cents, an increase 4.4% year on year. They continued to perform remarkably well and is at 100% increase every quarter year on year since IPO. Amazing.

Shopper traffic also increases 8% year on year and are higher than rival malls such as Vivo City and CMT malls. Average rental reversion continues to be strong at 13.7% in Q1 and given the future prospect, we can certainly expect more from it.

Net gearing remains low at 28.3% and is one of the top 3 lowest amongst all the other S-reits.

Interest coverage ratio is stable at 7.04 times so there are no major worries about them not being able to repay the debts. Costs of borrowings remain low at 2.36% for now, though I expect this to increase once they complete their refinancing.

The AEI for Nortpoint which will commence in Mar will see a dip in the occupany rates to about 76% as the company plans to shift out tenants temporarily. During this period, we might see a blip in the numbers so there might be some short term knee jerk reaction when it is due.

I'm quite positive about the company's outlook and will remain vested for as long as they continue their good performance over the years. Should the market presents any opportunity to enter, I will be happy to do so as a shareholder.

*vested with 13,000 shares of FCT.

Wednesday, January 20, 2016

CapitaCommercial Trust (CCT) - FY15 Results Review

This is my second consecutive coverage for the quarter for CCT which I am vested in. For the previous quarter, you can find them here.

The trust reported their full year earnings this morning.

CCT managed to record a 2.1% increase year on year on their distributable income, which translates into a 1.9% increase in DPU for the shareholders. The full year DPU came in at 8.62 cents (2H: 4.31 cents), which represents a yield of about 6.3% based on current price. Again, it is important to note that they have a CB outstanding maturity due in 2017 at $1.53 but so far they have been under the money.

Portfolio occupancy remains strong at 97.1% (96.8% last year) this year which represents a strong foothold of the overall economy we have in Singapore.  If we take reference from past bear market scenario, we can see that the trust operated well even in poor market conditions - still registering 94.8% during gfc and 95.8% during the euro crisis.

The monthly average rent has also increased at $8.90/psf ($8.61/psf last year) this year so obviously the slowdown effect has not yet taken place. I am expecting the average rent to revert back to the low $8+ in FY2016 so there could be impact to the distribution for shareholders, which I think has been somewhat priced in by the market. A lot would depend on their latest acquisition, Capitagreen, which has one of the highest capitalization rate in the CCT portfolio.

In terms of DPU, I think this is a company that shareholders can be proud of. The management has proven their capability of rewarding the shareholders and from the past 10 years data, we can see how DPU has risen steadily over the years.

The trust has a couple of lease expiry coming up in 2017 and 2018 but the percentage is small and they are spread out evenly. I don't think there's any major of concern for this.

Final Thoughts

There's no major surprise coming from this stock at the moment.

I think a lot of the supply effect has been priced by the market in the share price but will continue to fall under pressure given the weak sentiments of the STI.

I won't be looking to add into the counter anytime soon as I find many other attractive counters which I wanted to get in since sentiments are weak. I'll keep this for now in the portfolio and will remain so for as long as the company is delivering results.

*vested with 8,000 shares of CCT

Saturday, January 16, 2016

"Jan 16" - SG Transactions & Portfolio Update"

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
China Merchant Pacific
ST Engineering
Ho Bee Land
Fraser Centerpoint Trust
IReit Global
Dairy Farm*
City Development
Stamford Land
Nam Lee Metals
CapitaCommercial Trust
Keppel DC Reit
First Reit
Total SGD

It's been quite an adventure ride to start the year.
The index has declined about 8% since the start of the year and my portfolio has taken a hit as well. Though, as a long term investor, I'd see this as an opportunity rather than worries so I'll just have to brace myself with this, having mentally prepared for a number of years now.
I've divested Vicom this month at a price ranging from $5.97 to $6.02. My conviction with Vicom has always been pretty clear - strong balance sheet, excellent earnings and good predictability of cashflow - a clear case of winner. My only concern with them is their rather expensive valuation given the growth concern for both their vehicle and non-vehicle segment. Given that there are other opportunities in the market, I've decided to rebalance the portfolio and take on a risk on approach which I believe will give me better returns in the future.
I've also divested Silverlake this month at a price of $0.63. I read quite a bit on the Deloitte report and what they feel about the findings and I came to realize that I had actually lesser understanding on the company than what I thought I would know. Given this situation, I have divested on the company and decide to move on. I think I made a small loss here given I was entitled to the free bonus shares previously.
I added Ho Bee Land this month which I have blogged here. This is now my 4th largest holdings in the portfolio so I have a very strong conviction about this buy.
I also added more ST Engineering at a price of $2.86. I continue to think that there are opportunities for the company even as their balance sheet has weakened and their earnings are threatened. Current valuations are not expensive based on their historical so I'll have to wait on their next quarter development to see if their earnings will be badly impacted.
Last but not least, I've added OCBC further at a price of $8.48. Banks are a straightforward play for the long term and the main concern right now on everyone's mind is on their NPL. I continue to think that their NPL has been stressed test to limit the losses on each sector but we'll have to see if the O&G and China downfall will have great impact on the banks' earnings. Still, I think banks are a good long term play on recovery.

The overall portfolio has gone down about $15k from previous month of $360,600 to $345,601 this month (-4.2% month on month; +22.3% year on year), mimicking the losses on the STI (albeit with a lesser losses).
At this stage, I don't think there are any unduly worries as I continue to look for open opportunity in the market. Personal cashflow remains strong and I am eagerly awaiting for next month to come because I would have quite a bit of dividends coming in so the more the market goes down, the more money I am probably going to pump in.
Last but not least, I have one advice for this. In any bull or bear case, there are abound to be many naysayers and "gurus" who are trying to predict where the market will bottom. Unless you are a trader, I'd advise that you ignore these "noises" because they are as clueless as any experts out there in the CNBC or Bloomberg news. As investors, I'd rather spend time analysing the prospect of companies instead of relying on these people. These people love when their ego is being stroked but they usually perform poorly themselves.
Thanks for reading. Have a great weekend :)

Thursday, January 14, 2016

How Much Should Sembcorp Industries Be Worth?‏

The last time I have anything to do with Sembcorp Industries (SCI) was when I divested the shares last year back in April 2015 at a price of $4.84 (Link Here). Back then, my main concern was their increasing debt (consolidated) and weakening in their utilities function, along with the relatively fair (not cheap) valuation at about 10.8x PER and EV/EBITDA of 7.9x. I didn’t predict that oil price would come to such level we’ve seen today back then.

How fast things have changed today. With the recent news of a major oil crisis, SCI has been dropping furiously and its share price has been languishing at around $2.46 at the moment, almost half from what it is a year ago. Pretty crazy.

Some readers have requested me to go through SCI like what I did with Keppel previously. I am not going to go through each and everything specifically so I’ll just quickly run the important numbers.

The outstanding order book for SMM is slightly higher than Keppel, and since SMM operates mostly based on these as their core earnings, they would have been more badly impacted than Keppel. SCI is less impacted because it has its utilities and infrastructure business to buffer.

Based on CIMB estimates, the risk for cancellation of Sete Brasil / Petrobas is about $5 billion revenue and if we take in 6% EBIT margin assumption, it’ll work out to be about $450m EBIT impacted to the downside. This translates to about $0.215 based on earnings.

Then, there are also the other Jack-up orders which had a higher probability of being cancelled/deferred. This totalled up to about $470m EBIT impact for this segment. This translates to about $0.225 based on earnings.
Finally, t here are also the recent ongoing litigation involving Marco Polo where they most probably had to reversed their earnings. These impacted to about $41m EBIT earnings or $0.0196 based on earnings.

Shares of SMM are languishing at around $1.4 at the moment, so we can do the calculation from there.

The company has also issued a profit warning guidance in Q4 later, so we certainly know that it’s probably not a good idea to add anything until they announced their full year results.

Looking at it from another angle

What about trying to look at SCI from a different angle?

Since SCI owns 61% stake of SMM in their books, and taking today’s closing price of SMM at $1.37, this would translate to about $0.98 in SCI book after adjusting for their respective no. of shares.
Now, if we take SCI closing price today to be at $2.46, it means that their utilities and other infrastructure function would be worth $1.48 ($2.46 - $0.98).
The other infrastructure function’s book value is about $0.30, so we can take that their utilities segment is being valued at $1.18 ($1.48 - $0.3) at the moment.
The big question now is if Mr. market is discounting too much SCI at the moment, not factoring the potential growth of their utilities. Should we then, as contrarian investors, pounce on this opportunity?
Well, we’ll never know because we don’t know how much more is SMM going to fall, so the best bet if we want to be conservative is to price them at $0 value. This means that for as long as we are convinced that the utilities segment is worth at least $2.46, then we should be happy to be buying more.
We know that their utilities segment is very strong on overseas growth and are somewhat muted in local due to higher competition cited. The question is now on whether we can continue to see growth coming out from the utilities and if so how much should they grow to justify the $2.46 worth.

Using a reverse engineering methodology based on 5 years DCF model on FY14 earnings, with a WACC of 6%:
- $2.50 worth would mean that the utilities segment needs to have a long term terminal growth rate of 3.2%.
- $2.00 worth would mean that the utilities segment needs to have a long term terminal growth rate of 1.7%.
- $1.50 worth would mean that the utilities segment needs to have a long term terminal growth rate of 0.9%.

Final Thoughts

The company has increasing debts that are way more than previous years so there is also a concern that they might need to call for rights issue to raise cash. However, looking at their current EV/EBITDA of 6.75x, it does look decent and better than when I sold them a year ago (EV/EBITDA = 7.9X).
I should be looking to enter at some point but am currently waiting for their final results to be announced on 17 Feb. By then, I hope the market continues to discount them, and I’ll gladly pick them up at a much lower price later on.