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Tuesday, March 31, 2015

Liquidity - Paying a Price for Immediacy

I've been following the latest letters from Howard Marks of Oaktree for some time now. It has been truly amazing given the amount of wisdom inputs I have received from this guy just by reading some of his letters. For those who has never read any of his letters previously, I would strongly recommend you to give it a try because I assure you will get something out of it. Nothing out of extraordinary if you don't read it but I think it'll help anyway, at least for me.

Anyway, Howard has published his latest recent letters on the topics of Liquidity. I'll be sort of summarizing them below and providing some thoughts on it myself which hopefully will help you get interested in his past and future works.

Debates on the Definition of Liquidity

For a start, we begin by defining our understanding on Liquidity. If you ask your friends around you on the definition of liquidity, they probably reply that of something (an asset) that is readily saleable or marketable. However, Howard thinks that it is more than that. He thinks that liquidity is the degree to which an asset or security can be bought or sold in the market without affecting the asset's price (emphasis added). The key here is not simply the question of whether the timing or the availability of selling the asset itself but rather whether one can sell the asset at a price equal or close to the last price stated.

If you pause and think about it for a moment, it makes rather sense. An asset isn't usually liquid or illiquid by its nature. Liquidity is ephemeral, it can come and go according to a number of factors.

Take the case for our local property residential development for instance which everyone can relate to. Since the government introduces a couple of cooling measures for purchasing properties, liquidity has somewhat dries up in recent years. The reason for this is simple. The measures are put in place to slow down the rising trend of property price in recent years. Since there is essentially a ceiling to which the asset can grow further, there will be more sellers than buyers at this point in time. If you find yourself cash-strapped as a seller in the midst of this crunch hustle, then the asset is deemed to be illiquid to you.

The opposite is also somewhat true. During the property boom cycle, the nature of the asset itself is liquid from a seller's point of view. When you have demand flocking from all angles queueing up to purchase the asset, it is said to be a liquid transaction. I understand that at this point some may think that the property is ultimately still an illiquid asset no matter what the case is, but that's because you are comparing them against other assets relatively in a different situations.

For instance, the stock market is deemed to be a relatively liquid system where one can purchase or sell a stock as quickly as at a press of a button. If you think about the logic behind it, the liquidity for the stock market is very much a function of the quantity involved. If you are trading a blue chip counter like Capitaland or Keppel Corp, then I assure that liquidity is not a problem itself and one can buy or sell the stock based on the latest bidding price determined by the market. However, if you are trying to trade a counter with an extremely low free floating shares around, then buying and selling could become a problem. Heck, I even took a few weeks to get my bid price settled for Noel, a counter I am vested recently which I have blogged here.


Everyone knows the idea behind Contrarianism.

You buy low and sell high. You don't buy high and sell higher. That's not contrarianism. What is low and high is subjective of course, which is why an efficacy system of market exists in the first place. However, there's one indisputable explanation for why the market went up on any given day and that's because there's more buyers than sellers. When buyers feel the urgency more than sellers to transact on that particular day, the action drives the stock price upwards. Under those circumstances, sellers enjoy great liquidity and buyers have to pay a premium for the price in most cases.

This is the very same reason why some of the great investors around are advocating Value Investing. You buy when there are bloods on the street (everyone is fearing) and sell when there is party poops lying on the mainstreet. Okay fine, I made the last part out myself. What Howard is trying to say is basically in order to achieve immediacy, the sellers tend to sacrifice something else that is equally as important: Price (having to replace the "liquidity" factor for price). And as a buyer, the price discount that they accept makes an important contribution to the bargain hunter's excess return.

The Promise for Liquidity

According to Howard, one of his standing rules is that no investment vehicle should promise greater liquidity than what is afforded by its underlying assets.

If you ever encounter a salesperson that tries to talk to you and give promises in that manner, an investor should reflect and ask oneself what would be the source of that liquidity. Because if there are no such sources, the incremental liquidity is usually illusory, fleeting and unreliable. This is known as a Ponzi scheme as some of you may have heard of and the system gets exposed when markets freezed up or when the promise for liquidity is tested through in tough times.

Liquidity is a good thing (everything else being equal) and Illiquidity is not necessarily a bad thing. What we need to remember is that liquidity isn't free. It usually comes at a cost and in the form of return foregone if the situational itself is not going in your favor.

Sizing one's portfolio based on the nature of the asset itself is a good start before going situational, which is a form of unsystematic risk that we cannot control. When situational consequences come in the form of a recession, things do change pretty rapidly and even the stock market, which an investor deemed to be liquid in nature, may seem to be "illiquid" at such times when they had to replace the liquidity factor with a price foregone.

Final Thoughts

Looking back at where we are now, it is pretty obvious that we are in a situation where many of the major central banks are pumping in liquidity in the form of easy monetary policies. When you have liquid assets circulating around the global market like what we have now, what we are going to get is an increased value of assets or a bubble until it pops out and it goes back to the norm.

The bottom line is pretty clear. Liquidity can be transient and paradoxical. It is plentiful when you don't require any attention from it but scarce when you need it most. Given the way it comes and goes quickly based on situational, it is dangerous to assume that the liquidity that is available in good times will still be there when the tide goes out.

According to Howard, the worst thing that an investor can do against illiquidity is to:

  • Employ trading strategies under which an investor buys things by thinking how it would perform in the short run, not what they'll be worth in the long run.
  • Being focused on what the market says your assets are worth, not what your analysis shows them to be worth.
  • Buying with leverage that exposes you to the risk of a margin call in a declining market.

With that, I'll leave you to ponder around on the topics on liquidity and hope it'll give you better insights on how you should be approaching your investment towards the efficacy topics on liquidity.

Friday, March 27, 2015

Recent Action - FraserCenterPoint Trust (FCT)

In my previous post about a month ago, I mentioned that I am in the midst of building up some cash holdings (original article here) as I feel the market is somewhat overheated and is due for a correction. I continue reducing my portfolio and in particular for Reits as I feel they are currently in a sector that are exposed to the highest risk (rising interest rate) coupled with an over-valuations (in terms of yield and P/BV) as a whole. I'll explain this in greater detail later.

I have reduced my holdings in FraserCenterPoint Trust (FCT) by selling off 6,000 shares this morning at a price of $2.05. FCT still remains one of my core holdings at 24,000 shares left in the portfolio. Those who has followed my blog from the beginning will know that FCT has been my baby counter right from the beginning when I purchased them at a price of $1.40 during the Euro crisis. I managed to average up a few times throughout these few years and the result has not been disappointing so far. In fact, I think the long term fundamentals is still extremely solid with the mega Woodlands and Yishun projects to come by 2020, which will provide an uplift to the overall portfolio.

I will not be going into an extremely detailed post at this time for my decision to sell (buy) as I've done in the past for FCT. If you are interested in reading them, you can look up the past articles here:

FCT AGM - 2014

FCT acquires Changi City Point (Tenant Mix)

What's next for FCT?

Overall S-Reits Sector

The whole S-Reits sector is rather overheated and this is not backed without evidence.

Overall S-Reits Valuation

Based on the latest report from Maybank as of Mar 2015, we can see that both metrics for the whole sector of S-Reits in general are overheating. From a yield perspective, the sectors are now trading at almost -1 Standard Deviation away from the average mean over the past 8 years data. The last time we've seen the yield being compressed this low was during the pre-crisis level of 2007 and the recent multi-year peak in 2013, where the sectors then contracted to a more reasonable yield of where they are now.

Another metric using the book value is also showing that the sectors are now trading at a valuation much higher than +1 SD from the mean. The last time it went beyond this high was during the peak of 2007 and 2013 as well where the sectors then retreated aggressively.

In fact, if we take a look across individual Reits, they are all showing the same pattern as the general market right now.


Take FCT for example.

The yield metrics is showing that it is currently trading at an almost -1 SD away from the mean which is at similar to what it is trading during 2013. For the book value, they are trading just slightly above the +1 SD which is a sign that it is also at an overheated level.

FCT Valuation


My personal take right now is that at current valuation I am rather bearish on S-Reits right now.

The more those analysts are upgrading their price target on S-Reits, the higher the chances that I am going to lock in those profits and reduce my holdings in S-Reits.

The overall sectors are still yielding an attractive proposition of around 5.44% right now, and if you are a hardcore income investors, you are probably still going to like the sectors very much. We are still in the low interest rate environment and surely but slowly see rates moving up, even for things like FD, bank savings and the recently announced government bonds. For me, I'd rather weigh in these factors and use my judgement in coming up with a risk-adjusted return to justify my action.

Many people are acquainted with buying low and selling high, but I think we are in a situation where people are buying high and hoping to sell higher. The latter is much more risky and only the best party pooper who can slip in and out quickly will avoid the damage. For the many others, it can be a horrible situation to be in.

So what do you think? I am sure some people will disagree with me, but would like to hear some constructive views from the other side of the fence.

Tuesday, March 24, 2015

Recent Action - Noel Gifts International

I've initiated a small position in Noel Gifts International to test out the strategy I have previously discussed on my post on Design Studio (view article here). Since the counter is rather illiquid, I have only managed to purchase 18,800 shares at a price of $0.295.

The idea of using this strategy is to test out the psychological importance of paying out dividends out of earnings that is in excess of 10% yield in a single year. While this is not the most prudent way for the management to do so, it allows a good opportunity for investors to get in early in anticipation for the announce-to-be special dividends later in the year, where it will announce a strong signal that I think will send the price to rocket upwards, similar to what it recently does to Design Studio.

My time frame for holding this counter will be somewhat short and I am expecting to hold it for less than 2 years. I will explain more in detail later on the significance of that 2 years holding period. This is rather weird because I do not usually purchase a stock if I don't think the business is going to be a success for the long term. Anyway, I still did my own due diligence on the matter and hope you will find this as useful.

Company Overview

Noel Gifts International is the leading hampers, flowers and gifts company with an extensive offering of chic floral arrangements and gifting ideas for the stylish and discerning.

The company has been in existence for the past 39 years and it was listed on the SGX Mainboard in 2008.

Financial Numbers

The gross margins over the years have been rather impressive given the relatively easy entry of barriers for the business to operate under, I do not expect them to churn out a margin of around 50% or thereabout. 

The problem begins to arise when you start looking at their overhead cost operations, with employee salaries being the main issue, along with the other distribution costs. You can take a look at their financial statements to understand better of the situation. In general, the gross profit is barely covering the distribution and the employee's cost despite their impressive margins turnover over the past few years. With overhead costs only going to go up with increase salaries, the only solution to tackle this issue is to increase the volume they are selling and improve productivity per headcount. We can see a lot of companies doing that on the productivity kpi these days.

The EPS that you see in 2012 and 2013 were inflated due to the one-off fair value adjustments on the investment properties. Again, this is one aspect of accounting treatment that I have repeatedly emphasized on this blog that may skew the nopat results. Without accounting for such adjustments, the EPS is rather stable at around 1.50 cents/share.

The company has interestingly been dishing out aggressive dividends of around 1.50 cents/share, which is around what it earns for their main core businesses. I can understand why they have maintained the dividends in 2012 and 2013 even when EPS was higher than usual because the gain is mostly on the adjustment which does not impact the cashflow. As far as cashflow is concerned, they are paying out mostly what they earned on the earnings.

Cash Conversion Cycle

I am curious on the way the business is operating in terms of the cash conversion and my initial intuitive proves to be somewhat right.

As you can see on the table below, the number of days of sales outstanding (DSO) is around 21 days while days of payable outstanding (DPO) is about 16 days. What this means is that the company is churning out their working capital (excluding inventory) just about fine in terms of receivable and payable. For those who are curious about this, you'd always want to receive money as soon as possible while delay payments to suppliers as long as possible if you are acting as a business owner and it makes sense because you want to turnaround cash to your advantage as soon as possible.

The reason I have actually striked out the inventory portion is to highlight the business that they are operating under. As a company operating in the hampers and gifts business, they will always have to stock their inventories in advance as much as possible and ensure that they re-stock their inventories ahead of the festive. The good thing is most of the inventories will be hardly be obsolete since they can last for some time on the shelf. It is also easy to predict whether business volume is going to increase by looking at the inventory holding increase or decrease. If they are estimating business to increase, we should be seeing a corresponding increase in the inventory, just like what is going to happen in 2015 due to the demand for the SG50.

Cash Conversion Cycle Calculation

Inventories movement

Before I proceed to the next segment, it is also important to note that the company is operating under a debt free scenario for a few years now, so their balance sheet looks relatively clean but with the caveat that their return on equity is pretty poor due to the poor turnover of its return on assets, despite the high margin they are churning out.

Catalyst 1

In the month of Oct in 2014, the company has entered into the agreement regarding the sale of one of its investment properties for the Balmoral Development. In doing so, the company has locked in a gain of around $2.4m or an EPS of about 2.1 cents/share.

The management did mention that they were going to use the proceeds for other investment opportunities and returning part of them to shareholders. 

I expect the management to return about 1.3 cents/share from this transaction alone.

Catalyst 2

In Jun 2014, the company has been awarded a huge contract from the NPD regarding the distribution of gift in regards to the celebration for the SG50.

The contract value awarded is amounting to $7.47m and using an conservative estimated net margin of about 4.7%, the contract will add an estimated EPS of about 0.34 cents/share for 2015. I suspect it might just be slightly more because they probably are going to use the extra hands of people they already hired and factor in the contribution. In other words, I am expecting an improved productivity and an estimated 0.50 cents/share.

From here, I expect the management to distribute a special dividend of about 0.30 cents/share.

Catalyst 3

Earlier last week, the company has been awarded another mega contract from MAS for the packaging, marketing and sale of numismatic currency set for an awarded contract of $7.9m.

Using the same estimation margin as above, I estimated the company to factor in at about 0.55 cents/share.

However, since this will most likely be recognized in the financial year 2016, I should be excluding this for the 2015 projected dividends. The special dividends for this will come in the year 2016 to shareholders.


Earlier, I mentioned that this will most likely be a short holding period trading from me which I estimated to be less than 2 years. Judging from the catalyst that the company has been awarded in the next 2 years, we should be expecting a huge jump in earnings and a special contributing dividends of around 1.5 cents (from normal core business) + 1.3 cents (catalyst 1) + 0.3 cents (catalyst 2) = 3.1 cents/share for the financial year 2015, which translates to 10.5% yield at the current purchase price of $0.295.

For 2016, I am expecting a dividend of at least 1.5 cents (from normal core business) + 0.4 cents (catalyst 3) = 1.9 cents/share. This of course excludes any potential major contract won in the future with its better brand recognition. Assuming there are any, this will only contributes more to its bottomline.

Having said all this, the risk is obviously there if you are holding this for a long term play. I have highlighted some of the major issues they are currently facing in the overhead operations cost and another in Malaysia and China where they have ventured but still facing major struggle to compete with the others given the ease barriers to entry for local vendors.

Let's see if the strategy works out fine in the end. I'll post an update should I decide to sell at the end.

Monday, March 23, 2015

What Is Your Ideal Country To Live In ? (A Tribute to Mr. LKY)

This is a tribute post on the passing of one of the greatest visionary leader we ever had in the history of Singapore: Mr. Lee Kuan Yew.
This is a sad day for many of us as the world mourns over the loss of Singapore's grounding father, the great father for all Singaporeans and the legendary adviser to the many out there. He will be sorely missed and judging from the way everyone is mourning over his passing this morning shows how great an individual person he is.
My post below is specially dedicated to the man himself, who has almost single handedly developed and groomed the nation from a third to first world country in less than 50 years.
Ideal Country To Live In
I am pretty sure that most of us have come across the idea thinking of living in an ideal country of our choice, no matter where they are.

Not surprisingly, everyone's version of an ideal country may be different. With the ease of global shift and transformation these days, it is not entirely an impossible task to migrate from one country to another and find another place where you can call home.
I have been asked many times when I was younger about an ideal country I would choose to live in and call a place home. I was young and ignorant most of the times back then and hence I couldn't care less. On top of it, I do not consider the consequences it would have on my life. At worst, I even thought it was weird to be contemplating such thing.

Well, you see - Back then, I had no preference where to live or stay in a place called home because it doesn't seem to matter to me that much. But things change as I grow older. My thoughts were more matured than before and I had to consider a few factors after having a family of my own. I had to make decisions that best fit not only mine but also my family lifestyle. I come to realize the conflict between the idea of a revolving ideal country to live in and the opportunity costs of moving to another. This can become an inflection point in my life.

Financial Freedom

As a financial blogger, financial freedom places on the high end of my objective.

Many often preach about how achieving financial freedom would allow us to live off the constant worries of putting bread and butter for our families through the mighty reign of passive income. Regardless of rain or recession, food and shelter act as a coverage for the basic necessities.

Financial freedom seemingly allow us to indulge in whatever job we want to work for, whoever we want to date with or whichever country we want to live in. Financial freedom gives us more flexibility to make choices that we once were not sufficiently privileged to make, though we know they are not entirely flawless.


However, please do not take financial freedom to be the entirely the same as freedom.

Financial freedom is a subset of Freedom, though the former is talking more towards the money perspective point of view. 

Now, as we already know, money is not the ultimate price for everything. Money cannot buy happiness, commitment or promises. They are merely a currency of barter to allow us to trade for food, transportation, apparels and accommodation. More importantly, money cannot buy a home.
To the many out there who contemplates about moving to a place where they can call another home, do note that it doesn't sound as easy as it appears. There are simply too many variable factors where you had to consider before choosing to stay permanently where you can call home.

Take myself for instance, my own preference for an ideal country (home) would revolve around these 5 factors:

  • Safety is  not compromised

This is attributed to the low crime rate, safety working environment, harsh punishment for offenders and eyes for justice. The rare occurrence of natural disasters would also have to come under this factor.

  • Efficiency is rewarded

I admired countries which constantly aspires to grow and reward efficiency and productivity. I am not talking just about a developed nation in general but a country that is serious about growing and preparing itself for a better tomorrow.

  • Differences are appreciated

Here, I am referring to differences in opinions and thoughts which are mutually respected and considered. A country progresses through the notion of different ideas and creativities from the people and I applaud those differences.

  • Cultures are adapted

I think we have lived through a century where we often meet people that comes from different countries or different cultures and I think a respectable nation would be conscious enough to adapt the culture or people that comes with it.

  • Nations are united
Today's incident regarding the loss of Mr. LKY probably shows an example of the strength of the nation and the unitedness of its people in going through these difficult phases.
Final Thoughts
The thing about comparing a place called home is unlike those of comparing wealth for different people. Countries have to be compared relatively because everyone needs a place to stay where they can call home, where privelege caveat applies.
Now, do you still need to find one or do you already have an ideal place where you can call home?


Thursday, March 19, 2015

The Pareto Principle (80/20) Investing Strategy

In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth. The 80/20 rule has then been commonly used throughout everyday's life to assume the practical meaning of 20 percent that are vital and 80 percent that are trivial.

I am a firm believer of the idea behind this principle, including investing. I believe that the investment I made at present day will compound over time to give the majority of the results in the future. This is very powerful because you are essentially spending time today to train and dedicate the golden goose that will yield you an unimaginable superior results in the future.

The same goes for Warren Buffett for instance. Since the inception of Berkshire Hathaway in the 1950s, the company has delivered outstanding long term results for its shareholders. The management eye for detailed investment in American Express and Coca Cola in the early years have delivered over $20 billions in capital gains and dividends and until today they are still holding on to these great companies. Being just a normal human being, the man has made some mistakes too along the way such as the Tesco investment which he admitted he did but it should not be seen as an isolation. The point being in the preceding 30 to 40 years, Warren and Charlie compounded their great wealth of knowledge and eye for investment in great businesses that made up 20 percent of what is really important that yields 80 percent (majority) of the results. That is all that is important to him and his shareholders.

I have previously written an article (original article here) on one of Warren's favorite quotes which sparked several debates in the comments section. I thought it was a good time to revisit that a little bit. Personally, I feel that it is a brilliant mental framework for every investors to consider, even if the strategy does not fit our own investment profile. In the analogy, he referred an investment selection as tickets which an investor has only 20 chances to make throughout his lifetime and because of the limited selection, this prompt investors to think much more deeper about the investment they made than under the normal circumstances.

At the moment, I do not have the experience of a decade-termed investor but I believe that in a typical investors career, out of the 80 -100 investments they have made, probably less than 20 or about would end up accounting for the majority of the investment gains. These are termed as "winners" in yours and my portfolio. In one of his book, Warren once said that as investors, we are not paid for the number of activity we did but rather we get paid for being right. In other words, an investor could spend his whole day watching the news, participating in forums, increasing the number of buying and selling activities and still the efforts do not account for majority of the gains.

This is the Pareto Principle we are talking about - 20 percent focusing on the right amount of effort on the right companies that yield 80 percent of the results.

As an investor myself with a focused investing strategy on dividends, the important thing is to focus and uncover quality dividend paying companies with strong cash flow generation with staying power. Companies with these attributes usually tend to have an above average performance and they tend to earn and increase their dividends payout over time, yielding investors increasing cash flow for many years to come. In fact, these few investments are all we need as an investor in our lifetime as they will do the heavy lifting for our portfolio that will outperform the general market.

The Pareto Principle is the law of vital few and a measure of productivity. We should be looking at implenting the principle in our everday's lives, even if they are not being applied solely to investing. The next time you are trying to do something, think of the Pareto Principle and see if the 80/20 rule works for you.

What do you think of the Pareto Principle? Does it applies to investing or other activities in your life?

Monday, March 16, 2015

"Mar 15" - SG Transactions & Portfolio Update"

No. of Lots
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
China Merchant Pacific
FraserCenter Point Trust
SembCorp Industries
FraserCommercial Trust
ST Engineering
Stamford Land
King Wan
OCBC 360 (Cash available for investment*)

Total SGD


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

Since my previous update, I have since divested all my shares for MGCCT and Neratel for two reasons (view them here). The first is due to its high valuations which I thought was pretty unwarranted at this stage of the bull run. The second was due to the desire to raise some cash on hand to take advantage of any market correction at the later stage. More on this rationale will be explained later.

For the month of March, I have not made any purchase nor divestment transaction to date. I thought the market was still going rather sideways and a few of the counters are holding up partly due to their cum-dividend status. At the moment, I'll just continue to monitor around the market. I have a few counters high on my toplist to add on, but there'll be no rush.

I have made some changes to the portfolio reporting update from this month. If you have noticed, I have now included the cash available on hand for investment purpose and they are being stored at the OCBC 360 account which I just opened last weekend. Having delayed for almost a year now, I was rather inspired by a few of the fellow bloggers and in particular Mr 15HWW for opening this account. The ability to earn a 3% interest while having the option of waiting for market correction to happen seems pretty too good to pass right now. I have not included any other funds required for emergency, social security, insurance endowment or short-term funds for daily working capital purpose in this category as it would make it rather complicated. I have also received a few queries asking whether this includes my spouse portion and the answer is no as she is using mostly her own money to fund her apparel business (24Fabulous).

The overall portfolio has now increased from the previous month of $289,860 to $291,530 this month. The estimated annual dividends from the portfolio is expected to be $14,558 which has gone down from the previous month due to the divestment of two main dividend paying counters.

I am expecting quite a bit of funds coming in from the next two months due to performance bonus and dividends paid out in the months of Apr and May respectively. It's a good way to build up the cash further should market decides to keep running up. In the meantime, I'm pretty satisfied with what I currently have in the portfolio.

What about you? Having a good month for March?

Saturday, March 14, 2015

This Stock Is Trading At Less Than Its Cash Value

In a bullish market environment, it is often difficult to find companies that provide a long term value with a sufficient margin of safety to shareholders. Because of such difficulties, we often see investors pumping up their investment in commonly seek blue chip companies that pushes its price to earnings to record high these few years. 

However, this stock that I will be highlighting shortly is currently trading at a massive discount. In fact, they are trading at less than what the cash value is worth on their books. I will be explaining in further detail later.

The company mentioned is Fu Yu Corporation

To give a little bit of the background, the company was started in 1978 and listed in the SGX in 1995. The company is in the business of moulding, fabrication and assembly and they are a pioneer in the major plastics manufacturer. I will not be doing a thorough review on the company’s foundation at this moment as this is only a preliminary review at the start. Should you be interested to explore further, please conduct your own due diligence on the company.

The company reported its full year 2014 results recently on the last day of February. 

Balance Sheet Strength

On their balance sheet, the one thing that stands out is their huge cash and cash equivalent balance which amounted to $83 million, which is equivalent to 11 cents / share. The current share price is trading at 10.8 cents / share, which is already a discount to what they have for the cash on their book.     

The company has also positive net working capital excluding cash. This means that current assets (excluding cash) are able to cover the provision for current liabilities, mostly through their trade receivables. 

The other thing which stands out on their balance sheet is the zero (or very minimal) borrowings they have. With an impending interest rate increase, the non-leverage factor is definitely a plus to have on any company’s book right now. 

The NAV of the stock is currently at 23.23 cents / share. 

Sign of Value or Trap? 

With such a strong balance sheet, you wonder why the company is trading at such massive discounts to what their worth are. 

One main reason is due to its volatile business nature, which has seen its gross profit margin for its core business going up and down over the past few years. The business has also been suffering net losses from 2006 to 2009 as well as in 2011. The company had started to turn profits only recently from 2012 onwards. Obviously, this is a turnaround play to see if they can sustain the profits.

Despite the massive cash they are holding on their book, the company has also not paid dividends to shareholders since 2007. My guess is probably in view of the recent losses and volatility, the management wants to wait it out until profitability is sustained before they are willing to resume the dividends payout. Nevertheless, the key is to look out on the margin of their business. 

In terms of cashflow, the company seems to operate in a competitive industry where it needs to spend quite a bit of their cash to ramp up on capital expenditure. A quick look at their PPE and you can probably see how much equipment they are using to operate on their business. Return on assets doesn’t look extremely fantastic though they are relatively reasonable given the industry they are in.

This is still a stock in review on my watchlist. I'll be watching out on further news regarding their project orders and margins.

Thursday, March 12, 2015

S-Reits - Mar Update

It has been a while now since I last posted an article update on S-Reits. The last time I did that was back in Aug last year and it has been slightly more than 6 months since. For those who are interested in my previous update, you can refer to the article here

The news surrounding the impending increase in interest rates is gaining momentum now and I think as a vested investor in S-Reits, we need to understand the consequences of an increase in interest rates which will affect the company’s cost of doing business and their bottomline, which in turn will affect the distribution income paid to shareholders as dividends.

I've actually turned bearish on S-Reits stocks since the start of the year. With valuations to their compressing yield spread and book value rather high, plus the impending increase in their respective cost of debts, I doubt they will be able to sustain their relative high valuations for very long much longer. Any investors that tried to enter the S-Reits market at the current price need to fully understand the impact and consequences that will unfold within the next few months. The thing about investing in S-Reits is most investors like the feeling of getting a quarterly income through the dividends from the rental properties and this gets repeated over and over again if they have build up a sustainable portfolio of S-Reits. However, I realized that in the pursuit of income investing, most investors failed to look beyond their second level of reasoning which is all the more important.

The first thing is Timing. Investing in S-Reits at the depth of when Quantitative Easing was just started is different from the timing of when Quantitative Easing was about to end. As I will mention more in detail later below, the impact on the cost of debt is something that an investor needs to consider rather than assuming that dividend distribution can only move upwards all the time.

The second thing is Valuations. Many investors attribute valuations to property counters by looking at their book value. Again, a quick look across the board and we can see that many of the S-Reits counters now are trading near or over their book value. In other words, you are paying the full value of what their properties are being valued right now, subject to revaluation on a yearly basis. That is hardly anything a value investor will be doing right now. Contrast this to a few property developers which are trading at half the book value and you roughly get the idea.

The third thing is Distribution Payout. By now, everyone should know that S-Reits stocks are structured in such a way that they will have to distribute out more than 90% of earnings to enjoy tax benefits. Some S-Reits even pays out the full 100% distribution of their earnings. This means that the companies are retaining very little to grow their business through inorganic merger and acquisitions or Asset Enhancement Activities. Organic growth through rental step-up will also have to be contained one day, as the increase will not be forever. Worst, it might even goes down during an economic crisis.

Anyway, back to our main discussion for this post, I shall divide it into two separate parts for our easy reference. The first part will be focusing more on the latest update of the various Reits debt profile expiry while in the second part we will see how sensitivity analysis will help us to determine the impact to the increase in their cost of debt percentage.

Debt Expiry Profile

Many investors would have known by now that S-Reits companies thrive on leverage during the low interest rate environment that push their costs of financing low. As a result, many companies are gearing up for more organic and inorganic growth through AEI and acquisition respectively during these few years.

If you have taken a closer look at their financing terms, you would have noticed that a lot of the loans these companies were getting is on a typical 3-year loans. When the term is up, they would have to engage in further financing possibly at a higher rate. Many companies such as the Mapletree Reits Group have also tapped on their capability to issue a Medium Term Note (MTN), which is typically of longer duration and more flexibility. Many companies have also locked in a fixed rate on their debt to keep their financing not being subject to the volatility of floating interest rate.

The truth about the debt expiry profile is we will see a cycle of S-Reits companies refinancing their loans at a higher interest rate now than before. It is not something that is necessarily bad, but is something that everyone and the management would have known that it is going to happen, and it is up to us how we want to see them.

Debt Expiry Profile

Sensitivity Risk Profile

The second part is the continuation on the first part where I have done a table based on the sensitivity risk profile to increase in interest rate of 0.5% in 2015 and 1% for subsequent year (cumulative interest 1.5%).

The sensitivity analysis is taking into account the respective Reits' profile on the debt expiry, fixed loans rate and current cost of debt rate when computing. Based on the table below, MAGIC and Ascott would be the worst to be hit by the increase in interest rate in 2015 while CapCom, MAGIC, SPH Reit and FCT would be next to be hit in 2016.

Again, these does not mean anything but rather just a profile to see what is in it for them should interest is increased in the next few years.

Sensitivity Analysis

Final Thoughts

While S-Reits do provide a stable and recurring income that makes an investor feeling good, as an investor we certainly do not want to overpay for what their worth are. The key is to keep looking, assessing their risk and wait for a better opportunity to enter if valuations are rather stretched. Weigh the pro and cons and come up with your risk adjusted return conclusion. Who knows, you might just get a better deal.

Tuesday, March 10, 2015

My Experience On The Issues Of Warchest‏

There has been an ongoing talk more on warchest recently from fellow friends and bloggers following Derek's and LP's initiated conversation the other time regarding portfolio allocation. The truth is portfolio allocation is seemingly a very important yet overlooked concept that many had underestimated.

I've been reading some articles and books on human behaviors in recent weeks myself which I felt was somewhat intrigued and would like to share my thoughts on the subject matter.

As someone who had invested in the stock market myself and coming from the retail investor point of view, I have come across similar situations and experience that many other retail investors have come across or newbies that will come across someday. The subject matter in this article is about how continently difficult it is to keep cash as a warchest given the various scenarios based on my past experience.

A Newbie’s Behaviour 

Everyone that has done some sort of investing was once a newbie at start so I’m pretty sure most would be able to relate to this experience.

In recent times, I see many new comers asking about directions on how to start investing, what knowledge do they need to get started, which online brokerage offers the lowest commission rate, which trading platform is the easiest to navigate, which blue-chip stock to pick, which investing strategy to apply, etc. These general queries have mostly been answered by more experienced investors with some common consensuses – i.e You will need to start reading financial statements, understand the various financial ratios, do your own due diligence, learn from fellow peers, pick some government backed blue chips in the STI index, keep some warchest and diversify. 

I’ve seen these responses a lot and I remember getting roughly the same advice when I started investing.

Interestingly, when a new investor (and I am culprit of this myself) entered the market for the first time, an enormously high level of energy seems to surround them that keeps them bullish for a long period of time. Most of the times, their investing behaviors will be subject to crowd herding, i.e they will forget every basic fundamental advice they have been given from the start and hurriedly enter the market without preparing for it sufficiently. Similarly, any amount of money that is meant for warchest would be deployed into the market without thinking prudently of the consequences. Sometimes, you just need to learn from the callous market behaviours itself, pay some tuition fees and do better next time.

An Allocator’s Behaviour 

As financial bloggers, we usually do not understand some of our friends' shopaholic behaviours and why these people chose to spend their hard earned money into some useless de-fashionable clothes and gadgets. The truth is we might be seeing the same reflection through similar lenses ourselves.

I have personally known many friends who are not able to control their behaviours when it comes to purchasing shares. Whenever they have a new capital available, either from their salaries or dividends, they would deploy the available capital straight into the market buying new shares, regardless of valuations. It is the same addiction we see in many shopaholics that we often lament about and sigh, only in this case the end product is not the same. 

An interesting observation shows that these people are actually poor controller of capital. Some people just could not resist the temptation of any capital available inside their bank. They are afraid that they would be tempted to spend these available money on items that they should not be spending on. This is the same reason why there are many investors who started investing without having a required emergency funds that they should be putting as priority.

A QE’s Behaviour 

Massive monetary easing policies across the world have kept interest at a rate near zero for the past few years. With interest rate lingering at zero rate, it seems foolish to keep cash compounding at zero rate for several years. As a result, we are seeing a lot of liquidity in the assets market encouraging investors to put in more capital into a full-blown assets that have grown bigger each day.

While the above statement is not incorrect, I have a feeling that this is becoming sort of a lazy excuse for many investors to justify themselves investing in assets that has seemingly grown to a level that is somewhat overvalued. 

Because of this, these investors failed to see the value that cash can play as a back-up option should things go south. Instead, they insisted on pumping more and more capital to earn the return that generate better than what the other alternatives, i.e bank, bonds are currently offering.

Final Thoughts 

Some things like warchest strike to me as being similar to taking things for granted in our daily lives.

When times are good, we don’t miss them. But when times are bad, we wish we could rewind back those times to have more of them. 

Sadly, most people learnt their lessons through the hard way. As Seth Klarman said in his recent letter, preparing for a market correction or bear market does not mean that we are hoping for it. It just means that as an investor we have taken calculated risk in trying to justify our returns. Similarly, keeping a warchest is akin to taking a calculated opportunity costs in trying to justify defending our positions. 

What about you? What is your experience that you see people having issues with warchest?

Saturday, March 7, 2015

Finding Gems Amongst The Junks

I remember when I was younger, it was so cool to follow the latest trends, gossips, gadgets and the many more that people and news were reporting all over. Even when you were walking beside a group of hunks in school you'll look somewhat better in person. 

The opposite is also true. When you mix around a group of friends that are generally unpopular, you get lesser attention from the public, but that's also probably the time when you can build a greater relationship and find out more about each person's personality.

The topic for today's article is on finding gems amongst the junks in the stock market. With the stock markets reaching high and higher, and valuations somewhat overstretched for some industries, we should continue to look for undervalued companies that have been beaten down badly in the past few years. Commodities, O&G and Properties are some of those industries that have been out of favor in recent years, due to their respective problems they are facing.

In this article, I will be discussing some of the individual companies in the properties sector that presents somewhat an undervalued proposition. I will skip an in-depth analysis at this point in time and will present my thoughts should I decide to buy them. Should you be interested in the companies mentioned, you are of course encouraged to conduct your own due diligence before buying.

The New Threshold For Properties Sector

We often hear about legendary investors talking about buying stocks with a margin of safety. Paying 50 cents for a dollar deal seems like a very good deal because it presents a margin of safety during liquidation period and downside is somewhat more limited, caveat applies.

However, in recent times, the pessimism surrounding the property markets is so bad that paying 50 cents for a dollar (price to book at 0.5) does not look sufficiently probable to buying with a margin of safety. Take a look at the appended table below on the various properties counter in the different regions and you can see that almost everything everywhere is trading at a massive discount. 

In other words, the new threshold to look for beaten down properties sectors has been raised to another level to be more selective. This is of course just my personal threshold level in relation to the poor sector performance in the next few years in view of the higher supply and increasing interest rate. But it's always better to be safe than sorry, taking a more conservative outlook than anything.

What To Look Out For

After reviewing the above "new" threshold of the company's book value*, it is also prudent to take note of the following business fundamentals below to ensure that we know what we are in for after buying the company. These are what I would be taking a close look on before deciding what to buy:

*Since we are talking about properties sector in general, we assume the book value consists of mostly their development and investment properties.

1.) Fair Value Gains/Loss Accounting Treatment

I've talked about this in the past and will just quickly brief on it again.

This is more of general accounting stuff that many investors do not pay attention to but for those vested in property industries had better known this accounting treatment, at least on the surface level.

Many companies had in recent times favored and adopted the accounting treatment of IFS 40 to report their investment properties at their fair value. This is the very reason why you see many property companies recording record gains and NAV sometime in 2013.

This is going to be very important because with the recent pressure of a higher supply and credit tightening, many had predicted the price for the properties sector to decline. If that's the case, the company would have to adjust for the impairment loss of the fair value which they had previously recognized as gains. In other words, there could be possibility that the company would record a loss and a decline in the book value should that happen. A vested investor should be able to understand the underlying risk impacting their investment.

A good recent example of this is Lafe Corporation, whose main properties development they had on their books is for the Residences @ Emerald Hill at District 9 Somerset (Woolalala ^^ ). Because of the recent pressure on the luxury segments, the properties had declined much in value and the company had to adjust for impairment that resulted in the net loss for the year. The book value had to decline because of the net loss as well.

2.) Extension Fees on Proportion of Unsold Units

This is another factor which I realized many investors are caught unaware.

In general, the rule states that foreign developers will have to pay extension fees to the Singapore Land Authority based on the proportion of unsold units if those units are not sold within the stipulated two year period from the date of the TOP. Extension charges are paid based on the proportion of unsold units at  8%, 16% and 24% of the property purchase price for the first, second and third extra years respectively.

Many companies, including Capitaland, Keppel Land, Wheelock, Wing Tai, Bukit Sembawang, OUE, CDL and Lafe have been a victim of this and it's interesting to note on the extension fees they have been paying and we now understand why they would rather absorb the ABSD fees or throw the sink for you rather than having to pay these fees and still have to find buyers after that.

3.) Privatization Play

There has been many privatization rumors surrounding those undervalued companies given the many recent example we have. Understanding and monitoring the intention of the business owner could be key to increasing the probability of a privatization.

For example, we know that the boss of Ho Bee has been scooping up the shares in recent times, increasing its stake to around 72.5% now, but it could perhaps be because of some other intentions, for example building up diversified office play or the company's qualification criteria that allowed them not to pay the extension fees, might be a turnaround factor for considering this as a privatization play.

In any case, do continue to look around for clues.

Final Thoughts

The book value is a very important indicator for the properties sector and we should not be ignoring that. However, as mentioned above, a few factors surrounding the property market may have an important role in determining the future book value of the company.

My strategy is to reach out to companies which is undervalued relative to the "new" threshold I talked about earlier while constantly monitoring the important factors that does not impact the Earnings too much. As long as the earnings does not turn negative, the book value is only going to increase over time and that should be the turning points I am looking out for. This is called paying a good amount for the liquidation value and getting the business for free.

Another strategy is to pick ahead of the property bottoming, at least in the local markets. Some companies have been beaten down massively to almost lower than 70% book value (P/BV < 0.3) so picking out the bottom could be another on the cards I am looking out for.

What about you? Does any of the property companies interest you to become vested?