Friday, October 31, 2014

The $2 Chicken Rice Story

I chanced upon a stall that sells chicken rice for $2 and saw many people queueing for it. Knowing what to expect but curious, I went to purchase them for lunch. Not too far away from the stall, there is another chicken rice stall that sells for $4.

The $2 chicken rice was packed with lots of rice and 3 thin piece of the chicken. Not that I am complaining, but I ended up finishing the chicken with my rice still more than half left.


Here, I am not going to talk about the capacity to eat nor greed versus need.

What I am going to talk about in this story is the concept that has been used by many marketing experts out there that take advantage of humane's predictably irrational mind.

Based on the book Predictably Irrational by Dan Ariely, human nature tends to define value on a relative basis rather than absolute basis when it comes to purchasing. Take the chicken rice example I mentioned, the $4 chicken rice would have given more than double the meat the $2 chicken rice meal had offered. But people choose to purchase the one with the lower cost instead, buying multiple packets since it was more affordable.

Take another example for instance, you go to a restaurant by the Collyer Quay and had this in their menu:

Wagyu Beef with salted peas and mashed potatoes - $48
Chicken Rice Speciality - $12

All of a sudden, the chicken rice become such affordable to you. I know some are probably going to argue the intangible such as service and ambience but how many times are you caught with such situation and still choose to do so. The book leverage on compelling human mind explanations to show that a highly effective technique to pricing is to put another product at a higher price next to it. This plays around our mind the sense of relative value.

Perhaps this is why many Singaporeans are one unhappy bunch despite earnings multiple times the income of the neighbouring countries. Look left, look right, how to be happy with $100k/annum when your neighbour is earning $150k/annum.

This should remind us about a quote from Theodore Roosevelt:

"Comparison is the Thief of an Ultimate Joy"

Being rich in life is not about looking left or right, look at your own hands and self in the mirror, that's happiness.

Thursday, October 30, 2014

"Oct 14" - SG Transactions & Portfolio Update"

 No.
 Counters
No. of Lots
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
FraserCenter Point Trust
30
1.92
57,600.00
23.0%
2.
Vicom
6
5.95
35,700.00
14.0%
3.
SembCorp Ind
7
4.80
33,600.00
13.0%
4.
China Merchant Pacific
25
0.895
22,375.00
9.0%
5.
Ascott Reit
15
1.225
18,375.00
7.0%
6.
Mapletree Greater China Commercial Trust
20
0.93
18,600.00
7.0%
7.
Neratel
20
0.79
15,800.00
6.0%
8.
FraserCommercial Trust
11
1.41
15,510.00
6.0%
9.
ST Engineering
4
3.71
14,840.00
6.0%
10.
OUE Ltd
5
2.09
10,450.00
4.0%
11.
Ascendas Hosp. Trust
7
0.705
  4,935.00
2.0%
12.
Stamford Land
4
0.56
  2,240.00
1.0%

Total SGD


250,025.00
 100.00%

This month is rather lackluster as I have only made divestment in SPH (See Post Here).

As a result, the portfolio is down from previous month of $274,400 to $250,025 this month mainly due to the divestment of SPH and the lackluster performance from Sembcorp Industries. I am still monitoring SCI closely but choose to wait until Sembcorp Marine report its results next week. Maybe I could catch a better entry price by then.

As a result of the divestment from SPH, together with the unutilised investment fund this month, in addition to the inflow of dividend cashflow next month, I am holding a rather huge cash at the moment. I hope I am not tempted to spend the cash away on some food or entertainment!!!

From this month, I would also like to include the amount of estimated annual dividend income from the portfolio. As of Oct, the estimated annual dividend stands at $12,738. Again, the drop in dividend income is due to my decision to divest a couple of dividend stocks such as First Reit and SPH and chose to invest them in growth stocks instead.

Companies are still in the midst of reporting their earnings so it will be interesting to see what come next, especially after the Fed ends their buying bond purchase.


Tuesday, October 28, 2014

Recent Action - SPH

Every year during this time, I would take the time to review SPH full year results to see how they were doing. Last year in Oct (See Here), I was disappointed with their results and was contemplating whether to hold or let go of this darling grandfather stock. Anyway, I managed to hold to them eventually and have well "eaten" their normal, final and special dividend despite the not so satisfied results.

Today, I made the decision again to review SPH recently announced full year results and decided to let go my 5 lots at a price of $4.23, not too bad I think given the range they have been in the past 5 years or so (will talk it more detail in conclusion).

My decision to divest the company has been based on figures which have been disappointing and not too satisfactory for me.

If we take a look at the top line and operating profit figure, specifically for Newspaper and magazine, the drop on revenue year on year has been pretty bad at around 6%. Operating profit has dropped at around 16%. Taking a closer look, the fall in circulation can somewhat be offset by the increase in the property and other segments. However, the drop is advertising revenue is massive and hits hard for them.

Revenues and Operating Profits
Looking back over the past 2 years at least now, the decline in print and advertising on offline have been a secular trend given the high internet penetration of the young people these days. Sources of advertising revenue such as Classifieds have been on free fall and is evident in their latest results.

Some people have mentioned whether the property segments will come and rescue the core business, especially given the hype that Seletar mall will begin operations in Nov 2014. Using my calculated estimated capitalization rate of 4.85% (See Link Here) over its latest valuation of $493 million, we get an NPI of around $24 million/year. Having an ownership of 70%, this will translate to around $16.7 million/year for additional income. Being a conglomerate, $16.7 million will not impact their earnings by much, given that their loss in advertising revenue alone is over $50 million. We have not even taken into account some other expenses and considerations and the revaluation gain/loss.


The company has declared a final dividend of 14 cents/share, making the total to 21 cents, a 1 cent drop from previous year. You can see that the company is floating right now with their cash flow, given that their latest payout has now exceeded to 107.8%. I seriously doubt they will be able to increase their payout anytime soon.


The key here is that the company is trying to transform their business into the digital platform, having more online than offline, tapping on the digital space, integrated content and online advertising. I think it will take some time for the strategy to play out but will good for the business over time.

Conclusion

This is a counter that somehow people loves most despite their results. If we take a look at the price range over the past couple of years, it has always range somewhere between $3.80 (after xd) to $4.30 (before xd). Last year they went to as high as $4.60 because of the hype regarding the listing of the SPH Reit and the special one-off dividend. Over the next year, they should be at least maintaining their total of 21 cents/share dividends. If you are satisfied with the 6% yield, this counter should be fine. But given the current market volatility, maybe there are more opportunities to cash in on the proceeds from selling this counter, at least for me.

Saturday, October 25, 2014

Attended Illumina TOP Party at D'Leedon Condominium

I attended the party held at the D'Leedon condominium on Saturday evening which my parents in law has purchased. As previously done at the Interlace, the developer, Capitaland went all-out to make an impression by organizing a big event party to mark its units completion and has invited residents and extended families to the party. The events were huge and there were at least 25,000 attendance in the place, easily.

Entrance at D'Leedon Condominium

It was my first experience attending such event in Singapore, so it was an eye opening experience. There were a couple of Ferraris and Lambourghinis making the entrance as I went in as well. There were food, drinks, performance, music, workshops (wine appreciation, etc), photo events, fireworks and many other surrounding the events - all in more detail later.

So upon reaching there, we were greeted by a bunch of event organizer and proceed to check out the show units. I suspect the reason that the organizer did was because the development has somewhat 254 unsold units (out of total 1,715 unit development) and Capitaland is offering these units at an after interior design furnishing for the remaining sales. I must say that the interior looks pretty modern and stylish and it should cost somewhat $100K for such refurnishing. Another method to counter the reason pessimistic in residential sales.

From the pictures below, you can see how much my wife and son loves the place. One was busy taking pictures everywhere while another shows his affection by sleeping soundly on the bed in the master bedroom. By doing so, he became the center of attractions of thousands of on going lookers who were visiting the show units.

Living Room
One of the bedroom


Masterbedroom

Swimming Pool View

After visiting the show units, we proceeded downstairs to the food counters. There were a line up of counters such as Hokkien Mie, Chicken Rice, Chwee Kueh, Nasi Lemak and other buffet counters which provided noodles, fish, sushi and many more. I had such a fill after going for a couple of rounds.



After we had our fill, we went to view some of the condo's facilities and played with some props to take some photos ourselves. Some of the other facilities include tennis, basketball court, swimming pools, study room, and one which impressed me most was the gym pool (see pic below). I thought it was cool that there was a gym pool and I would really like to pop by my parent's in law place one day to try that.

There were also the performance by one of America's Got Talent - William Close when he played his stringed musical instrument, dubbed the longest in the world. We didn't manage to stay until the rest of the party as my son kept on crying but heard that there was a fireworks to the finishing.

Family Photo 1

Family Photo 2 - with props :)
Swimming Pool

Gym Pool
America's Got Talent - William Close

Fireworks - which we missed ;(

Overall, it was an enjoyable evening and I thought it was a good effort by the developer to do that not only to reward those who had purchased but at the same time, they are able to showcase or market the rest of the units at a single go. I spoke to a few agents and home owners and I can see that they were impressed by the effort the organizer had put into the event, so hopefully we can see sales coming right in after yesterday.

Most of the units from the developers are left with 4 bedrooms with over 1,700 square feet selling at around $1,500 psf (I think including after interior design I mentioned earlier). In total, the amount would sum up to around $3 million for a 4 bedroom. Do I have those kind of money right now? Hmm, flat no. But maybe some of you might have. So interested? :D


What's next for FraserCenterPoint Trust (FCT)?

The last time I went to update about FCT was back in April when news were coming out that they were going to acquire Changi City Point. How time has flied since then. Fct of course has remained my major stake in the portfolio. 

FCT has just announced their full year results on Thursday and DPU has once again hit record high with 11.187 cents. As an investor vested in the stock, I am happy to know that their bottomline will go right into my pocket in the mean of dividends.


So the question now, what is next for FCT?

Being curious, I went to do a projection for its FY2015 DPU based on the latest information provided.

First, the occupancy seem to stabilize at a pretty high rate for all the malls, including the worrying Bedok Point. The problem with Bedok Point is it appears the management are reducing their passing rent in order to fill up the occupancy for the mall. We'll see more about it later. Overall, the occupancy for all the malls are now at an average of 98.9%, which I thought was very good.


Next, we take a look at the respective mall's capitalization rate, which measures the efficiency of the management in extracting out the rental income from each mall. This is taken by dividing the mall's respective NPI by their asset valuation. It appears that these malls have a relatively good capitalization rate, if we compare against Paragon mall @ 5.28% and Plaza Singapore @ 5.41%. So no worries on this one either.


Capitalization Rate (%)
FY2014FY2013
Causeway Point5.355.35
Northpoint5.255.25
Bedok Point5.505.50
YewTee Point5.505.60
Anchorpoint5.505.45
Changi City Point5.70N/A

The next 3 years is going to be crucial for FCT as almost all of their upcoming leases are going to expiry and need to be renewed. As an investor, you can look at it both ways - either be worried that the occupancy isn't going to be filled up or confident that the management can increase the passing rent for the new leases. For FCT, it appears that the management are positive looking about the latter.


If we look specifically only for next year, i.e FY2015, we can see that more than one third of the leases are going to expire, and this is where the management could see opportunity to increase their higher passing rent to the tenants.



For the purpose of projection, I have used the average 2014 figure for the percentage increase in each of the mall shown in the data below. And the total figure I got was an increase in NPI from $118.10 million to $135.20 million. The majority of the increase are still coming from the contributions from Changi City Point acquisitions.


Quarterly historical data1Q142Q143Q144Q14Average
Increase in rental over preceding rates
CWP15.4%9.7%8.1%12.0%11.3%
NP7.3%10.9%7.0%4.0%7.3%
ACP0.2%11.8%6.9%13.5%8.1%
YTP6.1%11.1%8.1%17.4%10.7%
BPT-16.0%-11.8%-2.9%5.6%-6.3%
CCP- - no renewals17.7%8.9%
FCT Portfolio2.5%9.3%7.8%10.9%



NPI ($m)
FY2014FY2015 Est.
Causeway Point56.4858.11
Northpoint36.0037.54
Changi City Point5.1618.53
Bedok Point6.236.11
YewTee Point9.5610.12
Anchorpoint4.674.80
Total118.10135.20

Taking the FY2015 estimated NPI into the calculation, I have derived an estimate DPU of 12.22 cents for FY2015, which is a 9.2% increase year on year. Taking current price at $1.93, this represents a forward yield of 6.3%, quite decent if you ask me.


NPI135,200
Less: Borrowing Costs(18,000)
Less: Trust expenses(1,700)
Less: Management Fees(13,800)
Net Income101,700
Add: Net Tax Adj5,700
Add: Distribution from Associates4,500
Distribution available to unitholders111,900
FY 2015 DPU Est.12.22 cents


I do not think there will be any surprises coming in from FCT in the next 3 years or so. Potential risks can come in the form of lower occupancy rates and refinancing issues but if the management are able to mitigate them well, then we should see stable contributions from them in the next couple of years so. Now that you know, will you still be vested with the stock?

Please let me know your comment.

Thursday, October 23, 2014

SPH Reit - When will Seletar Malls be injected?

Following the article on SPH Reit by fellow blogger S-Reit System Investor which I thought was well analysed and the recent buzz surrounding the injection of Seletar Mall into SPH Reit, I wanted to follow up the discussion with the management thoughts on the Malls and my thoughts into the matter.




Here is the Q&A discussion with the CEO and CFO of SPH Management at the seminar organized by the Securities Investors Association.

1.) There are reports that local retailers are struggling with high and painful rental renewals. What is your view on current rental renewals?

CEO: From a business point of view, rental is a key component and the other key factor is labour.

From a retailer point of view, each business set up should make sense to him or her. The number of labour or manpower that they can recruit is sometimes not within their control. So, retailer would wonder how to continue? They will look at good performing units and cut back on unsustainable units. 

In future, retailers would be very savvy in terms of where they open new units and where they continue their presence. For example, more than 90 per cent of retailers chose to stay with Clementi because the business is tested and they know the kind of sales they can achieve. Bottom-line, we have to give them the best environment so that the mall becomes their best choice.

2.) How do you actually make your money?

CEO: Our rents are definitely not below market rate especially for Clementi Mall which has already achieved S$1,590 per square foot in first lease cycle. Even before signing the lease agreement, we discuss with the tenant about their sales projection and sustainability.

3.) What about raising parking charges?

CEO: Paragon Mall has a surcharge for vehicles parked before the mall’s shops open. This is because there is a hospital nearby. So, people visiting the hospital will park their vehicles at the mall due to limited parking availability. However, the surcharge is just S$2 and is redeemable if you shop for S$30 in the mall. We don’t want to increase the car park charges to such a point that shoppers should feel the mall is too expensive.

4.) Do you have any plans to manage overseas Reit?

CEO: Our mandate is Asia Pacific but our focus will be Singapore, at least in the near term. However, we are doing a ground study on the overseas expansion.

5.) Do you think you will exhaust the S$20 million income support in five years?

CFO: Based on our year-to-date performance, especially the Clementi mall that performed better than forecast, the income support we actually require is lower. So, at this point S$20 million of income support would be more than sufficient. However, we also have to see the economic conditions during the remaining period of the income support and we cannot guarantee that we will exhaust it faster or slower.

6.) Why are management fees based on NPI as opposed to DPU?

CFO: The management fees is based on two components, 5 per cent of net property income and 0.25 per cent of net asset value. So, management fees may not grow in proportion to net property income but the fee structure is in line with market.

7.) Is your forecast operating cash flow sufficient to pay down the debt after factoring interest expense and capital expenditure?

CFO: Yes, definitely. Our net property income margin is 75 per cent which is very healthy and is sufficient to cover the financing cost.

8.) Why did you lose S$9 million in nine months on the net hedging reserve?

CFO: This is the insurance premium we need to pay for hedging our debt. In accounting terms, it’s a fair value loss or a net payable position because of the gap between the short term and long term rate. If we see short term rate increasing then we may be in a receivable position.

9.) Why is the yield for Paragon lower than Clementi mall?

CFO: Yield for Paragon is 4.8 per cent and Clementi is 5.4 per cent. Paragon is a blended yield of medical and office as well as retail. The yield of Clementi Mall is in line with other suburban malls.


My Thoughts


Mall business is getting to become a more complex business proposition in the 21st century. Unlike other properties such as office or industrial which is highly driven more on the economy, property managers have to be creative and innovative to make the malls an active and vibrant for shoppers to visit. A successful retail malls is about strategy and implementation and requires constant work and determination to nurture a good mall.

Many people seems to blur the relationship between landlords (management in Reit instance) and tenants. The truth is rental reversion is highly correlated to traffic visitors and therefore management's objective to increasing rental reversions is to promote traffic arrivals into the malls via several initiatives such as organizing events to create a buoyant and lively atmosphere. On the other hand, the tenant's role is to convert traffic into sales and hiring a good sales person (and product) would boost its existence amongst the many competitors in the mall.



I previously blogged (Link Here) about how finding the right tenant mix is crucial to improving traffic and to the long term success of the malls. Having simply the highest "income" generators (usually the F&B and Fashion) is not enough to sustain a long term success of the mall business and usually you would need those "traffic" generators (but "income" destroyers) in your malls to pull traffic in. Example of such would be supermarket chain or cinema, and to the delight of Seletar malls, they have secured Shaw theatres and NTUC Fairprice supermarket among their anchor tenants.

Initial Tenant's Mix on SPH Reit Malls


If you compare with a few of the properties below, you would also see that the cap rate and average rental rate for Seletar Malls are rightfully below those matured malls like Plaza Singapura or even Clementi Mall. You can see therefore that the management would probably need to work their way up to increase the passing rent before the malls get sold to SPH Reit and this might take at least a year or two more before results can be seen. Therefore, we would probably see at least 2016 before Seletar Malls get injected into the Reit. With the parent company still holding major 70% stake in the Reit, it is very possible that they would want to manage the mall well and nurturing them before injecting into the Reit.


Comparable PropertyOwnerCap RateAvg Rent/psf
ParagonSPH Reit5.28%$21.70
Clementi MallSPH Reit5.11%$15.90
CauseWay PointFCT5.42%$13.50
Plaza SingaporeCMT5.41%$20.10
Seletar MallSPH Reit4.85%$11.90

I'm vested in SPH but not SPH Reit and the above are purely based on my own personal opinion.

Wednesday, October 22, 2014

Bear market will make you rich

We are into the final week of the October month and it seems forever since we last had such a volatility in the market. The month of October has historically been the most volatile month for stocks (such as the 1929 crash, credit crunch 2008) and it has proven itself right once again, at least this year.

I remembered the time I was in Spain while watching the Dow dropped over 400 points in a single day and I was watching the STI stocks dropped quite a bit as well, especially for oil and gas related (Keppel, Sembcorp) and commodities stocks (Wilmar, GoldenAgri). The brief correction keeps quite a number of people on the toes for quite a while, some panicking while the others are excited about an opportunity to put their investment funds to use.


Personally for me, I was hoping for a correction for sometime now. I see the stock market as a cycle where it goes up and down and it is only healthy that it did what it does because it will reverts back to the long term average mean, which keeps going up over time. Sure, my net portfolio worth might goes down during the correction, but having a cheaper market means I will use lesser funds to buy the same stock that will yield a higher dividends in terms of percentage returns. And to be honest, when you set yourself for financial independence, all that matters to you at the end of the day is cashflow cashflow cashflow, not networth.

Take a classic groceries example for a second. You had $100 to spend on groceries for the weekend to buy a couple of meats, fruits and some snacks and drinks for the party. Now, assuming that the supermarket is holding an anniversary and are dishing out discounts to the items you are buying, should you be happy or sad that the worth of your meats and snacks are now lesser than before? Of course, you would be ecstatic as it either means that you can buy more items with the same $100 or you can buy the same number of items with lesser amount of money. Fantastic either way if you ask me.

Here's the truth, a bull market will bring butterflies to your stomach and make you feel good on the outside but a bear market will make you rich over time. My plan is to reach financial independence by the time I am 35 years old and it all depends on the amount of cashflow I would have at the peak of the journey, so the longer the bear market persists, the faster I am going to reach my financial independence, all caveat taken. So while most people are worried about their portfolio, why not take the bear market as an opportunity to increase your exposure accordingly, focus on the business and reach financial independence earlier?