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Tuesday, August 23, 2016

Wongamania (Banana Economy) - Review

I was recently invited by the team from Capitalgains Studio to try out the new Wongamania game on one evening at one of the studio. 




There were a few of the financial bloggers which were also around (InvestOpenlyBudget BabeSTE and Musicwhiz) and we played the game together. 




This wasn’t the first time I had played the game as I previously had played the original version and loved the game. I was expecting the revised version to be better and a lot more challenging and it did not disappoint. 

For those who are not familiar with the game, Wongamania is a financial board game that are played in a fun manner where one player can pit against another in the game to collect as much assets as possible and receive passive income from every turn of the game (depending on where the economy is). The winner of the group is then announced when one has collected three trust fund. 

This is a bit like monopoly in the modern times with slightly more intellectual frame of mind to think. There is a lot of luck and thinking needed to win the game. 

What I also like about this version is the fact that there are more types of assets as compared to the previous version. 

In the original version, the assets are generally consists of stocks, bonds and properties. But the revised version has further introduced dividend stocks, junk bonds, convertible bonds and hotels as their asset classes. It is interesting to see which assets would outperform in the different segment of the economy it is played in. Buy low sell high - that's the mantra of all successful investing. Whether or not it is easy to execute is a different story.




There will be an official launch on the 9th September from 1 to 6 pm at the Kinokuniya Ngee Ann City. Do keep a lookout for it!!!


Friday, August 19, 2016

Junk Bonds Yields Are Spiking Up

We have seen many companies tapping the market for fund raising activities in the past couple of years and in a world of low interest rate environment, these yields are enticing to folks who are hungry for yield. 




The recent Swiber case has probably put an alarm on the reality of what is to come, with companies facing more distressed debt that is maturing with no capability of sufficient cashflow to refinance them. 

Kris Energy, an O&G producer, has a debt facility that is maturing in 2017 and they are in a position where they might default on these debt covenants. Looking at the current yield to maturity and the way the price is slammed to below par will probably tell you a telling story of where their financial position is at the moment.




The other junk bonds are also being affected by these news.




Some of the common names we know -  Hyflux Preference Shares, Aspial and Oxley Bonds are all trading at below par and are facing plenty of volatility on a daily basis. The YTM are spiking up substantially since we last seen a year ago. 

Among these few, the shortest duration will be for Hyflux NCS 6% which everyone is obviously flocking to. They are currently trading at 94.5 with an option to call in Aug 2017. 

If we take a look the their interest coverage ratios across the years, they've always been floating above the water trying to swim alive in the water they are producing, no pun intended.

Anything below 3x ratio is bad to me and it gives a false sense of security to investors that the company is doing well. 




In fact, what they've been doing is simply pushing the cans down the road by issuing a new bonds to redeem the earlier one, similar to what Oxley and Aspial are doing as well.

The shorter duration will obviously have an advantage here in such distressed case, as they will most likely get recalled first ahead of the others.

The ability of these companies to tap funds from the market gives them an advantage in a period where liquidity is massively available. However, when the fan hits the road, credits will be dried up and that's when we will know who is swimming naked.




In case anyone thinks bonds is safe, they might now. You might be better off getting some other asset classes at a higher level margin of safety.


Saturday, August 13, 2016

Personal Updates

There are some really hot news recently surrounding our small nation.

The first is on Pokemon Go, where literally everyone and I really mean everyone, people of all ages I met on the bus and at work playing this game. Even my boss is playing the game. Am I the only one not playing the game? 

The second news came out this morning when Singapore won their first historic gold medal in the name of Joseph Schooling. You can see when something like this happens, the nation unites as one. The last time I've seen similar things like this was during events like SG50, LKY memorial day and the SYOG. Incredible stuff.

There are some personal updates which I'd like to journal from my side as well.




New Addition to the Family

My wife is currently expecting our 2nd child and she is currently on her 16th weeks. I have yet to know the gender but will know the next visit to the gynae.

It is a joyous moment specially for me because I've always wanted to complete my family with 2 children and I don't take these things for granted. For those who understand, it's never easy to have what you want so I'm incredibly grateful for what I have, in all aspects.

The difference between the two siblings will be 3 years by the time he or she is born. 




Savings Rate

I am not going to lie here but financially I will struggle quite a bit when the new child is born and my older child is going to his pre-school in 2017.

With my sole income to support the household, it is becoming increasingly difficult to finance so many things that are happening at one go.

For one, I'll have to budget on the hospital and delivery fee which I have estimated to cost at around $12,000 to $15,000. This is the same costs I have used when my first child was born. It also includes a nanny which we have engaged through the agency for 1 month service after doing some research on it (special thanks to fellow blogger, Jes). We are not entitled to the baby bonus as we are only a permanent resident here. I will classify this as a one-time costs.

I'd also budgeted an additional $1,000 per month from 2017 onward for the second child. This is used to cover all the basic necessities which will be used to fund his or her needs. Again, this is the same amount of costs we've incurred each month for our older child. I suspect there might be some economies of scale involved, especially with the stroller, toys and other shirts / pants. But I think we should budget more on the prudent side. Any leftover from this fund will be used for his or her investment, like we did too for my older child.

My older child is also starting to begin his pre-school in Jan 2017 which is located very conveniently just opposite our house. The school fees amounted to about $2,000 for one term, which works out to be about $700 per month. The schedule runs for about half a day from Monday to Friday. This school is chosen due to its convenient location, and we also have a preference towards catholic school and school that focuses on Chinese language.

Just like that, I am expecting to incur an additional $1,700 per month in expenses on top of what I am already paying. This will push my savings rate almost to a low single digit per month.

In terms of increment, I am expecting somewhere in the region of $300 / month from my job. This will help to cushion the additional expenses. Let's just hope inflation doesn't hit the milk powder and diapers for most of the part. Go Mead Johnson and Mamy Poko. Otherwise, I might have to run to JB a little more often now.

Dividends will play an increasingly more important role than ever now that I have no more savings from the normal active income.

There is little to no chance that my wife will be going back to work, so the only way out is I'll have to work harder. There are no questions about it. Life is that tough to survive in Singapore with many children. I guess the low birth rate statistics is already hinting that.


Maid or Car

We've contemplated owning a car when we have two children but this looks like another additional expenses which we can't afford at the moment.

We have an existing maid which we have engaged back then and this will cost as much money as it is owning a car.

To me, this is a clear cut decision. It's either one of the two but certainly not both. At least, we are certain we cannot afford that in our household.

For the moment, we've decided that we would prefer having a maid at home than owning a car. At least from a financial perspective, it's pretty clear that owning a car beats taking a cab throughout. We spent about $300 per month currently on cabs, but it's still cheaper than owning a car.


Ok just kidding... We weren't fantasizing about this car



Blogging

To be very honest, I will not know what will happen in terms of writing.

One thing for sure, my time will be even much lesser than what I am already having now. These days, most of my writing has to be done only at night once my kid is asleep or when I'm watching soccer on weekend nights. There will be time when my energy will be so exhausted that I won't be able to write anymore.

I'd leave this as open for now, but it'll be very likely that writing will become very rare once 2017 hits my time.


Investment Strategy

Due to the similar time constraint I mentioned above, I'd have to admit that I will be having a much lesser time to research on new companies. I'd have to leverage on much of the knowledge I have on companies I'm familiar with, so it's unlikely that you will see me venture far and beyond.

I still have passion looking at financial statements of the company and understanding the nature of their business, so it's also unlikely that I will go passive on ETFs at the moment.

There will be changes to how I will approach my investment from here but I'd like to keep it as private and personal since this blog is personal anyway.

On this note here, I'd also like to reiterate that everyone reading my analysis should take it with a pinch of salt, just like anything else you read out there. 

Throughout my blogging journey, I've also received several pleasant and nasty comments and emails and I'd like to reiterate again that this blog is personal. I am not here to gain anything from anyone nor am I selling anything to you out there. This should be a clear disclaimer.

If you'd like to learn about investing, there are many good courses out there that teaches on value investing (Big Fat PurseT.U.BFifth Person). I can assure that you get good value out of your classes with minimal costs there. These are the good knowledgeable guys who have been there and done it.


Pokemon Go? 

I suspect I am a herd aversion by nature.

I think I am the only known person who doesn't play this game at the moment, despite the craze it has brought to our country.

Separately, I am lately watching a korean reality tv series called "The Genius", where it depicts an intellectually smart show with social and fun laughter to it. I'd encourage everyone to give it a try if you have some time to kill off. I don't have much so I am watching them really on weird off timing.




I guess that's about on my personal updates from here. I'll check in again next time with any major updates again. 

Thanks for reading.


Wednesday, August 10, 2016

Ireit Global - 1H FY16 Results Review

Ireit Global announced their Q2 results this evening which I will take a few moments to quickly update their results.

This is a company I've taken the decision to average up, with the latest additions coming up only recently this month. It has also taken over to become my largest position currently in the portfolio.

There's no surprise there with the results as it came in within my expectations.

The revenue and NPI increases double digit year on year due to the acquisitions they made towards the Berlin properties which yielded them an NPI of 7.1%.

The DPU actually came in higher at against their forecast by performing better by 1% but the DPU in Singapore dollar has dropped by 9.1%. The recent weaknesses in the EUR has contributed to this. The sensitivity risk of every 1% drop in the EUR is almost 10% impact there to the DPU. 

Nevertheless, it's something I am aware and comfortable about. 

The management has also taken further steps to hedge 100% of the distributional income for FY16 at EUR1: SGD 1.53.

DPU for the first half came in at 3.18 cents, which represents a 8.5% based on current price, still very decent in my opinion given the long QE program the Europe Central Bank is embarking upon.

I owned 72,000 shares currently, which will entitled me to a dividend of $2,290 for the upcoming payout in September.



In terms of their debt maturity and gearing profile, it's something which as investors I am not too overly concerned about. The company does not have any major refinancing until in 2019 and their coverage ratio stands at a comfortable 8.3 times, higher than most reits you can find out there.

The company does have a heavy gearing at 41.8% on the balance sheet, though this comes at a cheap cost of borrowing at 2%. This means that should they decide to do any acquisitions or AEI, they probably had to reach out to the market for additional funds.

This is not uncommon of reits and it's just something investors have to be informed about.




The company share price has recently trend upwards and I'd actually like to see them did a placement or rights at this point in time, given that the yield has been compressed, which will make them easier to purchase an acquisition with an accretive yield than before. Even if not, this should make a good chance for them to raise funds in order to have the sufficient funds required for any inorganic growth.

One only has to look at how successful reits like Ascendas did their placement and equity funds to understand what it means to have a rising share price. It's one of the fundamental for a successful long term reits.

*Vested with 72,000 shares as of writing.


Saturday, August 6, 2016

"Aug 16" - SG Transactions & Portfolio Update"‏

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
IReit Global
73,000
0.75
54,750.00
12.0%
2.
ST Engineering
13,000
3.34
43,420.00
10.0%
3.
Kingsmen
45,000
0.65
29,250.00
7.0%
4.
HK Land*
2,500
8.55*
21,386.00
5.0%
5.
Ascott Reit
10,000
1.13
11,300.00
4.0%
6.
First Reit
8,000
1.31
10,480.00
2.0%
7.
OCBC
1,134
8.31
  9,423.00
2.0%
8.
Warchest*
260,000.00
60.0%
Total SGD
440,009.00
100.00%


It has been a good start to the month as I just returned from my holiday trip recently and felt all refreshed. We spent quite a bit on the accommodation and everything else and it has taken our expenses a bit on the toll this month but it was a well worth trip.

The market has been holding up strongly in the 2,830 points as the bull is continuing to fight the bears. For me, I'd try to position myself in both ways such that I will continue to benefit from either movements.

There are a couple of activities which I have made since the last portfolio update. For the detail, you may refer to the page: "Recent Transactions"


What a Beautiful month!!

First, I’ve made a full divestment of Advancer Global Limited on the first day of the trading when the share price hits an unexpected high of 44 cents. This translates to a 100% gain from the IPO costs which I got for 22 cents. I thought the share price was very richly valued considering the risk vs reward at the time and I gladly locked in profits thereafter. 

Second, I’ve also made a full divestment of UOL at a share price of $5.94. This was purchased recently in Jun which I have blogged here. The share price have since ran up and I locked in the gains at a 10% profit as well. The catalysts will not be realized until late 2017/2018 and opportunities might knock in the door sometime later. In any case, my strategy is always to be on the prudent side and to lock in the profits first.

Third, I’ve also made a full divestment to Capitaland Commercial Trust (CCT) at a share price of $1.53. This represents a 15% gains (19% gains - inclusive of dividends) from last I bought in Aug last year and May earlier this year. I will be entitled to the upcoming dividend payout of 4.13 cents since this was sold after it goes ex-dividend. At current price, my take is that the trust is richly valued in terms valuation and yield has been compressed to 5.5%.

Fourth, I’ve also made partial divestment to Kingsmen at a share price of $0.655. This was done prior to the results they will be announcing on the 10th August. My average price is at $0.75, so this divestment translates to a 12% loss (9% loss - inclusive of dividends). This is a company which I’m still relatively divided because on one hand the near term outlook is expected to be weak, guided by the lower contracts won this year and the falling gross, net margin and return on equity over the past few quarters but these may have already (or not) been priced in the share price. The luxury segment of the retail shift will also take time to evolve as they will need to adjust to the requirements of the industry. Overall, I think it'll take a while before the company would recover.

On the purchase side, I’ve accumulated more HK Land at a share price of US$6.15 which I’ve blogged here. Even though they may look undervalued in terms of their net asset value, which mostly comprises of their investment properties, there are certain risks such as negative rental reversion and China risk which might directly impacted the business.

This month, I have also taken the opportunity to accumulate Ireit Global at a share price of $0.745 ahead of its earnings results on the 10th August. My decision to purchase this company is based on its strong Germany leasing profile activities and long wale as well as its high dividend yield, even though they may be impacted more by the weakening of the EUR further. This decision is also based on my assumption that the ECB will launch a much longer QE, which I took reference on the performance of the US reits when the Fed was doing the same from 2009 to 2014. I think this will be my dark horse in time to come.




The portfolio has increased from the previous month of $433,256 to $440,009 this month (+1.5% month on month; +41.8% year on year). 

The XIRR YTD on the equity has increased this month by standing at 17.4% on an annualized basis. The benchmark for STI has returned -1.7% this year to date. I'm finger cross hoping that the strategy can continue to yield me a favorable outcome.

In terms of dividends, there will be some dividends this month / next month which will be a much needed boost in terms of the cashflow. I'll explain sometime in my next post why this is becoming a very important element now more than before.

The cash portion has now gone into an overweight territory to 60% this month.

In the immediate term, there are some opportunities I have identified in the banks so I'm likely to monitor the segment closely, should there be a good opportunity to go in. My plan is to go in at batches since the cash is playing an important option to do that.

Hope August is a good month too for everybody :)

Thanks for reading.


Did August fare well in terms of equity portfolio for you?


Wednesday, August 3, 2016

Recent Action - HK Land

I have accumulated a bit more HK Land today at a share price of US$6.15 for 1,000 shares

This is an average up position from my last purchase back in April which I wrote here. Part of the fund came from my recent divestment from UOL which I will talk about in more detail in the next portfolio review. So I am just shifting capital here.



The company recently reported their 1H results which surprisingly came above my expectations, albeit still weaker if compared year on year. I’d have expected a lot weaker sales from the residential segment, but they have surprised on the completion from China. 

My way of analyzing this company is to focus on the underlying and recurring earnings, which technically strips out the fair value gains and the residential earnings, and then further see what is left with it. It's a simpler method to do because the residential portion is something which is more lumpy in nature and difficult to forecast on the timeliness of the revenue recognition.


Recurring Earnings

Underlying earnings per share for the first half came up to US$ 16.70 cents, which is 6% lower from the previous year on the back of a slightly weaker residential sales. 

Do also note that 1H 15 earnings included a one-time write back of US$16m from its MCL’s projects so if we strip that out, we are looking at somewhere in line.

Commercial office rental earnings continue to outperform as there are tighter vacancy for Grade A offices in HK. Rental reversion for the first half amounted to 2% increase from HK$101/psf in 2015 to HK$103/psf in 2016. The current cap rates for the commercial properties in HK is currently at 3% but is expected to plateau at very tight levels, mainly due to the risk-on approach for delaying rate hikes. 

I won't be delusional here. There are potential downside to this, just like any other asset classes, so the risk is there.




The HK portfolio retail earnings dip slightly by 1% year on year from HK$218/psf to HK$216/psf in 2016. 

The Singapore portfolio which comprises of both the office and retail earnings also took a slight dip in 2016 as the glut of office supply and weaker rental markets take precedence. We are already familiar with that from the Reits which are suffering from the same here.




I've updated the spreadsheet to include the 1H 2016 results.

Valuations still remain "cheap" compared to their 10 years long term mean. Cheap can remain cheap for a very long time. One only has to compare this to Wharf Holdings and New World Development listed in HK to understand what I mean.

I am expecting dividends for the year to remain at US$ 19 cents, which translates to about 3% yield at current price. The recurring income will be more than sufficient to pay out dividends comfortably. The company has also a strong balance sheet with net gearing of 8%. So I am not expecting any liquidity issues here.

China devaluation remains a risk since the business is in close proximity and directly related with China and the Yuan.

*Vested with 2,500 shares as of writing.


Sunday, July 31, 2016

Which Of The 3 Local Banks Should You Buy?

Banks are increasingly difficult to analyse because of the various business nature and regulatory compliance requirements which needs to be monitored.

I am not adept at analyzing banks because I do not have an in-depth understanding of the industry. If I made any mistake here, please forgive and do point out to me. I am still learning to understand the industry and will hopefully get better over time.




Folks who invest in the 3 local banks do so because they are the main core of STI components. If you track their returns respectively, you'd see a lot of similar correlation between the two. Hence, I believe many folks who bought into banks do so because they believe MAS is regulating them efficiently and sufficiently.

I've drawn up the basic lists of a few of the important factors when I do look into banks as an investment. These are not extensive in nature because there are so much more one has to look beyond and understand on the industry before they can be on top of their game.


Net Interest Margin (NIM)

For those who are not familiar with NIM, they are simply measuring how successful the banks are at investing the funds after taking into account the expenses on the same investment.

Customer deposits which the bank gets from folks like you and me are being reinvested at a higher return, and the margin measures the spread difference.

Among the 3 banks, NIM % is highest for DBS, which inched slightly over the other 2 banks. Having said that, DBS has yet to report their Q2 and I am expecting them to drop by a similar 10 basis point at least.

For UOB, we need to watch out on the latest Q2 performance as NIM has declined by 11 basis point yoy and 10 basis point qoq on the back of declining interest rate environment.

For OCBC, the NIM has performed better by declining less at 7 basis point qoq and have actually inched slightly up by 1 basis point yoy.


Non-Performing Loan (NPL)

NPL is an important component of banks due to the nature of the industry they are operating in. In short, NPL measures the bad debt unrecoverable amount which the banks are measuring against the Loans and Advances less provision for general and specific allowances they've made.

Among the 3 banks, NPL % is lowest for OCBC.

The provision for allowances is one which I think is severely overlooked by many because a bank can continue not to make any provision but they have to take the hit when the storm comes. At the opposite end, a prudent management can provision for general or specific allowances, on the back of a potential storm before they come. Notice the difference.

For instance, DBS has made lesser provision for allowances against their oil and gas exposure as compared to OCBC and UOB, who have made further general provision in Q1 and Q2 2016.


NPL% inched up during 2008 GFC

For the purpose of this exercise, I've further broken down the exposure mainly on two most commonly discussed: 1.) China; and 2.) Oil & Gas.

Do note that the exposure was not done based on NPL but rather as a total loans less allowances they've made on the back of these exposures.

OCBC and DBS are banks that have a greater exposure to Hongkong and Greater China due to the growth strategy that they are pursuing. For example, OCBC has a wealth strategy management to tap onto the Chinese market through Wing Hang. For UOB, they have a greater exposure on the rest of the South East Asia.

On exposure to O&G, UOB has again emerged as the winner as they have the least exposure to these industries. We are of course assuming that the O&G exposure is bad here. It could be the other way round when the cycle turns.




Capital Adequacy Ratio

For those who are not familiar with the Basel III arrangements, there are the respective regulatory minimal adequacy for banks to keep. Common Equity Tier 1, Tier 1 and Total CAR has a minimum adequacy regulatory of 6.5%, 8% and 10%. There is also a need to keep a capital conservation buffer of 2.5% which will slowly be phased transitionally from 2016 to 2019. This increases the requirement for banks to beef up their capital balance sheet in order to get stronger and pass the "stressed test" the banks are required to take from time to time.

Out of the 3 local banks, OCBC has currently the strongest CAR at 17.5%, which is well above the minimum regulatory requirement. The other 2 banks are not far off either.

This also explains why OCBC is currently discontinuing to offer the scrip dividend while UOB is enticing a 10% scrip dividend in order to increase their capital adequacy. I see scrip dividends issued by these banks more as a disadvantage to shareholders over time.


Valuations

Moving on to valuations, it appears quite evidently that DBS emerged as the winner when we are valuing them in terms of price to earnings and price to book. Nevertheless, the key is still in ensuring if DBS has taken the conservative path to impairing their bad loans appropriately. If they don't and the crap hits the fans, it'll come back to haunt them like what happened to Deutsche Bank right now.

In terms of dividend yield, OCBC still emerged as one of the highest dividend paying bank with 4.19% yield.


Final Thoughts

I'd summarized the above with the following table which might be easier to compare across the 3 banks.

Summary - Done by B

A lot of people are buying into banks right now.

Personally, I feel that with the current valuations, banks are not as attractive as their valuation suggest because there are pretty evident scale that all their core business are taking a trend downwards. For instance, the loans growth, net interest income and others. In terms of how they are going to fare onward, there are also signs where the growth might be stalling in several geographical markets.

In order for banks to be attractive at this point, investors should at least not pay above P/BV above 1x which I feel is very much fair to richly valued. Unless you have a lot of warchest on the sideline or desperately wanted a bank exposure so much in your portfolio, my personal take is to wait further until a lot more crap hits the fans. You can be sure banks will be the first to react regardless of whatever bad news out there in the market.

If you had analyzed the banks' past 10 year valuations which will see them fare against the likes of GFC and the Euro crisis, you would notice that there are a lot of rooms for them to still fall. On the opposite end, we'd see these banks trade as high as 1.2x to 1.3x book value, so there are risks that one might miss out on the run should market goes crazy. Core business down but valuations up? Never say never.

I am tempted to cash in given my current warchest on banks but I'd rather swing high and hard when the right time comes than buy these banks at fair value right now. Somewhere along $8 will probably entice me to start my first round on OCBC, but I'd go slow because all it takes is just one right moment to hit all the jackpot home.


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