Saturday, September 16, 2017

Comfortdelgro Hits 3-Year Low

Comfortdelgro hits not only a new 52 weeks low last Friday but also a 3 year low. The last time they hit around this share price was around in Jun 2014. That was right before the contracting model announcement takes place for the public transport.

I just did a quick comparison to see how they fare in terms of earnings between the two.

It seems on a glance earnings was pretty much on par. While operating profit came in slightly lower in 2017, finance costs came in much better due to the lower borrowings they have (stronger balance sheet), hence overall profit was higher. If we just annualized the FY2017 earnings based on the half yearly, we'd get about $320m for the full year. That's a big IF earnings had bottom already.

If we break it down by division, we actually don't see a lot of difference with what they are 3 years ago. Public transport is evidently higher with bus and rail leading while margins are marginally higher. The taxi division is actually rather flat, with margins coming in at around 11.7%.

Based on the fleet size published from the LTA, it appears that 2017 has dropped to as low as 2011 and not 2014. So there are something to reconcile here. Perhaps it could be that utilization is higher or the revenue they charged is now higher. Given that margins are rather similar, it appears the latter is more unlikely.

On Friday after market, LTA announces that SMRT had won the tender bid for the Thomson East Coast line with $1.7b over 9 years. That's 30% lower than what SBS Transit has come up with their proposal. Given that margins are only hovering slightly less than 10%, I'm quite skeptical on how they can come up with the 30% lower tender bids. If we are an outsider, we'd never be able to come to rationale the major difference. Of course, one thing good about SMRT is they no longer had to account publicly on their financial statement. We also know who their major shareholders are.

The news will be huge for the media and analyst to over-exaggerate on the failure for SBS Transit for failing to get them. I actually think earnings wise this will not impact much in the short term. It's a massive project filled with potential cost overrun. That's why the government is taking the revenue risk for the first 9 years. A friend who worked in SMRT once told us that it's not easy to make money on the rail. There's a lot of surprises that will hinder the forecast.

Meanwhile, the slide will continue and probably compounded with even more bad news for CDG.

Thanks for reading.

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Thursday, September 14, 2017

The Struggle With Hardwork

My wife and I recently watched a Japanese documentary at home and we began pondering on why the Japanese, and typically the older generation tend to have a different attitude than the newer generation like ours.

Friedrich Nietzsche, one of the famous German philosopher, once said that the most essential thing in human history is that there should be a long obedience in the same direction, thereby results can be attributed to the cause which made life worth living.

The Japanese family that we saw in the documentary aspire bringing improvement in the lives of the consumer. They work hard and for long hours and made constant improvements to the product they are selling in order to make it worth for the customer who consume them. They are willing to take hardship, slowdown to reboot before moving on to identify the rootcause. They do not simply focus on the results directly but on the process that leads them to the eventual success.

Now, the younger generation often have a different mindset of thinking.

We are a lazier bunch of people, no less thanks to the society that shaped us this way. We strive for a work smart, not work hard attitude and are constantly being judged with our efficiency.

The society that we live in demand faster outcome with less desired amount of work. Everything we long for is easy and instant. Consumers want everything that is ready for immediate consumption.

Think of merchants today which are incorporating cashless payment to make it more convenient for the consumers to tap and go. A big yes to convenience but try teaching that budgeting skills to kids who thinks a plastic card can buy everything in this world.

In the midst of the transitioning, our lives have come to resemble those of tourists, wanting the experience of touch and go but not wanting to stay long enough to risk experiencing the realities that comes with inconvenient permanence.

There is hardly any loyalty with employees who stayed a permanent 10 to 20 years like most did in the past. Employees treat companies like a cash machine and employers treat employees like a commodity. Whoever has the upper hand wins and down you go, thank you very much for your "service" and "dedication".

The "short cut" epidemic has reached every aspect of our culture and behavior from health to relationship to career to saving/investing. Some people personally find it difficult to save because they are so accustomed to living life in the spending zone. There are way more people who found it difficult in building up their wealth because of the lack in competency in doing so and in the midst of it fall to prey of a quick scam fast profit.

I had personally struggled with health myself in the past. It is not an area which I had much competency in and also not an area in particular which I enjoy. But I know it is important to get myself fit and health back in shape. Since then, I started to take interest in the food I eat, the nutrients my body needs and the rest that my brain requires. They are hard work no doubt. Put a sinful fries or instant noodles in front of me and I can sniff it from 5 yards and beyond. It's a struggle. When I fell ill, I knew I had hit the nails on my head but will continue to be inobedient afterwards. #Trueconfession.

We are humans and whether you like it or not, we are all vulnerable to temptations of some sort that you are weak in. It is in our human tendency that we cut corners and choose the path of least resistance to dress up our cowardice and weakness in disguise and in doing so, we began to relentlessly making ourselves weaker and more probable to losing the race.

Take action before it's too late, even if your inner self had already knew about it.

Thanks for reading.

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Tuesday, September 12, 2017

Is SPH Worth Taking A Look Now?

Every once and then, there would be companies in focus that would be the major target for the short seller. These are mostly sick companies because their outlook are bleak. If you recall in the early of 2016, we had similar cases with oil and gas companies. Keppel and Sembcorp took the most hit and they were depressed to levels that everyone just want to shun on it.

SPH has been a grandfather stock for a very long time. Long time shareholders would know that they used to get to as high as $18 to $20 before doing a split back to $5. The GFC event in 2008 brought them down all the way to $2.40 before rebounding sharply when the market recovers. This was despite the start of the decline in the media print and ads as people start to read less hardcopy and go more digital. It didn't deter shareholders though as the company continued to pay decent dividends that goes from 24 cents for a few years after the gfc and only the past few years that they began reducing it to levels they can sustain.

With the current share price hovering at around $2.58, perhaps it's worth to take a look at what the company is worth. Let's break them down by parts.

1.) SPH Reit

This is the most straightforward play.

The Group owns 69% of SPH Reit which is currently valued at 1.05x P/BV at 99 cents. This is rather fair value considering that they use a rather aggressive cap rates to value their properties at 4.3% cap rates as compared to other retails CMT and FCT who are using a 4.9% cap rates.

$0.99 x (2,559,633,342 / 1,614,973,980) x 69% = $1.08

2.) Seletar Mall

The company held 70% stake in Seletar Mall in the highly anticipated divestment to the Reit in due time.

The latest appraisal for the mall is at $495m using a cap rate of 4.9%, again rather fair comparatively.

$495,000,000 / 1,614,973,980 x 70% = $0.21

3.) Bidadari Site

SPH and KDDL managed to outbid its competitor by winning the tender bid at the Bidadari site a couple of months ago at an agreed price of $1,132m. The book value of the land will be $1,132m x 50% = $566m based on its 50% stake. 

The Group will be redeveloping the land site for mixed commercial and residential use in due time so we can expect them to earn a margin on it by slapping a conservative tag margin of 15%. We can also see this 15% as a potential upside to the rnav.

$1,132m x 50% x 1.15 / 1,614,973,980 = $0.40

4.) Healthcare

The Group announces its maiden entry into the healthcare sector when it bought Orange Valley healthcare for $164m. The net asset value for OVH is at $71m, so the company is paying around 2.5x. Still, I think the right way to value this is using earnings multiple on the sector.

Orange Valley runs five nursing homes in Singapore with more than 900 beds and charges about $2,700 per month for each bed. Assuming 100% full utilization, it works out to be 900 x $2,700 x 12 months x  = $29m. This is just the topline margin. Based on the last earnings result from OVH, the company earns an EBIT of about $6.5m. Slapping an earnings multiple of 25x (based on competitors) and translating this into EPS, we get about:

$6.5m x 25 / 1,614,973,980 = $0.10

5.) Stake in M1 & Other Investment

The group has a 13% stake in M1, which is a small part of their market cap.

With M1 share price hovering at $1.80 and the other investment worth around $250m on the book, this works out to be at around:

[($1.80 x 13% x 930,151,000) + ($250,000,000)] / 1,614,973,980 = $0.29

6.) Net cash less borrowing

The company has cash of $233m and a borrowings of $1,484m and they are being consolidated from the group against their Reit.

($233m - $1,484m) x 69% / 1,614,973,980 = - $0.53

Adding point 1 to 6, we get a value of $1.55.

7.) Print, Ads and Media

If the current share price is $2.58, what this assumes from here is that the core media and print business is valued by the market at about $1.

Readership of SPH newspapers have declined since 2009 for about almost 25 over quarters to date and you can see there has been a switch to the growing trend of digital subscription. This is cannibalization in the sense while digital is up, hardcopy is down. This is despite the rather steady print price the group has set for their newspaper.

When consumers switch from print to digital subscription, advertising also drops since advertisers spend less in digital space. You can see how drastically the drop in the ads print revenue from this year to the last and to the previous year. The company continues to face margin pressures over the years as margin drops from a high of 37% in 2010 to 24% in 2016. The company also faces more impairments as the new CEO tries to kitchen sink this year while starting afresh next year, so we should see further impairment towards the year end.

With 9m FY17 media earnings coming in at $57m, we should expect full year earnings to come at around $76m. This translates to about $76m / 1,614,973, 980 = $0.05 or 20x earnings based on $1 price. Multiples for media are never cheap to begin with, even when they were doing decently fine all these years.

This is a big key here as the new CEO tries to redevelop a switch into digital over the longer term which should involve restructuring in the interim.

Final Thoughts

The drop in the share price has accounted for a lot of the drop in the media earnings as well as the bleak outlook.

I think it is safer to look at SPH as a special situation play than hoping for the media industry to recover, which is a way long shot and a big question mark.

Dividend sustainability would be key. I just suspect the company would be able to retain around 17 cents dividend payout for the next 2 years as the company divested some of their non-core investment. Do note that this is a return of capital not a return on capital though. They divest these investment assets and will not be able to generate further roic on the investment so you get it back as a capital repayment form.

Short sellers are having a field day these days, owning 30% of the overall volume in day trades over past couple of days.

There are always silver at the end of the lining if we managed to look at it closer.

Sunday, September 10, 2017

Two Faces Perception of Masks

Variant Perception is a concept defined by Michael Steinhardt as a view that is materially different from the consensus and that you have a belief that it has an average probability of being correct.

For many, the fear of standing out negatively overrides their desire to stand out positively. By following the herd mentality, you are cushioned by the many views that are supporting the reasons for the fact that makes you comfortable. The problem is usually the case where valuation gets higher and as investors you are paying that comfortability for a premium with lesser margin of safety.

On the other hand, being a contrarian is lonely because you are going against the crowd for most of the time. They are usually slow, infrequent in nature and are an outcast by most standard which most people don’t quite understand at the beginning. You’ll get plenty of questions which will make you rethink on your thesis and on the extreme you may begin to doubt yourself if that strategy even works after all.

Variant Perception can be a very useful strategy because it identifies a lot of value opportunity which was shunned by the general public masses and that is usually where the greatest distortion between value and fair price lies in between. That does not mean you will not make any losses in the interim, you will still do, but the aversion is far greater when most of the things have been priced in.

We always hear the famous quote of our favorite investor, Warren Buffett saying this:

“The first rule of investing is Don’t lose money”

“The second rule is Never forget the first rule”

This does not mean that investors should never incur the risk of any loss at all and completely avoid any investment. What this really mean is that over several years of investment, your portfolio should not be exposed to appreciable loss of principal which is defined by a permanent loss of capital.

Take an example where you are being assured that the probability of an event happening is 51% as opposed to losing at 49%. If this statistics hold true, then it will make sense to go for the win with the higher probability. That doesn't mean you will not make losses, you can still do as the probability of losing is still there, it is just that probability is lower. The problem is if this statistic thesis does not hold true 100% percent of the time, which almost always happen to an investor who are subject to various market and perception forces.

The other thing that is exciting about this Variant Perception is being a contrarian it is never wrong to change your mind if the thesis has changed. I think there are plenty of people who shy away from openly admitting their decisions are wrong and failed to take action from it. The funny thing about this is you can be wrong but taking the required action to make it right and you can be right but taking the wrong perception to think you are right when you could be wrong. Sounds complicated right?

What this means in simplistic manner is that if you are wrong, hands up and admit them and then learn from the mistakes as this will be better in the long run than hiding in the shell and think it is alright.

The greatest investor of all time, Buffett doesn't make losses? No la, he still did, he just learned from his mistakes a lot better than us.

Thanks for reading.

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Tuesday, September 5, 2017

"Sep 17" - SG Transactions & Portfolio Update"

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
Fraser Logistic Trust
Fraser Comm Trust
First Reit
CDL Hospitality Trust
Total SGD

I am doing again an early update because it's the school holidays and we will be traveling again for a short holiday to Penang for about 5 days after today. We are geared up and ready for another round of experience.

There's a mix of both good and bad during this month. The month started badly and news surrounding the North Korea keeps appearing. To make it worse, there are tons of news about how Grab is going on all out to capture the Singapore market to fight off Uber. This sets the tone for short sellers to make a big hit on the market. The good news is it gives me a good opportunity to accumulate. Love it. Keep it going guys.

I started off by divesting all my shares in Katrina after a disappointing short stint which didn't work out. I made a loss of about 7% but it wasn't particularly huge from the absolute amount point of view. I was disappointed to see the earnings result despite increasing the number of outlets, margins was heavily squeezed as the company tried to move from the traditional dining to online delivery model. While it appears that its a good move, it seems to me that it is cannibalizing the dining numbers more than bringing in additional revenue. Anyway, F&B is always a tough one. I keep reminding myself not to engage in this sort of environment but always digress. Naughty me.

I also divested Guocoland at a price of $2.30 after just holding it for barely a month. This was a good 22% over a large absolute profit so this brings in the most impact coming into this month. I had a target price in my head of around $2.30 when I bought in and didn't want to wait until their value is fully realized because you never know what to expect out there from a HK listed owned parent group. I always felt that HK developers are trading at such steep discount for such a long time that I am not convinced the value will be fully priced by the market. Anyway, it's money in the pocket first that matters.

I also load up about 21,000 shares of First Reit at $1.33. This was a pure move of trying to increase yield for the longer term, giving a decent yield of about 6.4%. The company is buying the Siloam hospital and the management has done well over the years to increase the DPU steadily.

I also recently initiated a small position in Vicom which I blogged here. I am still watching the deregistration number and it still looks high over next 1 to 2 years, so it is unlikely we will see improvement in the near term. The yield is fairly decent and I am playing out a thesis that they might distribute the cash they have on hand. 

I also accumulated a little bit more shares in Comfortdelgro and M1, which are currently my biggest two positions. Both have been battered really bad so I am sitting on a loss currently. To think that after all these bad news are in, I am actually only down 6% so far for Comfort and 5.5% for M1, inclusive of dividend, so they are not as bad as I thought. Still, I think no light at the end of the tunnel, and short sellers are still lurking, so maybe another round of accumulation for me next month.

Net Worth Portfolio

In a market like what we experienced today, I am pleased to find that the portfolio has trended well in the right direction from the previous month of $612,564 to $620,386 this month (+1.3% month on month; +39.3% year on year). This portion includes capital injection, and of course the dividend just received recently too.

Cash portion has also gone to comfortable level back at 20%, so it'll be ready for any further accumulation should weaknesses persist.

Thanks for reading.

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Sunday, September 3, 2017

Guest Post - Cost of Flour vs Cost of Bread - Part 2

I enjoyed this post a lot from our guest contributor, CK who has kindly analyzed and shared his finding with us on a few development that are ongoing at the moment. I am a big fan of property myself and am following closely the development of a few residentials and how they are being priced with demand sentiment. Who knows, if time is right, we might just go in with a second property. Knowing the flour (land price) the developers paid, it certainly helped in making decision.

Singapore real estate market is very transparent in terms of the data availability on real estate deals that is publicly available. Extending to the earlier blog post (link here), I did a back testing on selected government land sales (on a psf ppr) compared against the median psf achieved for the project and did a ratio analysis on the cost of land vs. the cost of sales (i.e. flour vs. bread).

Do note that the median sales price psf on the project is based on data available over the past 2 years shown below:

The above throws up some interesting observation.

1) Considerable improvement since 2013. This reflects that developer are able to improve their margin largely due to lower land cost as property prices has been on a downtrend since 2013 based on the property price index.

Case in point for Highline Residence, Principal Garden and Artra which are all located within district 3 where the lower land cost paid for Principal Garden and Artra is one of the key reason for the better ratio compared to that of Highline Residence.

2) Resilience in suburban: The winners on the above ratio are that of High Park Residence and Clement Canopy. This validate the ‘upgrader’ market we are seeing in Singapore whereby the price of HDB within the vicinity provides a good support and market for such developments. Quoting Wing Tai Holdings chairman and managing director Cheng Wai Keung in the press release for Wing Tai 30 June 2017 full year results: “The result has been a “strange phenomenon” where prices in the general upgraders’ market have been driven up to the point where they are now close to values in the costly Orchard Road fringe area.”

3) Bullishness on recent land price reduce margin of safety for developer just as the over-bullish land bids in 2013 resulted in a poor bread to flour ratio, developer are currently out full force in their land bids and you can see from the papers that a development is up for en-bloc everyday. Case in point in district 3 (yes again), a land bid at Stirling Road was awarded for over S$1 billion at $1,050psf ppr which is not very far off the bid in 2013 for Highline Residence.

4) Developer who got their land bank in the last 2 years set to benefit In the same vein, developers who have residual land bank obtained over the past 2-3 years “low cycle” is set to benefit from the improved sentiments. This have to a certain extent been reflected in share price of developers such as City Development, UOL, Fraser Centrepoint Limited, Bukit Sembawang and Guocoland. The next development which is launching is incidentally at Fernvale which is the best performer based on the above analysis by Sing Development - Wee Hur. Using the median price achieved by High Park Residences (which is fully sold out), the ratio projected is fairly comparable to recent developments launched.

Note: The writer had over the past 3 years been vested on Bukit Sembawang, City Development and is currently vested on Guocoland, Wing Tai, Goodland, Wee Hur and Chip Eng Seng.

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Friday, September 1, 2017

Recent Action - Vicom

I initiated back a new position in Vicom a few days ago at $5.67 for 6,600 shares.

I used to own this position in the past and divested this early last year when there are better opportunities. You can search the blog on the past Vicom articles I wrote.

This is not a huge position and am struggling to get more shares as liquidity is scarce.

After my divestment with Guocoland, my cash position increased quite considerably and I wanted to allocate some of those into dividend counters.

Vicom caught my attention after their latest quarterly results announcement especially with the dividend policy moved from 50% to 90%. Now, on first glance, it doesn't look like they are increasing it that much after all. Last year, payout was already at 83.3% and the previous year it was at 80.4%. So bringing it up to 90% doesn't seem a huge increase.

However, I believe the signal from the board is clear. Making the policy to go for a 90% payout signals that the company will not have much growth to maneuver and will pay most of their earnings out to shareholders. Parents Comfortdelgro owns 67% of Vicom, so that's probably there's a bit of engineering over there.

At current price, that represents a 4.6% yield to an investor. That's unlevered yield, so it's unlike any of the Reits you see out there.

Vicom is known for its equity bond nature but businesses are down and outlook for Setsco doesn't seem to bounce back anytime soon either.

The big catalyst I am eyeing is that $100m cash they have on their balance sheet. If parents Comfortdelgro mandates, they might just give out a one-time huge dividend payout in the next 1 or 2 years. That'll be the real teaser. All things else, I'll just wait for the 4.6% yield while waiting out for that thesis to play out.

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