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Saturday, May 23, 2015

"May 15" - SG Transactions & Portfolio Update"

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
China Merchant Pacific
Fraser Centerpoint Trust
Nam Lee Metals
Fraser Commercial Trust
ST Engineering
Stamford Land
Noel Gifts
King Wan

Total SGD


*Does not include emergency, social security (CPF), insurance endowment, and short term (1 month) funds for immediate working capital.

May was an exciting month for investors because that's when we received most of the dividends this month. I blogged about it a couple of weeks ago which you can view here.

There's a couple of changes made to the portfolio from the last update I did in April. First, I divested all my shares in Sembcorp Industries, followed by a couple more for FCT. Then, I added a core position in Nam Lee Metals and recently accumulated more Vicom into the portfolio. I'm also entitled to the bonus from CMP after they announce a 20 for 1 which increased the position for this month.

The amount of warchest has now increased to about a third of the overall portfolio, a position that I am looking to increase if there are not suitable investment to add. With the many products out there yielding quite a bit of good interests out there, I will not need to be in a hurry to utilize them to an average investment.

The portfolio has dropped a little from the previous month due to the volatility of the market to the downside. I won't be too concerned about the daily or monthly movement as they only represent short term vision which does not coincide with my goal. If market continues to be weak and presents opportunities to add on, it would be a good chance to accumulate for the long term. I will continue to look for value in the market in the meantime.

With the Fed looking to hike interest rate finally in the next few months, we could possibly see some hiccup in the market especially those with high gearing. We may also want to see the refinancing capability of the management to ensure that they can continue to refinance at a higher but reasonable rate.

Thanks for reading.

How was the month of May been for you? Let me know!!!

Wednesday, May 20, 2015

Recent Action - Vicom Ltd

Following my post earlier this month (here) on Vicom's Q1 FY15 result, the share price has dropped and I took this chance to accumulate by purchasing 2,000 shares at a price of $5.96. I don't have too much to update regarding the nature of the business that I have written on previously, so this is more on accumulating on opportunities when I see price weakness looming.

Based on the Q1 results, I estimate that they will come up to around 38 cents EPS for this year, which translates to about just over 10% growth year on year. Assuming the same payout ratio of 80% is maintained for this year and given their track record in increasing dividends every year, this could translate to a dividend of about 30 cents/share or 5.1% yield based on my above entry price. Hey, that's better than most of the blue chip companies that people are interested in that yields less than 5% but have a much higher payout ratio. Think those companies such as the telcos, SPH, SIA Eng, ST Eng, etc. Given that this is an SG50 year, they might even give out more as special dividend with their cash balance looks to burst the $100M point this year. But just take it with a pinch of salt.

Forward price to earnings based on my estimate at current price would translate into about 15.7x, which is very decent for a company with Vicom type of business moat. Even looking at the past couple of years, you are not going to get anywhere much cheaper than what it is now, unless earnings dipped severely or recession looms. Parents company CDG is trading at around 22x, so this gives a rough indication of what investors should be expecting.

EPS (cents)28.730.
Growth %-4.3%7.4%5.9%11.7%
Dividend (cents)17.618.222.527.0-
Payout Ratio61.3%60.8%69.9%79.1%-

Cash & Cash Equivalent ($m)% of Total AssetCAPEX Requirement ($m)Net FCF ($m)

As I had previously mentioned in my previous couple of articles on Vicom, I like the company because it has a very good core business model of people coming to Vicom for services rather than the company having to source out for demand. The nature of the landscape of the vehicle population in Singapore also means that it is unlikely to decrease, even though growth might be stalling over the next couple of years.

With their expertise in the testing and inspection services in the vehicle segments, they have also translate this expertise to the non-vehicle segments where they are expanding into the various O&G and construction industries.

Capex requirement for both the vehicle and non-vehicle segments remains low, which is another reason why I like the company. This means that they are able to free up most of the free cash flow that goes into the huge cash balance they already had. Most of the expenses should come from the salary overhead and as long as they can maintain this (which is not very difficult based on my experience to control), then EBITDA margin should stay at about the same region. In any case, they've got a very strong EBITDA margin to begin with at above 40%.

Vested with a total of 8,000 shares as of writing.

Tuesday, May 19, 2015

What About 2nd Chance At This Price Now?

The share price of 2nd Chance has been in severe declining phase since its last failed execution of spinning their properties into Reits. The last time I blogged about this was back in January this year when the share price declined fiercely to the news that it went down from $0.45 to as low as $0.38. If you are interested in the original article, you can view them here.

Since then, the company has reported declining earnings for quarter 1 & 2 that sent its share price plunged further down to as low as it has touched $0.30 today. I mentioned in the original article that price was still overvalued back then, but what about at current price? Do you consider giving a second chance to take a look at them?

Stripping out one off gain, last year trailing earnings are still at around $0.0244, which represents an earnings yield of around 8.13% based on current share price of $0.30. The earnings for this year will almost certainly be worse than last year judging from the first half results, so earnings yield could plunge further down to around 7% based on my estimate. Dividends could also be slashed downwards and share price could face further pressure.

Temporary or Permanent Loss of Moats

As an investor, it is crucial to consider whether the fall in earnings are temporary or permanent in nature. Some industries face certain cycles in their businesses for the different periods and a value investor would be able to use the opportunity to add to their position when the cycle is at its bottom. 

Based on the core nature of 2nd Chance business, it seems like some of the revenue contributor business are cyclical in nature and the drop may be temporary in nature. Securities, Properties and Gold are certainly assets that we are more familiar of and we know how they can go up and down based on different economic environment. The apparel business is a little tricky because they've closed down a few shops recently that led to a loss in profitability in 2015. The management cited the loss due to labor intensive and restructuring organization. My guts feeling tells me that they might be considering to streamline the overhaul process for the apparel business while the other business maintain the earnings for now.

If you take a look at the breakdown below, you would see that properties and securities contributed a high gross profit and EBITDA margin to their bottomline, and it is key because they do not require much capex and labor to incur for. These items probably tied up a lot of their investment in their books, but they are giving decent return since they purchased it many years ago.


Net Profit

Outstanding New Warrants

I highlighted about the potential dilution from the outstanding new warrants they issue at an exercisable price of $0.40 during the period 25 July 2016 to 24 July 2017. Based on what we've seen lately, it seems that the warrants will be out of the money and highly unlikely that they will be exercised. So this concerns will go away for now.


Current share price is at $0.30. NAV is at around $0.37. Gearing is at around 34%. Earnings yield are at around 7%. 

This looks to me much like what we've been paying for Reits out there with the same above criteria but with so much more love than this one. Again, remember that they are having a bad cycle for their apparels, gold and properties and when the cycle bounces back, they could be a reckon to consider.

There's certainly not much catalyst at the moment, so I'm waiting patiently to see if it can go down lower to my target price at around 27 - 28 cents. We'll see how it goes in the next few weeks. If market continues to weaken, I may just give this stock a second chance to own them again.

Monday, May 18, 2015

Redefining The Conventional Definition of Success

Success in the capitalism society is often defined as one who manage to captivate through material possessions and titles. This is not surprising in the first place. Capitalism is often closely associated with economic growth and has often been criticized for its underlying focus on profits and how these ultimately lead to income inequality where the rich gets richer and the poor gets poorer.

Take external multinational corporation for instance. How many times do we see titles being inflated to "AVP" or "Managing Director" when we meet with external customers or suppliers? At the very least, you would see the title "Managers" being printed on the namecard. This is good for defining success because you want to exercise your authority by having these powerful titles.

The same goes when a recruiter asks for your current title at work and when it doesn't sound as impressive as the title at the next potential job, it might be difficult to get them. For some reason, these are the pretty hollow things that are usually overrated.

In our highly conceptualized society, luxury cars, condominium, credit cards and results lean early on what success might look like. Different cultures may represent variations in vocational perception of what success is but the general idea of bigger home, thicker wallet and fast cars are becoming one of tattered path to success.

Last week, one of channel 8 show broadcasting Jamie Chua personal luxury home and her famous collection of Hermes Birkin handbags have hit quite a bit of talking points there. Even my mum and wife were there to watch them. The general idea that I get from the public is the girls are seeing her as some sort of role model, a person that defines what "success" is with all the famous collection of luxury items one must have when you get to her age. The society is obviously mesmerized by the different definition of success they are looking for and it can be harmful at times. We can blame the media for so relentlessly corrupting us into believing that success requires us to act or behave in a certain way and own things so rare that only one of those you can own it. I like to think that people are old and educated enough to think well enough for themselves to decipher the code between the unconventional meaning of success.

As a society, we obviously need a better financially less dependent measures of success. Perhaps, we can start by defining success that works for the collective. A good example would be the collective voluntary assistance reaction to the recent Nepal earthquake. We give and provide helping hands to one another in all forms of assistance to the needy and casualties in Nepal. At some point, we need to break out from the formal structures of what success really is that rule over our head. We need to show sufficient respect to the aunties that clean our roads, the janitor that cleans out toilets and the less proficient professions that make out society a complete world to live in.

I count my blessings to be able to have them around.

How do you see or define success? What is success means to you?

Saturday, May 16, 2015

Thoughts On Fraser Centerpoint Ltd - 3.65% Bonds - Part 2

This is the second series on the FCL retail bonds which seems to be a very hot topic these days. For the first part, you can view my previous article here.

The prospectus did show a bit more information on what we need to more as a bondholder and one of those is to ascertain whether there are a callable feature which would disadvantage the bondholders.

As a fixed income investor, this represents an early redemption risk on top of the reinvestment risk that bondholders need to consider, especially in a low interest rate environment where it goes in favor of the issuer. To account for this particular disadvantage to the bondholder, there is a callable premium that the issuer would have to pay on top of the normal redeemable par value amount. The callable feature would exist in the 4th year of the issued date from 22 May 2019 onwards with the details shown below. The IRR for the earliest redemption should it happen would be at 4.1%, so bondholders would enjoy the premium over the guaranteed 3.65%.

With the impending interest rate increase, I doubt that we will be seeing any sort of redemption going unless they can issue at a lower rate. It is also unlikely that the issuer will recall the bonds even in the event of healthy working capital because cost of debt is known to be much cheaper than cost of equity, so I think they'll honor all the way to 7 years. Don't get start excited yet on the potential 4.1% yield. The probability of that materializing is very low.

Who should be bidding for this?

1.) Those who are satisfied with the 3.65% yield on a fixed income requirement.
2.) Those who are willing to take slightly higher risk than SSB or SGS but with higher returns.
3.) Those who requires a less volatile investment (compared to stocks) but requires some sort of decent cash flow.
4.) Those who believes that the issuer will still be solvent after 7 years (With BAA1 ratings, they should be fine).
5.) Those who wants to be a lender and not an investor.
6.) Those who thinks that they are not able to earn a return of 3.65% per annum for the next 7 years.
7.) Those who wants to include bonds as part of their overall portfolio allocation.
8.) Those who wants to use this avenue as part of the endowment plans i.e money to be used after 7 years from now.

One thing for sure, this is not for any quick capital gain play. If you are thinking that the price will shoot up just because they are oversubscribed, you may be disappointed with the outcome.

Will I be balloting?

I doubt I will be participating in this for now.

The biggest reason lies in the fact that over the next 7 years, I will most likely be using the funds to find some sort of opportunities in the market that will yield a better return over the long run than what the retail bonds are able to provide at this time. The markets are known to be an unknown, but that's the opportunity loss (gamble) I will be taking for now.

At my age, I think I am comfortable enough to go for opportunities that I think will yield higher sort of returns over the long run. Participating in this will make one a lender, not an investor, so there needs to be clear clarifications that any sort of growth the company enjoy over the next few years will not impact the bondholders. Cash is king, so locking in at 3.65% over the next 7 years does seem relatively risk averse, especially as I am just starting to grow my wealth to greater milestone in the next few years.

Even though the overall market does seem pretty high at the moment, there are always opportunities you can find if you look deeper into several sectors that are in trouble right now. Even if not, there are other opportunities that I can park my cash with greater liquidity at the moment that yield roughly about the same decent yield returns, so I will not fret too much into this.

Thursday, May 14, 2015

Nam Lee Metals - H1 FY15 Results & Thoughts

Not too long ago, I've written a post regarding buying into a position in Nam Lee Metals which you can view here. The investment thesis remains largely the same but thought that I will update the tables for those who are interested since they have announced their half yearly results this evening.

B's customized financial overview (2007 - 2015*)

Q2 Result remains largely within the expectations that the business seems to be trending back up after a difficult last 2 years which the management concede. In its outlook, the management also reiterated that business and demand for aluminium will pick up so we will probably see stronger performance from here.

There's a few things to highlight from the Q2 results.

Free cash flow has gone into negative territory because of negative working capital and requirement for capex which they have used to purchase a warehouse which was highlighted earlier. Cash conversion cycle is slow and this is pretty common to them as they will have a year of huge positive operating cashflow followed by negative operating cashflow next.

As previously highlighted in the first article, I was not too concerned about this because they have the huge cash balance in their books to mitigate the slow turnaround. Inventory did increase significantly in this quarter, implying that the company is stacking up for the increased volume. That's all that matters at the end of the day.

The company also took up term loans in this quarter which was not there previously. I suspect this facility is to ensure that working capital operations can move on smoothly in case they needed more time for turnaround and cash is not sufficient to cover them temporarily. For now, I don't see too much concern regarding this unless this gets geared up pretty high.

Earnings yield annualized is now at 14.6%, which implied a price to earnings ratio of around 6.8. It's pretty decent in my opinion, given that the company tends to payout a conservative 1.5 cents dividends to shareholders. First half earnings per share is already at 2.12 cents, so this is already covering the payout they are supposed to usually give out.

There shouldn't be any catalyst to move up the share price aggressively, so this will continue to be a long term play, yielding decent yield for now for me.

Vested with 70,000 shares as of writing.

Wednesday, May 13, 2015

Thoughts On Fraser Centerpoint Ltd - 3.65% Bonds

There seems to be a lot of investment vehicles coming up recently attracting investors to park their money with. Not long ago, we have the structured UOB and revised OCBC deposit, then the Singapore Savings Bond (SSB) and more recently the FCL Retail Bonds offering attractive rates at 3.65% for a maturity period of 7 years.

Duration: 7 years
Interest: 3.65%
Payment: Semi-Annual
Offer period: Now till 20 May Noon Close (Retail investors can apply via ATM or iBanking)
Min Sum : $2,000 (increment of $1,000 next)
Trade date: 25th May
There has been a couple of retail corporate bonds offered in the past too by blue chip companies such as the CMA and CMT but I don’t remember it generates so much interest as the one being offered recently by FCL. I can probably attribute this to 2 factors. First, it shows how long we have been living in a low interest rate environment that when we see corporate bonds offering at a rather attractive yield, we get excited about it. Second, there’s plenty of buzz regarding the offering and people are simply subcribing to this as part of herd investing mentality. The thing that gets these people excited are the subscribing activities where they get to press ATM to subscribe the way they did for IPO. But this is vastly different products for different needs. People who usually subscribe for IPO are usually short term focused but this is a rather meant to be a long term instrument.
First of all, I must say that it’s rather confusing for some people to have so many different investment vehicle presented in front of them and having limited amount of money to invest. The traditional over the past 4-5 years has been flat Reits investment because they are structured to give pretty decent yield return to investors. When others came into the scene with products such as the OCBC 360, it suddenly attract investors to park their money there.
The thing about deciding whether you should be investing in this FCL 3.65% bonds carries a few factors such as age, career, needs, appetite for risk, etc.
Depending on your age, career stability and appetite for risk, bonds are traditionally less risk averse instrument because they provide investors a fixed amount of payout until the maturity date. Bonds are subject to interest rate risk which would decide whether the bond price goes up or down below par but if you are intending to hold until maturity, you will not be subject to this risk because it will be redeemed at par. However, the one thing that many people failed to consider is investors are subject to reinvestment risk when the product mature because you will then need to seek for another product that can yield the same if not better yield. Unlike stocks, you are investing in a business that is supposedly going to move up and accumulate increasing business moat over time so there is hardly reinvestment risk if the business model proves to be successful. Having said that, stocks have plenty of other risks that I will not discuss here.
Going back to this, my thoughts is that with interest rate going to trend up, there will be more investment vehicle or companies like FCL that would perhaps be offering such debts deal to raise money. Imagine if Capitaland or UOL were to issue the same deal with higher yields at 4%. The investor who are invested earlier will be subject to these opportunity loss. Also, because of the rising interest rate trend in the next few years, chances are that the market value are likely to trade below the par value in order to make the Yield to Maturity (YTM) more attractive to potential investors. Note that I mention opportunity loss and not an actual loss because remember if you are holding this long term until maturity, then you are almost guaranteed to redeem your capital back at par value.
I suspect there’s too many hasty investors out there who blindly subscribed to this retail bonds offering without really thinking all the possible consequences. If SCI were to go down to $3.80 in the next few weeks for instance and you have no warchest, I’m pretty sure there’s a lot of investors who would be trading out of this retail bonds in order to catch SCI by then. If you are doing so, then you are only thinking short term and not what bonds as an asset are supposed to work for you in your portfolio allocation.

In conclusion, the correct approach to go about doing this is to consider your own needs based on criterias such as age, career stability, yield returns and time horizon. Once those factors are considered, you will have a better idea of whether you will need this product or not.
Again, there’s no right or wrong in this but one certainly needs to think through before rushing to subscribe when the excitement is still high.

Will you be subscribing to this retail bonds offered by FCL? What's your reason for doing so?