expr:class='"loading" + data:blog.mobileClass'>

Friday, October 30, 2015

Jumbo IPO - Should You Be Getting This?

I think retail investors are not a stranger to this company. This is a company that owns several chains of restaurants across the island that serves the famous Chilli Crab that become one of the iconic trademark of Singapore food to the tourists. What many doesn't know is that the group also owns several chains of other eateries such as Jpot, Ng Ah Sio Bah Kut The and Chui Huay Lim Teochew. Personally, I live in the are that is located near the latter two so I have tasted them and are very impressed with the food, though publicity wise they are not as popular.




When I first read that the company was going for an IPO, I was very sceptical about the sustainability of the F&B industries to survive because everyone knows that the barriers to entry is low and running costs can get difficult to operate in a place like Singapore. Simply put, based on the Porter 5 forces, it is an industry that I generally wanted to avoid.
 
In the past year, I did a similar extensive research during my MBA program on how much does it takes for one to open a café or eateries. You can refer to the post Here if you are interested. 
 
But let's see how Jumbo numbers have pans out.


Gross Profit Margins

Based on the guidelines from the F&B industry (which I also emphasized in the above café post), the general rule of thumb for raw materials or costs of goods sold should never exceeds 35% or 1/3 of the overall gross sales. In other words, the gross profit margin needs to maintain at above 65% in order to compete and survive.
 
Jumbo performance was a couple of points off but you can see it's near. In fact, given Jumbo's strong moat in an industry, I would have expected slightly more from them. The reason for this is because it is very difficult for an F&B industry to push the costs to the customer when you have an elastic demand where customers have plenty to choose from what they want to eat these days.
 
For the purpose of easy reference, I have drawn up a topline comparison amongst the local listed F&B business. You can see that all of them have topline margin that are better than Jumbo and perhaps crab business is not as profitable as we think it is. Still, this is something worth noting for, especially when we consider the EBIT margin comparison later on.





EBIT Margins

For an F&B industry specifically operating in Singapore, labor and lease expenses would take up the majority of the overhead costs given the high wages and rental leases we have over here.
 
For labor costs, the general rule of thumb is it should not exceed 30% of the overall gross sales. Many companies such as Japan Foods and Sushi Express are already using innovative products such as technology and Ipad for food orders without hiring an extra headcount to do the manual task. Jumbo's salary related costs amounted to an average of around 28.2% over the past 3 years. Again, the number is close and you can see why it is very competitive.
 
For operating leases, the general rule of thumb is it should not exceed 10% of the overall gross sales. Rental costs are a big killer in Singapore. With more Reits asset manager pushing for more rental reversion every year, it is only a matter of time where we will see the fittest survive. For instance, I went to research on the malls at Orchard and they were pushing for a rental price of around $14/psf per month. So if you are looking at around 4,000 sqft for your restaurant, you are already looking at a rental of $56,000/month in rent.
 
Jumbo's operating leases amounted to an average of around 10.5% over the past 3 years. Again, the number is inching very close to the benchmark.
 
The overall EBIT margin has trended quite strongly at above 13%, and this is one of the stronger compared to the other F&B business.
 
If we take a look at the comparison, it is worth noting for that even though these competitors had higher topline margin, their EBIT margin is way lower than Jumbo, which indicates that Jumbo has the upper hand in managing overhead productivity over all the other competitors. In fact, the EBIT margin for the rest is so low that they would not be able to churn out any room for errors, otherwise they would end up in a loss position like Tunglok.






Final Thoughts

I am just penning my thoughts here on the F&B industry as a whole.
 
If you ask me on whether the fundamentals of the industry is strong, my answer would have been no because everyone is very cost competitive and they know what is the benchmark in order to survive in the industry. For Jumbo (or any other F&B industry) to work out well, they would have to go for horizontal expansion to open more branches to reap in more profits. This is exactly why they probably needs the IPO to open up other branches in a new area. It is very difficult for the industry to expand vertically by increasing the margins because the demand is elastic. And any small increase in price to customers would result in a large reaction from the customers.
 
I will not be going through the cashflow portion because F&B would generally not have much issues with Cash Flow. Their cash turnover is usually paid upfront for the raw materials and once they have them sold (foods do expiry quickly), cash would be generated again. The same goes with inventory turnover. Capex would most likely be in the form of growth capex if they decide to expand horizontally overseas.
 
From a valuation perspective, the company is trading at a multiple of 9.4x based on the latest trailing earnings and the IPO price at 25 cents. They are decent and may trade higher to match other F&B valuations but the 3 year numbers that are visible to us is a small data to extrapolate over the next 10 years. Assuming they can maintain and extrapolate it horizontally, this looks like a decent multiple buy after all. Still, I am not entirely comfortable with companies that are being valued through earnings multiple and the company having no organic growth power logically.
 
Based on the above, my verdict is the IPO price looks decent but the overall fundamentals lack sparks, catalyst and margin pressure, which might limit the growth of the company if one is to hold this for the long term. At least for me, I am certainly not a big fan of the industry. I prefer to eat and dine as a customer.



Wednesday, October 28, 2015

CapitaCommercial Trust (CCT) - Q3 FY15 Results Review

This is my first quarterly results coverage review for CCT since I've been vested in the counter a couple of months back.

The trust recorded a 2.6% increase for the quarter in the distributable income year on year, which translates into a 2.4% increase in the DPU to unitholders (which is approximately at 2.14 cents). This is pending the confirmation on whether there will be conversion on the CB which is currently priced at $1.54. Since current price is under the money, it is unlikely that these bondholders would choose to convert, unless they want the higher yield distributed via the dividend than the interest they are getting, but the chances are rather slim.

Overall portfolio occupancy of the trust's premises remain higher than the average market at 96.4% (compared to 95.8%) and they have a well spread portfolio lease expiry profile with major leases expiring 2019 and beyond. There are also very minimal leases expiry in the next 2 years which becomes very important to the company as the sectors is undergoing a down cycle heading into the next few years. What this means is there will probably be minimal impact to the NPI which then translates into a stable DPU for unitholders. If you zoom down into 3 of their largest assets, you can see that they have committed rents for leases at an average of above $10/psf. I think this will ease the tension down for shareholders who are reading news that the core grade A market has dropped down massively from the top due to oversupply environment.



I recalled back when the Euro crisis and oversupply situation hits the office sectors back in 2011/2012 and the situation is exactly the same as what we've seen today. The truth is the sectors cycle move up and down, and in the down scenario, I don't think we are going to see a very inelastic movement for demand as leases for office sectors are usually locked in for at least 3 years or more.

If we take an annualized scenario of what happened back then in 2011, you can see that DPU has dropped down to 7.52 cents. It is down but I don't think it looks extremely bad to be honest. As an investor, you probably will receive the dividends and assess the performance of the sectors again, so you'll arrive at another conclusion by then.






In terms of financial management, the management has also been very prudent with managing their debts. Their gearing remains low at 30.1% and their interest coverage ratio is very stable at 7.3x, which indicates their ability to pay off the debts using their lease income. The average costs of debt is also relatively low at 2.4% currently, though this is set to increase as the company do refinancing at a higher cost due to rising interest rate environment.

There are one notable big block of financing that is due in 2016, which is the RCS fixed notes issued for the Raffles Office Tower at 3.09%. Other than that, the rest are pretty much on schedule. On a sensitivity risk, a 50 basis point increase in interest rates will affect 0.04 cents DPU on the bottomline. I don't think that causes any major concerns for now.






Final Thoughts

I am actually pretty bullish on the company over the long run.

I think the management has shown over the years that they are able to manage their assets well and have proven strong to grow the company over time since inception of the company.

It is relatively impossible to get CCT at a cheap price if the sector is not undergoing headwinds so for me I think it is a good match in heaven since I like to buy when others are avoiding.

I also prefer the office sector more than the hospitality sector because the latter are often dependent on shorter lease (short travel). For office sectors, the cycle goes up and down but the leases are usually contracted over a number of years upfront, so we don't usually feel the impact to the bottomline as much as the hospitality sectors.

I'll be looking to add onto the counters should there be chances to do so.


Tuesday, October 27, 2015

My Thoughts On The Oxley Bonds Issuance at 5% Coupon Rate

Oxley is a relatively well known developers amongst the retail scene and they are the latest corporate to tap into the retail bond market by issuing a $125m with an option to increase to $300m depending on public interest. Going from the look of what their past retail bonds issuance is like and the public interest, it seems like the full allotment will be taken up.

They are not new to the scene as you can see below how their past bonds issuance have shaped up and organized over the years in terms of maturity spread out. In fact, we have a couple of issuance below that are yielding higher than what they are offering today at 5% with the same terms and conditions, so I am a little surprise that the offer was not higher because we are certainly closer to the day where interest rates would go up.

These types of senior unsecured bonds take precedence over the other debt obligations in the event of default and they offer relatively easier entry for access of funds than bank borrowings, where they had to meet some stricter criteria or asset pledge especially if the company credit is unrated.
 
 
 




With the way Oxley has set up the MTN, it appears easy for them to tap onto the retail market should they require funding. When one borrowings are due during maturity, all they need to do is to conduct some financial engineering and pushes the debt by using the proceedings from the latest issuance to repay the bonds that are due. This is a very common practice we see in corporations and they are always doing this either with MTN or bank loans. The only problem with the latter is that interest rates are floating so their interest expense can be unpredictable.
 
Oxley's CEO is a very aggressive person and the company is on the verge of expanding its footprint overseas in projects that could make or break. The company's net debt over the years have been ballooning and the latest gearing they had on their books was still at 3.18x (down from 4.92x last year). For the purpose of comparison, Wing Tai's gearing was at 0.10x net debt while Ho Bee is at 0.56x. In this regard, Oxley gearing is still extremely high by any standards.
 
I don't think Oxley is going to go bust or default on their bond payment as their quality assets would enable them to obtain financing, although the very high gearing does present some risk to risk averse investors out there. For me, the 5% coupon just isn't attractive enough to entice me to put my money, especially not when I believe the interest rates are going to increase in the near future and we might see more corporations issuing a higher coupon rates on a better condition.


Monday, October 26, 2015

Developers Facing Extension Charges

Earlier in the month, I wrote a post on a summary guide to some of the big developers listed in the stock market. You can view the post here.
 
In the recent weekend edition of the edge, they come up with a good summary guide for the impact of the extension charges in a worst case scenario for all the developers. It's interesting to note on some of these things but first let's take a recap of what is these extension charges all about.
 
Under the Residential Development Act, developers are required to obtain a qualifying certificate when they develop a project. These developers are then allowed 5 years to complete a project and a further 2 years to sell it upon receiving the TOP. Should they fail to do so within the allotted time, they would be liable for the extension charges under the QC rule. Developers have to pay 8% of the land purchase price for the first year of extension, 16% for the second year and 24% from the third year onwards. The charges are pro-rated based on unsold units over the total units in the project.
 
We know that this is very costly for developers as we will see in the below later and a few developers like SC Global has been taken private in order to avoid paying these charges.



 
The table above shows the worst case scenario, so obviously it takes into account the factor that these developers did not sell a single unit by then.
 
For instance, OUE's Twin Peaks and Wing Tai's Nouvel are both holding up the company's impact to the nav of 6.6% and 6.3% respectively. Other notable companies such as Bukit Sembawang and Heeton are higher at 7.1% and 20.7% due to their more exposure to residential unsold.
 
With these charges coming fast and furious, along with the potential hike in interest rates, we could see some of these developers give in and tried to sell their inventories at a larger drop percentage than what we've previously seen. At least, we've already seen Lafe Corp doing it by selling their Emerald Hills, which is located at prime area Somerset just beside The Robinson, sold at an attractive price of $1,700 psf.
 
If these developers are giving in, especially to residentials within the core district of 9/10/11, we could potentially see a viral cycle of lower demand and prices for residentials outside the core region, as the price spread between the core and non-core district will tighten.
 
I have been asked by several readers if developers are a good sector to be in right now. As far as my investing strategy for these developers are concerned, I'd prefer to get them really low such that I don't have to wait for an up cycle to earn decent returns for these investments. I'll be monitoring the development for this closely.

Sunday, October 25, 2015

A Digital Distraction Away From Life and Investing

I am now back in our local tiny island after spending a week away from the hustle and bustle of repeated weekly task. Even though the trip was still somewhat related to work and I still had to engage most of the time during the day attending meetings and discussions, and spending time responding emails during the night, I feel much refreshed coming back to work, perhaps there are learning takeaways that I get during the trip which I can utilize.
 
During the past week, I also had the chance to dispose my addiction towards digital distraction away from the normal routine. Technology is so pervasive and everywhere in our lives that it can be difficult to put down your laptop or stop responding to the text messages in your phone once you get into the rhythm. I am glad I was able to do so during the trip.
 
 
 
 
My active approach to investing means that I usually would require frequent contact and checking the news on either the individual company itself or any big macroeconomic news on a much required basis than passive investing. At times, it does get to a point where it can get really tiring and taxing to the bodies, as much as I love the process of doing so. This makes me rather doubt if I am still going to do this 10 to 20 years from now.
 
During the week I was away, I realized that I didn't have to do all those to sustain my active investment approach. I literally skipped all the macro news that happened during the week, stopped checking news and prices of the companies I owned and those in my watchlist, refrained myself from discussing on topics about investing and finance and many more. Okay, I did admit that I checked in for the quarterly performance on FCT but that was all about it. At the end of the day, I liked what I was doing and I think looking back perhaps investing is something that has taken over the majority of my life which is also a good thing because it makes me who I am today. But it does require some consideration especially moving on 10 to 20 years into the future.
 
A couple of fellow friends and bloggers (for example Lionel, Mr. 15hww) has started or recently switched their investing strategies based on simple portfolio allocation between stocks and bonds and for their stock components, they have advocated an ETF in favor to individual stock picking. I think the idea is rather straightforward and the purpose for doing so is they would rather spend their time on doing other things than researching individual companies which can be really taxing to the physical and mental. Perhaps this is something I would consider doing once I get to a stage where my other priorities would take over and I have lesser time to spend researching on individual companies. But let's see where it takes me once I hit the future.

What about you? Do you spend most of the time engaging in investing activities? Would you change your strategies if you had other priorities that eats your time in the future?


Sunday, October 18, 2015

Blog Leave - 19 to 23 October (Business Trip to BKK)

I'll be away on a business trip almost for the whole of next week to BKK, so it's unlikely that I will post anything on the market, with some of the companies I have reporting their quarterly results along the way.
 
In the meantime, stay safe and vigilant on the earnings results. It might just bring down the market if these are not within expectations.

Wednesday, October 14, 2015

Thoughts on Perennial Real Estate 4.65% Bond

My fellow bloggers and good friends LP and AK have both written an excellent article on their blogs explaining their thoughts on the bonds, so I am not going to repeat much of what is in the details.
 
 
Regular readers would know that I am not a big fan of bonds in general. I previously wrote regarding my thoughts on the FCL bonds so most of the thesis remains the same.
 
In general, I am in the midst of growing my base at my current age so by subscribing to the bonds it would limit the potential for my portfolio to grow anything higher than what is offered. Of course, every people are in a different stage of their journey, so I can't go on advocating investing in equities for everyone. You have to know what your situation and tolerance risk in order to gain better.
 
I just read the forums and news that the placement tranche for the bonds was oversubscribed so they could potentially raise the sum amount to allocate to the retail investors. The consensus I get from most people is retail bonds are getting increasingly popular with retail investors, with the previous Aspial and FCL bonds both oversubscribed as well. Interestingly, the same retail investors who are getting this 3 year bonds are mostly the same people who are not that acquainted with the company.
 
To be fair, the attractiveness for this bond comes from the fact that it has a short duration of 3 years maturity. They are also less sensitive to interest rate hikes which is now almost certain to go up pretty soon. Perennial Real Estate has been around for a long time and I remember how I used to be interested in their trust which has now been delisted. In other words, you probably don't have to think too much about what the companies do and what plans are they going to use the money to fund. Remember, as a bond investor, you act as a lender (not shareholder) and thus you only need to ensure that the company is still in operating mode by the time the maturity arrives after 3 years. You don't get to enjoy the growth portion an equity investor does. With most global properties now trading at an attractive valuation, it seems like it's a rather good deal for Perennial to issue the bonds at 4.65% (cost of borrowing) and use the money to gain higher returns for the projects they bid.
 
Final Thoughts
 
I leave it up to individual investors on what kind of projected returns you want for your portfolio.
 
If you are satisfied with the return, then by all means go with it and you can even throw in a couple of other corporate bonds or SSB which has been around now.
 
My personal take is that if you are young and are still working actively, I think equities is still the more attractive play over the long run. Putting the majority of your money into bonds would reduce your warchest subsequently and drag your overall portfolio returns, especially if you have proven to be an astute investors earning higher returns than what is offered.
 
The key part is to understand your situation and what bonds investing really entails. Heck, I even heard of investors trying to divest their FCL bonds in favour of this because this one was giving a higher yield premium over the former. FCL bonds have not even paid out their first coupon yet and the bond investors are already thinking of liquidating them. That to me, is simply ignorance.


Saturday, October 10, 2015

"Oct 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
45,000
0.91
40,950.00
12.0%
2.
Vicom
6,000
6.10
36,600.00
11.0%
3.
Kingsmen
37,000
0.79
29,230.00
9.0%
4.
ST Engineering
5,000
3.16
15,800.00
5.0%
5.
Stamford Land
30,000
0.51
15,300.00
5.0%
6.
Accordia Golf Trust
22,000
0.64
14,080.00
4.0%
7.
Ho Bee Land
6,000
1.99
11,940.00
3.0%
8.
Fraser Centerpoint Trust
6,000
1.97
11,820.00
3.0%
9.
CapitaCommercial Trust
8,000
1.38
11,040.00
3.0%
10.
IReit Global
16,000
0.67
10,720.00
3.0%
11.
Nam Lee Metals
35,000
0.28
  9,800.00
3.0%
12.
Silverlake Axis
14,400
0.65
  9,360.00
2.0%
13.
Dairy Farm*
1,000
9.26
  9,260.00
2.0%
14.
MTQ
7,000
0.52
  3,640.00
1.0%
15.
Warchest*
116,000.00
33.0%
Total SGD
345,540.00
 100.00%





It's another month that goes past which means another round of updates to the portfolio. The main purpose of updating the portfolio is to see how things have played out over the course of investing and to serve a reminder to myself where the end goal is.
 
The market for the past few days have rebounded quite aggressively since we hit a 20% decline not too long ago while everyone was starting to prepare for the bear territory.

It appears that these concerns are unfounded, at least in the meantime because everything appears to look “rosy” now despite the global outlook warning that there will be a few countries that will enter recession within the next year or so. This is probably the reason why staying vested in the market has its advantages and you can see why. In fact, experts believe that the best returns for investors are made within the first 5 days of the bull run. If you missed those runs, your returns would be reduced substantially. I guess we’ll just need to wait for another round of opportunity in the market which could take weeks, months or even years, no one knows.

For my own personal portfolio, I’ve benefited quite a bit from this rebound in the market.

First, I made a quick trade in the month by buying DBS and OCBC and then divested them a couple of days later for a gain of about $5K. It is a decent amount of profits but is not something which would dramatically change the outlook of my overall portfolio. Banks are always going to be cyclical in their nature of business and their performance will be closely tied to the global outlook of the economy. I think there could be another chance for a re-entry should the market head southwards but if not then it’s fine. Banks are not part of my long term strategies to hold them in my portfolio.
 
I also accumulated ST Engineering during the recent correction as I think it represents some value over the long term, especially since they are trading at a 5 year low in terms of the PER. With USD strengthening over the course of time, there will be a positive contribution to the company as around one-third of its business are denominated in USD currency.
 
Lastly, I also trimmed my position in Vicom as I feel that they are trading at a fair valuation given the moderate outlook of the vehicle and non-vehicle business for the next few years. Earnings are still resilient though growth outlook may be somewhat muted from here. I’ll be interested to see where they are heading in the next couple of quarterly earnings report and what the management is going to do about it before making any further decision.
 
For all the transactions listed above, you may refer to the "Recent Transactions" for the details.



Oct has been a very good month and something I will be proud of.
 
While the equity networth was never the focus of my attention, the portfolio for the month of October has increased quite a bit to $345,540 (+5.1% month on month; +38.2% year on year) due to the recent rebound in the market. It is also a big moment on a personal term because just a couple of months ago back in Aug I mentioned I was a couple of yards away from the goal. It appears that it is always better late than never.
 
With still 2 months to go before we conclude the end of the year, I will look to make a strong run into the final with a traditionally strong Nov and Dec still to come. The warchest portion has now gone back into 33% so I will pounce again on any chance of pullback in the market.
 
What about you? Have your portfolio recovered in the recent rebound in the market?


Thursday, October 8, 2015

Reducing Activities That Aren't Important In Your Life

One of the biggest beneficiaries I've discovered since becoming a parent is that I have a much greater willingness to pay for time and how I treasure the feeling of togetherness as one. The feeling is mutual for now, though I'm sure as he grows older, he will have time for his own activities and friends and will probably be spending less time with us.
 
This reminds me a story of a person who has planned many activities on his agenda only to find out later that he is unable to complete most of them. The solution for this is simple. He simply needs to reduce on the activities that aren't important in his life. Even so, there needs to be some sort of priority that he can organize.
 
 
Focusing on a few activities would have done wonders in our life. This is the act of channelling our energy into achieving a desired objective. Focused behaviour doesn't just happen by chance. It requires a lot of preparation and work to be done before hand. We need to look at our own behaviour and adjust our way of doing things, which could become awkward at start because we are not used to. In fact, in our everyday life, we are trained to multi-task so much that we have become servant to it.
 
Take my situation for instance. Since I treasure time and togetherness with my family, I had to think of ways that could push my case towards going home on time after work, cancelling any frequent dining appointments with friends and sustain it over long period of time. What this leads to in the end is the idea that strikes me with the possibility of cloning myself so I could enjoy my time doing other activities that matter most to me. Things will change and my priorities would have shifted over time but that is another case for another time. What I am trying to say is if we focus on things that matter to us, we are able to achieve great things which we are not able to if we diversify on doing too many things because of limited resources.
 
This is probably the reason why great innovators and entrepreneurs like Steve Jobs and Mark Zuckerberg wore the same shirt every day because they would rather spend time thinking more important things in their lives. The same can probably be said with bald people. When you reduce some of these activities which are not important, you can have time to think about things that matter.
 
Losing focus can mean going into multiple directions towards multiple goals and as a financial independence wannabe, it is the last thing that I wanted to happen to myself after working hard for a good number of years on the goals. Maybe the next time you have too many things on your plate, think again about organizing your priorities and get things done in an ascending order that matters most to you.
 
What about you? Are you focusing on things that are important to you?


Tuesday, October 6, 2015

Dividend Investing - Revisited

I would like to draw a reference post by GV which I thought he did really well in explaining the truth about dividend investing which many had overlooked.
 
Readers of this blog would know that I am a proponent of cashflow investing which is a subset of dividend investing if you like to see it that way. The main difference between dividend and cashflow investing is that the former can pay out dividends through the cash they burn while the latter pays out dividends through their operating cashflow which can sustain for as long as the company continue their service.
 
 
 
Let me explain the accounting terms behind this idea.
 
When a company pays out a dividend to shareholders, the cash portion is usually reduced by the same amount being paid. In fact, investors should know that dividend payment is part of a cashflow from financing activities under IAS 7 which will decrease the amount of cash retained in the books. Since retained earnings are reduced, the NAV of the company would decrease by the same amount. This explains why the moment the company goes ex-dividend, the share price would usually fall by the same amount of dividends paid in the short term. This is the bulk of what GV was explaining in his post but in a less technical terms so that beginners would understand.
 
So far, we've only been talking about the theory, which will unfortunately not always happen to be the case in practical and real life scenario. Sometimes, we may even see a company share price increase the moment they went ex-dividend. The reason for this is simple. People are bullish and are driving up the price by going long on the company. This is the psychological portion of investing that we may never truly understand unless you are an expert in understanding human behaviour.
 
Going back to what I have discussed earlier, this is precisely why I enjoy cashflow investing so much because for as long as the company is able to sustain its dividend payout through their operating cashflow earnings, you will always have buyers that will come in and drive the share price up eventually.
 
Contrast this with a company that backs itself up with a low dividend payout because it has to preserve cash to grow the company. The latter has to depend very much on the growth story of the business which most of the time has been priced into the share price. Companies such as Raffles Medical Group, Sarine, Osim and Super came to mind. The moment these growth stories slow down, the share price would plunge right down to what gravity would do to the company. This is somewhat different from investing in companies such as properties and banks because the latter would usually be valued at mark to market, which makes the valuation more relevant to their book value than earnings.
 
Dividend investing is not a bad strategy, but I think it is important for investors to understand the concept of cashflow investing because that's where the thin line will draw between a successful and average investors.
 
 
 

Friday, October 2, 2015

A Quick Summary Valuation Guide for Developer Companies‏

Many developer companies have long endured a depressed valuation for a number of years, due to poor market sentiments from the market and tightening of the government policies.
 
As investors, we know that these developers are currently trading at a significant discount to their book value, a metric which is key to valuing these companies. People used to get interested in these companies since they are trading at a discount to their book value but the market environment over the past few years has forced investors to consider a much higher margin of safety, such that many are looking at deep discounts to their book value.
 
I have appended a summary table below using key metrics such as P/E, P/BV and Dividend Yield for those who are interested to invest in some of the developers listed. There are some notable key areas which I wanted to highlight below especially to new investors which I think is key to making decisions whether or not to invest.
 
 
 
 
 
P/E
 
This metric measures the price to earnings multiple of the company.
 
It is a direct inverse correlation to the earnings yield and it measures how long the company needs to earn before investors would break even for the price they pay.
 
It is important to note that the number you see above includes the earnings from fair value gains of the property which the company typically does the revaluation exercise once a year. What this means to investors is the multiple could fluctuate and skew the result from one way to another due to these large revaluation gains/losses that arises from the properties. Since the trend is many developers have recorded fair value gains on their books, it is important to consider if they will take impairments for the same in the future, especially if global outlook is uncertain.
 
Savy investors would strip out these non-cashflow generating gains and focus on core earnings that trickle down right to the operating cash flow. This should help the investors see the picture clearer and make better decisions and comparisons since what we want from these are cash and not accounting earnings at the end of the day.
 
P/BV
 
This metric is most commonly used to value a developer since they are related to the assets (and gearing) the company owns relative to its equity.
 
It is important to note that the book value is somewhat different from the revalued net asset value (rnav) because there are some developers who does not opt for the revaluation under IAS 40 when the options were rolled out. An example of such companies are City Developments and Stamford Land. Having said that, most of the developers listed above have opted to go for the IAS 40 so their assets are mostly marked closely to market value, which makes up the rnav that many analysts are talking about.
 
Dividend Yield (%)
 
The dividend yield listed above are inclusive of special dividends issued to shareholders, either because they have an exceptionally good year or if they have divested some businesses most likely to their Reits. An example of such companies are City Developments and OUE, both of which owns the Reits arm in CDL-HT and OUE-COMM/OUE-HT.
 
In this regard, it is important for investors to consider if the special dividends are recurring in nature or if they come from a one-off divestment.
 
 
Final Thoughts
 
Developers are not well known for their high dividend yield simply because their business model requires them to constantly keep cash to further grow the assets of the company.
 
If you are an investor who prefers income to be distributed back to you, you should be more comfortable with Reits because their business model allow them to distribute most of their earnings back to shareholders in the form of dividends.
 
This may confused some of the beginner investors because it appears that latter is more attractive but what essentially the developers do is to reinvest the excess earnings back into the business immediately, which can generally be much better if they are able to find a higher IRR business than you do with the dividends reinvested. Of course, the recent market weakness has made the share price of the companies rather volatile but the underlying fundamentals should not change.
 
For anyone who are interested to invest in developers, please do more research on your own as guided above and treat the appended table as a form of reference and not face value.
 
 
What about you? Do you prefer Developers or Reits? Are you a growth or income investor?



UA-57154194-1