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Thursday, July 2, 2015

Recent Action - Kingsmen Creative

This week, I made a purchase of 15,000 shares of Kingsmen Creative at a price of $0.98.

After recently adding Silverlake into the portfolio (Link Here), I am delighted to add another company that fits into my criteria of strong business moats, high free cash flow generating capability, strong Return on Equity figures, and a superb strength of the balance sheet. More on those will be explained in a short while. This adds into the collection of similar companies I had in my portfolio that fits into the same criteria such as CMPH, Vicom, Silverlake, Nam Lee Metals, etc.

This analysis and decision was made after talking to a fellow blogger and good friend on the qualitative and quantitative nature of it's business, including how they operate as a business and how the market perceived to value these sort of industries.

If you have been following the recent Sea Games which was held in Singapore, Kingsmen should not be a foreign company to you. The company has been bidding some of the world's most important event in recent years and their niche industries allowed them to be awarded to become one of the leading sponsors of the games.


Business Overview

Kingsmen Creative is one of the leading service contractor that specializes in many prominent events in Singapore and the rest of Asia, including conceptualizing the interior behind many of the high end fashion brand names such as Chanel and H&M, events and exhibitions such as the Formula 1 and theme parks such as the Universal and Disneyland in Shanghai. Their main core business and operations are in:


  • Research and Design
  • Retail and Corporate Interiors
  • Exhibitions and Events
  • Thematic and Museums
  • Alternative Marketing





Financials Overview

I come from a profession that deals with financials all the time, so I'm a pretty sucker for financial numbers that look great to impress me. Since I am pretty sensitive to numbers, I usually bide around my analysis using a bottom up approach from the company's financial figures.

I have tabulated a summary table for the company's financial figures for the past 8 years (from 2007 to present) and included some of the most important financial metrics I usually require to analyse.


Kingsmen's Financials - 2007 to 2015

The company has been generating very good and steady increase of topline figures across the years, with increasing revenue while maintaining a respectable margin since the past 8 years and more. This is important because this shows how the company deals with external events such as competition entrance into the market share which could eat into their margins if they are not being competitive.

Their bottomline profit margin tends to stay across the 6% margin across the years and as you will see later, it is important that they maintain a steady growth of their topline while keeping cost competitive in check if they want to grow their earnings. Failure to do so will be detrimental to their growth as we've recently seen in companies such as Japan Food Holdings, who are struggling to keep afloat their high headcount costs which eats into the profit margin.

The Return on Equity (ROE) is an important metrics that I usually keep an eye on. Over the years, they have been generating a respectable ROE in the range of 23% while maintaining their financial leverage low. In some of my previous analysis on other companies, I usually like to break the ROE down into 3 financial levers to check the efficiency of the figures, namely Profitability, Operating Efficiency and Financial Leverage. I'll skip this exercise for this analysis in view that I had their margins and financial leverage checklist in place. The company has had some cash hoarding and accumulating for a number of years now, which typically strengthen their balance sheet but drags down the ROE of the company. In this sense, this is very similar to what Vicom is currently doing.

The company business model is built upon such that they operate in an asset light environment, with talent resource an important asset metrics to the company. The company has a low capex requirement in this case, which means that the company is capable of generating a high free cash flow ability as long as their topline and bottomline is increasing. If we take a look at the historical P/FCF as reference, they have been hovering in the range of 8x (with exception to 2009) for the past couple of years, and this is attractive in my view. Not many companies are able to generate such consistent FCF for a number of years in today's environment.

The company has been generating their earnings yield (opposite to the P/E metrics) consistently for a number of years at an average of about 11% now, distributing about half of them as dividends to the shareholders while retaining the rest to grow the company. This is important for investors seeking a dividend growth company because you want your company to grow, and also ultimately your dividends. The company is able to operate in a distribution business model like Reits by distributing out all its earnings as dividends at 10%, but it wouldn't make sense for them to do so. This is a company that has ambition to grow and investors would need to be patient to grow together with them.


Risks

As with all companies, risks are pertinent when it comes to dealing with permanent loss of income, which will ultimately impact the bottomline and shareholder's profitability. In my view, the main risks for Kingsmen would come from these factors:


  • Rising Headcount Costs
As mentioned earlier, talent retention is the main asset for Kingsmen and with rising manpower cost evident in today's environment, the company may struggle to keep afloat their costs in check. Their bottomline margin is coming in at around 6%, so they would need to find ways to increase their topline figures in order to tide the wave of a rising cost environment.

  • Slowdown in global activities
The amount of pies across the various global activities has to somewhat increase for this to make sense, otherwise it'll be a case of fighting for the equal number of pies amongst the rising number of competitors. I was highlighted by my friend that this is a niche industry with a high barriers of entry and high switching costs by customers, so customer retention and loyalty play a somewhat important role for that to happen. The opposite case goes the same when Kingsmen is trying to gain more market share from its competitors and they are facing the same barriers as their competitors.


Valuations

I am using a Discounted Cash Flow (DCF) for valuing the company due to it's predictability and consistency of it's FCF generating capability.

I am setting my criteria by using an unlevered FCF for the next 5 years starting from 2014, growing them at a terminal growth rate of 3% based on the profit figures, discounting them using a Weighted Average Cost of Capital (WACC) of 10% and using a Terminal EBITDA multiple of 10x, which is the average normalized multiple for the past 8 years. 

Sensitivity analysis of standard deviation +1 and -1 has been added for further reference and analysis.

Assumptions:

  • WACC = 10%
  • Terminal Growth Rate = 3%
  • EBITDA Multiple = 10x
  • EV/EBITDA = 9.3x
Based on the above assumptions, the intrinsic value came up to be at $1.25.




Assuming we are taking in some margin of safety discounts to our initial assumptions, we now get an intrinsic value of $1.00.


Based on the Gordon Perpetuity Model of using a terminal perpetuity growth rate of 3%, we now get an intrinsic value of $1.70, which presents a 70% upside and comes in line for long term investors who are willing to hold this for the long term.


Gordon Perpetuity Model


Conclusion

The share price has increased about 10% since I started monitoring them a couple of years back when the share price was less than $0.90. I still think it presents value at this price and management has proven their capability time and again that they are able to withstand challenges in the midst of uncertain global environment. Balance sheet has also strengthen quite remarkably since a couple of years back.

This should be a good company to own if you are thinking of holding them for the long term. I think you should not expect any fireworks you've seen in other companies but instil a steel of patience to grow together with the company. As for myself, I'm really excited to be able to add on companies with strong moat into the portfolio.

I'll be updating my portfolio with the latest update shortly with this purchase.

What do you think of this company? Will you decide to invest your hard earned money in this sort of company?


Tuesday, June 30, 2015

Recent Action - Fraser Commercial Trust (FCOT)‏

I made a decision to divest all my current holdings for FCOT of 11,000 shares at a price of $1.525

This has not been an easy decision (just like the recent FCT divestment) because they are two of those Reits that have been with me for the longest of time and have performed remarkably well since I purchased them. However, my strategy involves buying and selling at a valuation where I think gives me the best risk reward advantage and therefore at any given time, I had to consider if they have breached my limitations. 




I had in the previous week written an article (Link Here) regarding the possible short term fluctuations about the placement activities in the acquisition of the 357 Collins Street, which are expected to be yield accretive but just SLIGHTLY yield accretive. The decision to divest is actually much more to it than meets the eye.

First, I am looking at this from the Reits and balance sheet structure point of view and have compared them against CapCommercial (CCT) and Ho Bee Land. While the current capitalization rate for FCOT is comparable to the other two companies mentioned, especially for the office properties located in Singapore, the Australian properties which they have on their books are having higher capitalization rate, so this gives them an advantage in terms of the net property yield the company is able to generate. However, in terms of balance sheet and NAV, I believe FCOT ranks the lowest amongst the other two and this is something that propels me to be more wary


Gearing (%)P/BV
FCOT37.20.99
CCT29.90.91
Ho Bee30.10.53


Secondly, given the parent’s company (FCL) obvious direction to divest more of their Australian properties into their Reits wings, there will be plenty of acquisitions opportunities for FCOT (And FHT) in the next few years ahead. It’s a little tricky here because given the structure of Reits to pay out majority of its earnings, acquisitions will have to be funded via debts and/or equity.

The point I am trying to make is given the relatively high current valuation of the Reit in terms of its NAV (compared against their relative peers), any drop in the stock price means that it is much more difficult for the company to acquire a yield accretive acquisitions since the net property yield of the acquisitions cannot be lower than the yield they are already offering to unitholders. We see the latest Collins Street acquisitions as one of those examples where the difference between the NPI and current yield are not significantly different. In other words, share price would have to continue to move upwards in order to make sense for them to issue equity at an attractive price. The management can always choose to fund the acquisitions via debt, which is a much cheaper form of financing, though the limitations of the gearing and the rising interest rate would not have helped them much.

Conclusion

The divestment has now increased my warchest fund in the range of 39% of the overall portfolio.

I have also utilized part of the proceeds from the sell to purchase something else today, a company which I think presents a better risk reward ratio in the long run. I may blog in the next day or two regarding the purchase, given if time permits. Let's see if the decision to do so in right over the long run.

Thanks for reading.


Saturday, June 27, 2015

Why Is It So Difficult To Take Annual Leave?

As an employee of an organization, we are usually entitled to an annual leave amounting to different number of days as regulated by the ministry labor. Each employees' annual leave is also usually dependent upon the industry, job grade seniority and serving tenure in the company.

The purpose of paid annual leave given to employees is pretty clear. Annual leave allows employees to take paid time off from work for the purpose of having regular breaks so that they can rest, re-energize and come back to work fresher. It is also know from research studies that employees who take regular short break holidays can be more motivated about their work and perform more effectively than those who do not. They are less prone to suffer from anxiety and stress because they get to relax their mind off any related work stuff and they will feel like they have life after all outside of work.

Although it seems like that's the general knowledge that everyone could understand, that's not exactly the case of what we are seeing in many organization. As an accountant having worked in several organizations myself, I am required to make leave accruals on a monthly basis for the general provision purpose. The trend that I am seeing is a lot of employees tend to have many outstanding leave balance that tends to increase for the first 8 months, then slowly trend down within the last 4 months heading into the end of the year. The Christmas holiday could be an excuse for such trend at times, but the overall impression I get from most is they tend to carry forward the leave balance to the next calendar year or forfeit them altogether.




My Experience

I can relate to this as I experience the same dilemma myself.

I am entitled to the normal 24 days of paid leave a year. Perhaps, the nature of my role in the organization makes it such that it is very difficult to plan for long leave break, not to even mention the possibility of a sabbatical. With many companies suffering from the high manpower costs of labor crunch, it is also very difficult to have sufficient manpower to back up one another. As a result, the vicious cycle between giving the much needed break to employees and balancing the needs of the company comes into question.

This ties back to the recent posting I wrote about FI (link here) which sparks about different thoughts from different readers. I guess the point I am trying to bring across there is that FI gives you a call option to have more flexibility to choose about the things that you care most about. I have no qualms about people who likes to continue working. In fact, they can even choose to work 100 hours per week for all they like, but different people have different priorities in life. What is mine is definitely uniquely different from yours.

With that said, my difficulties in taking a long break of annual leave is definitely tied down due to the nature of my role, which I can't inherently do anything much about it.

What about your experience with utilizing annual leave from your workplace? Does it boils down to the culture of the company and/or roles?


Wednesday, June 24, 2015

Prioritizing For Negative Knowledge To Become A Successful Investor

Most investors strive for excellence when they enter the market, building a sense of confidence that they believe will do well for themselves. Unfortunately, too few of them focuses on the negative aspect of the knowledge that is so critical to become a successful investor.

The concept of negative knowledge is about experientially acquiring knowledge about what is wrong and what to be avoided during performance in a given situation. In short term, it is to learn from the mistakes investor made and avoid a repeat of them in a crucial situation. A common misunderstanding is that negative knowledge is deemed as bad, poor and disadvantageous because of what is being described literally. But because everyone is liable and prone to making mistakes at some point in our lives, and just because negative knowledge is  non-viable in certain situations, it is not necessary worthless or superfluous.




Negative knowledge can in fact be much more powerful than positive knowledge because cutting down on unforced errors on either investing behaviors or decisions can determine the long term returns of our portfolio. It does not necessarily mean that we will avoid making such mistakes. But given the idea that making enough good decisions over time and cutting down on those unforced errors will enforce the number of winners and probability of success in your portfolio.

Take a tennis match for example. When an average player is playing a top seed player, his probability of winning the match is usually higher when he cuts down on the unforced errors rather than playing for winner shots, and at the same time hope that the top seed player is having a bad day and making more than average unforced errors. The same goes for investing. When we cut down on the silly mistakes we know we are prone to making, we come up better and stronger.

Let's now take a look at some examples of those negative knowledge we tend to acquire:

1.) Collective Rationalization (Herd Investing)

I've written an article previously on the subject matter explaining my position regarding herd and crisis investing (original article) in greater detail.

Herd investing is usually a recipe for disaster.

The herd investing mentality allows the tendency to think that whatever the behavior or decision the group made must be coherently correct because there are multiple minds think alike. Time and time again investors fall for this sort of rationalization because they think that strength is power and they are in a much comfortable running away from the fire instead of being a firefighter contrarian. If you are interested to read my original article on the firefighter contrarian concept, you can read it here.

Following the herd is what caused investors to accumulate into the technology stocks during the dotcom bubble, real estate during the great gfc and chinese stock during the recent manic run. What happens to the market after that, we will (had) already know(n).


2.) Not Having A Plan

This is a hard one because it's a huge narrative concept that is open and can range from almost anything else.

The first and foremost is to have a plan on portfolio allocation, including how much are you willing to allocate for emergency funds, warchest, stocks or bonds. I didn't start rationalizing the importance of this when I started investing until recently when I found out the utmost importance of doing so. Going top down regarding portfolio allocation is usually the safest method to ensuring that one doesn't over / under invest unnecessarily in any products at any single time.

Next is to have a strategy on the types of investors you are willing to be and most comfortable with. Some are more comfortable with dividend investing strategy or others may be more willing to adapt the asset based strategy. Regardless of the type of investors, we need to ensure that we have a plan in place to execute our strategies in the market well.


3.) It's Not A Matter of If but When

The worst part about investing is that it is going to be inherently slow, especially if you aim to become a successful investor. Most people are thrill seekers and they ended up in the bottom of the bin soon after.

Markets have been known to have its dark days and as investors, we need to acknowledge that it is only a matter of time that we will all be sunk in the dark pool of bloods when things get rough. During this period, successful investors will be able to survive and pounce on opportunities while the tide will wipe away the rest of weak investors who have been swimming naked.

To quote Sir John Templeton, he said "To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest benefits".


Perhaps the next time you see new investors lurking for advice, you might want to tell them to prioritize on the negative knowledge first before dreaming for the big glory of winning the capital market system.

What about yourself? Do you think prioritizing on negative knowledge is important? 


Monday, June 22, 2015

Recent Action - FraserCenterPoint Trust (FCT) (3)

Today, I made a divestment for my last batch of 10,000 shares of FCT at a price of $2.09.




The last two divestment I made in batches was in the previous couple of months at the price of $2.15 and $2.06 respectively. You can view my rationale for divesting here:

Recent Action - FraserCenterPoint Trust (FCT) (2)

Recent Action - FraserCenterpoint Trust (FCT)

The investment thesis rationale for divesting remains the same as previously discussed. I think given the impending increase in interest rate and with the yield hovering at around 5.4%, the premium return yield in excess of the risk free rate continues to linger low, perhaps not having the required margin of safety that suits my comfortability.

Some may ask why didn't I divest all then when the share price was at $2.15. The only reason I could think of is I was awaiting for further development for both the economy in general as well as the Reits. Now with more information, I think I am comfortable enough to sell the holdings, diverting the proceeds to the warchest which has now grown to around 34% of the overall portfolio.

I'll be patiently waiting for a much better risk adjusted reward returns. Given the economy we are at right now, I am sure there are plenty of meats to choose from in a short while more.


"It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities" — Charlie Munger


Friday, June 19, 2015

What's Your Pre & Post Financial Independence Schedule?

I was reading Jason's post on post-financial independence (Link here) and was intrigued by the prospect of thinking about life after financial independence. In the post, there's a couple of financial bloggers who have span out their thoughts on pre & post financial independence weekly schedule which I thought was interesting to ponder around.

Whenever I spoke about to anyone relating to financial independence, there's a misconception that financial independence equate to retiring from the corporate world and to lazy or sit around doing nothing. Look, there's a vast difference between financial independence and early retirement, though the same can be said to be congruent with one another. Whilst early retirement isn't for everyone, financial independence is something every individual should think about attaining as early as possible according to what the circumstances may be for you. Unless you are born from a silver spoon, this does require a vast amount of time and effort to make that happens and by no means that this is an easy task. Just ask around those who've done it before us if you are not convinced.

I have written this post to make more of a fun exercise to think about what you can do pre and post financial independence. Remember that whilst you may like working for your employer and continue to do so post financial independence, the ball is in your court and you can tweak to find your own preferred schedule. That is the biggest advantage of reaching early financial independence ahead of time. 

Without further ado, let's see how I would have fared differently (guestimate) pre and post financial independence weekly schedule.


B's Full Time Work Schedule


Full Time Work Schedule

Work - I do not particularly dislike anything about my work in general but one look at the weekly schedule and you can see that work takes up the majority of the time ahead of all other activities. For anyone with a full time job, the schedule should look pretty much similar to what I have above. The thing is it would have been great to compromise between the two by having lesser amount of time spent on work while increasing the other activities so that you would have a more complete life as a whole. Unfortunately, it is almost entirely impossible to work lesser or even considered part-time for my role as the nature of the work doesn't allow to.

Physical - I would have loved to get involved more in exercise activities as we all know the importance of doing so but circumstances of the amount spent on work and families make it as such that there are only time to do any physical activities during the weekends.

Fun - Plenty of the fun activities, especially spending time with the kid, blogging, watching tv and surfing internet are done mostly at night after I had my dinner at home. Even so, you can see how these activities are being squeezed very tight because they are mostly the best time available to do these things without much interruption. I often take spending time with the kid precedence over other "fun" activities including blogging, so it depends very much on what time my kid goes to bed.

Social - I am hardly able to squeeze in any social activities these days with friends or colleagues because of family commitments. Things were quite different when I was still single and I have more time on my side to do other social activities with friends. These days, it's usually just about the Friday night and/or weekend gathering.


B's Guestimate Post FI Work Schedule

Post FI Work Schedule

Work - This is a lot more leisure and flexible now, given the vast difference from the release of the mandatory 9 to 6 work I have to endure. I foresee over the course of time I will be increasing the pace and amount of work done post financial independence, though it will be entirely on my discretion and choice on what I want to do with it.

Physical - I'd love to increase the physical activities by way miles more than the current state. I think having a regular exercise does wonder to one's mind and body and I would love to spend more of my time beefing up my health more than wealth.

Fun - I can already see how I''ll be integrating fun a lot with social and physical activities with my son and learning some skills ready to made activities along the way. At the end of the day, it's about doing whatever you want to do with your life, so this "fun" factor can ranges from anything you find it interesting in your life that you have dreamt to be doing all the while.

Social - I will have some time on catching up with old friends over coffee or simply just remisce the old days when we were still in school. Given the arrangement of time, social activities can fit in almost any days I want it to be, again at my discretion.


Final Thoughts

My weekly schedule will vary differently from each and everyone of you.

You may like to travel, so you might plan to take some long sabbatical out of the country. Some may also like to do more volunteer, so the time could be spent more on doing meaningful social work. Regardless what it is, your schedule will be on your discretion and you have more flexibility to play it around the way it suits your needs and style.

Although this is just a fun exercise, but I'll encourage everyone to try and think on your schedule now and into the future. You may have thought about it at some point in the past on your head, but to draw and plant them out is an entirely different think altogether. Try them, it's just a fun way of thinking about financial independence.


Anyone who are interested to do the same exercise can get the template from where I've saved mine:





I've drawn mine. How are your schedule looking like?

Saturday, June 13, 2015

"Jun 15" - SG Transactions & Portfolio Update"

 No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
China Merchant Pacific
74,150
1.06
78,600.00
26.0%
2.
Vicom
8,000
6.24
49,920.00
17.0%
3.
Fraser Centerpoint Trust
10,000
2.02
20,200.00
7.0%
4.
Nam Lee Metals
70,000
0.29
20,300.00
7.0%
5.
FraserCommercial Trust
11,000
1.48
16,280.00
5.0%
6.
Silverlake Axis
12,000
1.09
13,080.00
4.0%
7.
ST Engineering
3,000
3.32
  9,960.00
3.0%
8.
Stamford Land
10,000
0.58
  5,800.00
2.0%
9.
Noel Gifts
18,900
0.29
  5,480.00
2.0%
10.
King Wan
5,000
0.28
  1,400.00
1.0%
11.
Warchest*
79,000.00
26.0%

Total SGD


300,020.00
 100.00%


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




We continued to see some pertinent weakness going into the month of Jun as the STI index has dropped about 5% from is recent high. Like everyone else, my portfolio was also affected by the movement, though the drop was smaller than expected.

Using this as an opportunity, I utilized some of the warchest into buying Silverlake (original article here) when it continued its fierce selling in recent weeks. The stock has bounced back a little from the last I bought, so I hope the fierce selling will stop from here.

I've also used this opportunity to accumulate some odd lots of CMPH when the share price retracted backwards last week. Further details can be found in my "Recent Transaction" page link. It's not any serious amount of any accumulation though I would love to add more to it if not for the already high percentage holding in my portfolio. In terms of moat, cash flow, dividend yield and valuation, it still fared as one of the best out there compared to its peers. The investment thesis remains largely the same as before.

The amount of warchest has now dropped to about 26% of the overall portfolio due to the recent buying activities. I will be paring off some of the buying activities unless a very good opportunity comes by, otherwise the risk adjusted return doesn't seem to pay off well at the moment given the current market situations.

On a personal front, I have also not managed to add on anything to the warchest for this month because of the extremely high expenses incurred. The big bulk of the difference in expenses is due to the money spent on purchasing flight tickets and hotels for our upcoming family trip in Nov later this year, which I have decided to expense all off in this month. We have not had a decent family holidays since the birth of my son so we will be looking forward to our upcoming trip later this year. Next month should look decently better, though much hope will be towards the month of August when I will receive some dividends which will help in terms of managing some of the expenses.




The net worth of the portfolio has fared disappointingly for the past two months as we've seen a general market decline more than anything else. It has dropped from the previous month of $304,430 to $300,020 for this month. I will not be overly concerned with the drop as the market is known for its volatility in the short term but tend to perform much predictably in the long term. I'll continue to sit while waiting for the dividend paying companies to announce dividends in the second half of the year.

What about you? How has your portfolio fared for this month? Did you add on to any opportunities?


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