Old Chang Kee

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As stated in my earlier post, Old Chang Kee trailing dividend yield was at 3.45% on 12 March 2017. It isn’t a very high yield (esp. as compared to the business trusts and REITs). So you may be scratching your head, wondering why I put this in the ‘dividend’ stock list.

However, in an environment of rising increase rates, whereby the normal yield of stocks is hovering around 2% to 3%, a 3.45% trailing dividend yield is actually not too shabby. In 2016, its dividend yield was a good 6.9%. And that is not excluding the rise in the share price since 2009.

Over the past 8 years, since 2009 to 2016, Old Chang Kee has distributed an average annual dividend totaling around 31 cents per share (including Special Dividend Payout). The Group does not have a fixed dividend policy, but has paid dividends every year since it was listed.

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Base on the charts above, the payout and yield aren’t exactly trending in a linear straight line, but there is an overall upward trend nevertheless.

The recent TTM Payout Ratio is only 73.7%.

In addition, the company’s shares are up approx. 470% from 1 Jan 2009 to its closing price of $0.87last Friday (17 March 2017). In comparison, the capital gain returns of the SPDR STI ETF was approx. 80% for the same duration.

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Old Chang Kee has been around since 1956, growing from a single stall outside Rex Cinema to 80 outlets as of the financial year ended 31 March 2016 (FY2016). Tt is a not a big listed company, with an enterprise value of only S$97.8M.

However, there are many merits from this small company, besides the above average dividend yield.

In terms of business model, it is one of the simplest one, I can find. Seriously, it is such a small and simple company:

  • Their signature curry puff is sold at their outlets together with over 30 other food products including fish-balls, chicken nuggets and chicken wings.
  • Most of their sales are on a takeaway basis and their outlets are located at strategic locations to reach out to a wide range of consumers.
  • The Dip ‘n’ Go retail outlet offers delicious food on the go, with a variety of dips to go with.
  • Bun Times retail outlets offer Hainanese inspired buns.
  • The “Curry Times”, “Take 5” and “Mushroom” dine-in retail outlets carry a range of local delights such as laksa, mee siam, nasi lemak and curry chicken.

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The business model as compared to most full-service F&B companies is less capital intensive. Although they have dine-in retail outlets but most of their sales are from a takeaway basis.

So yes, besides the normal low expenses of not having to hire highly skilled and paid staffs (most of them are above 45-year-old aunties), the company does not have to fork out a high rental for large areas (seating areas + kitchen).

2-in-1 concept stores improve efficiency (extract from this article)

The 2-in-1 concept combines an Old Chang Kee store with one of its sub-brands. Its first 2-in-1 concept store was launched in 2013, in Alexandra Retail Centre, with Old Chang Kee sharing the premise with Curry Times Tingkat. The 2-in-1 concept optimises manpower and resources (store space and kitchen area), especially when both OCK and Curry Times have different peak hours.

 

To me, it is one of the few stocks which have both yield and strong fundamentals. Growth has faltered in recent years but there are plans for future growth.

 

Growth

The Retun on Assetts, Return on Equity and Return on Invested Capital all have been trending downwards over the years. However, nevertheless, the recent TTM ROE and TTM ROIC are 15.26% and 12.58% respectively. Still reasonably good.

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In the recent 3rd quarter results repor, the following was stated:

  • The Group’s revenue showed an increase of approximately S$1.4 million or 7.5%. (3Q2017 vs 3Q2016)
  • The Group’s profit before tax increased from approximately S$1.5 million in 3Q2016 to approximately S$1.7 million in 3Q2017, an increase of approximately S$158,000 or 10.5%.
  • The Group expects operating lease expenses (rental) and labour and raw material costs to remain high in the next reporting period and the next 12 months, and believes that the labour market will continue to remain tight. Retail conditions will continue to be challenging amidst mall revamps and with new entrants in the food and beverage market.
  • The Group believes that its new factory in Singapore when completed and fully operational in the later part of 2017, together with its Malaysia factory, will provide the platform for the Group to grow its business both locally and regionally, while keeping cost under control.

With regards to the last point, this article by Phillip Securities gives a more detailed write-up on the expansion potential:

“The Group acquired two factory facilities, in Iskandar Malaysia and 4 Woodlands Terrace Singapore (“New Factory”, adjacent to its original factory facility at 2 Woodlands Terrace), in Aug 2011 and Aug 2012, respectively. The construction works for both new factory facilities have been fully completed during FY16 and have commenced operations.

Currently, the Group is undertaking reconstruction works for its original factory facility at 2 Woodlands Terrace, and is expected to complete in June 2017 (1QFY18). When the reconstruction is completed, it will be fully integrated with the adjacent New Factory.

The integrated factory facility at 2 and 4 Woodlands Terrace will feature modern technology and machinery that will further improve its food consistency, labour efficiencies and space productivity. The integrated factory is expected to increase capacity by 60%, from 50,000 puffs per day to 80,000 puffs a day. The additional production space, which almost doubled, would also provide additional capacity for its product innovations.”

 

Fundamentals

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  • Total cash is more than Total debt, which is great. (Net cash approx. S$6.58 M).
  • However, the current ratio at 1.35 is low. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses), while total debt/equity ratio is high at 24.1.

Not perfect, but it is not very weak.

 

Valuation

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The Trailing P/E, Price to Book and EV/EBITDA all seem to suggest that the stock price is on the high side (over-priced).(As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value).

 

The current stock price of Old Chang Kee is S$ 0.845 (on 24 March 17).

Trailing PEG and Intrinsic Value

Let’s do a quick study on the current share price of S$ 0.845 – via Trailing PEG and Intrinsic Value.

1) Trailing PEG

P/E: 20.61

Dividend Yield (%): 3.55 (from POEMS)

5 years EPS compound growth rate: 0 (from FT.com)

The trailing PEG will be 20.61/(3.55+0) = 5.81. Which is not good (above 1).

2) Intrinsic Value

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Hence intrinsic value of Old Chang Kee is $ 0.46.

Given the current stock price of Old Chang Kee on 24 March 2017 is at SGD 0.845, there is NO margin of safety base on the estimated intrinsic value.

 

 

In Summary

In gist, shall keep a look out for this stock and hope to pick up some when its stock prices are favourable.

Posted in Old Chang Kee | Leave a comment

Loading up on my War Chest

I have previously done a post about ‘spring cleaning’ my stock portfolio on 5 March 2017 (read here). With equity valuations looking a bit rich, I reckon it would be good to raise the percentage of my cash holdings.

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On 11 Feb 2017, I did a short post on an update to my portfolio. The percentage of my Savings & SRS (cash) then was at 13%. Earlier on 4 Sept 2016, the percentage of Savings then was only at 8% (read here).

I recently sold my Super Group shares (at $1.295 a share), just a couple of days prior to receiving the package pertaining to the delisting of Super Group (the realized profit at approx. 16% of the amount invested, excluding dividends received). Although the selling price was lower than the $1.30 delisting price, it was not a lot.

The stock price of Super Group has been hovering at around $1.30 for quite some time (regardless of overall market performance). I first started buying

I first started buying Super Group shares in June 2014- only selling once in April 2015 (small amount). I have been all the while accumulating. So in total, it has been less than 3 years. 16% for 3 years isn’t a lot – but then Super Group is one of my biggest holdings, and I am glad that it turned profitable at the last ‘minute’ due to the privatization offer.

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
Warren Buffett

Well. time to say goodbye I reckon (even if I don’t sell the shares, the company will probably be delisted soon).

Anyway, now my cash holding has increased significantly – which is at 31%. It hasn’t been at this percentage for a long time.

This percentage is even greater than the percentage of my stock holdings (27%). I would say, the risk exposure to any market corrections or crash is at around 29% of my net worth (Stocks + Unit Trust), and maybe some of the Insurance Cash value. The rest will probably not be affected.

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Having said that, the passive income from stock dividends will be super low this year.

For the time being, I probably won’t sell any more stocks. I am pretty happy with most of my stock holdings for now. These are stocks that I can sleep soundly with, and ‘forget’.

Well, for the stock that I don’t really like (eg. Golden Agri) – the unrealised loss is still a lot…. I do think that in the long term, as a cyclical stock, CPO prices will rise.

 

 

Posted in Portfolio | 2 Comments

Random thoughts on RHT Health Trust

I previously wrote a post whereby I included a short list of my so-called ‘dividend stocks’ (see below). I am sure there are many other high yield stocks, and I probably would have missed them out (probably due to my lack of time and resources to do so).

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However, nevertheless, I do intend to pen down some of my thoughts here as to why I am looking at these stocks.Hope it helps to sort out my thoughts. Of course, my thinking would probably change in the future (depending on how the company and stock prices perform).

Before I continue, I would like to perhaps highlight that this way of thinking could be fundamentally flawed. As I am thinking in terms of what the stock can provide for me first (in terms of dividend), ahead of the company’s fundamental, growth and valuation. Dividend payout is an outcome of earnings, and without continual good earnings, dividend payout is not sustainable.

Let’s see how should I structure my thought processes. I started off this post by looking at the macro (eg. the sectors), the yield vs payout ratio and balance sheet, and consequently wrote about some of my thoughts on RHT Health Trust.

I don’t think I can complete the details of all these stocks in a single post. 

 

1) Sector

I am by nature risk adverse. Basically,  when I invest, I tend to think long term. I like defensive sectors and companies that provide things or services that people use on a daily basis. The business itself should be boring and easy to understand.

“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” Peter Lynch

I don’t really like trading in and out of stocks, and prefer to be very off hand once I have bought the stocks.

Healthcare

Consequently, it is no wonder that the first 4 stocks (RHT Health, Parkway Life REIT, First REIT and Vicplas) deal with healthcare.

Ok, Vicplas is not a pure healthcare stock (technically not in the healthcare sector). It operates through two segments, Pipes and Pipe Fittings, and Medical Devices. 

I have yet to come across the detailed breakdown of Vicplas revenue. Hence I can’t really gauge what percentage the medical devices section contribute to its overall profit. I also don’t have the complete 10 years financial data of Vicplas (data from Morningstar dates back to only 2009), but my feel so far is that it is a cyclical stock, and base on its short financial historical data, the performance varies widely year on year. On some years, it appears that there was no dividend payout (eg. 2003 to 2009, 2011, 2013, 2014).

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Base on the recent 2015 Annual Report, the medical devices section (unfortunately) was loss making (although there was a reduction in its segmental negative results to $2.7 million in FY 2015 from $9.0 million in FY 2014). The pipes and pipe fitting section is the profit making portion than more than compensate for the loss.

For the REITs and Health Trust, the lease for healthcare properties are relatively longer (as compared to offices and retail). RHT’s average lease is 15 years- with the view of renewing for another 15 years.

Ship-building

Next, Yangzhijiang. This is definitely a cyclical business and stock. With reference to my earlier statement, I don’t think it applies (eg. a defensive business). However, ship building is a need. I do not foresee this business going away soon in the future, or disrupted in a major way.

Despite being in a ‘challenging’ industry, Yangzhijiang appears to be a likely candidate to emerge from the collapse of the shipbuilding industry in China and South Korea, stronger. If I am not wrong, the industry has consolidated from 3000 shipbuilding companies (in 2012) to less than 100 companies in China. Yangzhijian is also China’s biggest privately owned shipyard.

Hot stock: Yangzijiang shares galvanised by decent results (read here)

Nevertheless, I think the recent jump in the share price seems too premature. After all, the leap in other income is due to the recognition of advance payment from terminated shipbuilding contracts and lower expenses. There might be further pressure on the stock price downwards in the future.

F&B and Supermarket

E-commerce has a major impact on retail, and to a certain extend F&B. Well, I do see more F&B outlets nowadays as compared to retail spaces. I guess the experiential aspect of dining is still critical – so people still a place to wine and dine. (Of course, Deliveroo, UberEATS, etc could be disruptive to the traditional F&B business). Which is probably why I listed Japan Foods. However, the recent years’ profit (since 2014) has been declining resulting in a decline in dividend payout (despite an increase in payout ratio).

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On the other hand, in the case of Old Chang Kee, their business model isn’t that of a full-service restaurant – more finger food, and on the go. They do not require large areas (less rental) and are typically strategically located at busy areas (some near MRT stations). The company seems to be in an expansion mode.

Sheng Siong has also been in an expansion mode ( the only issue is that smaller supermarket players are bidding up the price of the HDB commercial units).

Sheng Siong locks horns with smaller players for HDB sites (read here

In terms of business model, the sale of daily necessity is a great business. Of course, there are threats from e-commerce (eg. Redmart, Fairprice online). However, there will always be a niche in the local neighborhood for supermarkets.

In terms of growth, in the short list above, Sheng Siong has the highest ROE (~25%). The only other supermarket chain that can beat Sheng Siong’s ROE is Diary Farm (~31%). However, Sheng Siong has a stronger balance sheet (net cash with no debt).

 

2) Dividend Yield vs Payout Ratio and Balance Sheet

Although, like I said in my previous post, I started out by looking at the yield first… but a high yield which is unsustainable is pointless. One way to ensure that the company is not over-stretched in paying out the dividend is by looking at the payout ratio. Rightfully we should look at the historical payout ratio and see if there is a recent spike in the payout ratio.

Subsequently, I would like a strong balance sheet. Frankly, it is hard finding high dividend yield stocks with good balance sheets (harder to find those in net cash positions).

By default, most of the REITs and Business Trusts would be in net debt positions. REITs’ gearing can go up to 45%. And with the issuance of Perpetual Bonds / Securities, this makes it harder for retail investors to know the actual amount of debt (and the interests due).

So back to the list. The first 3 stocks consist of REITs and Health Trust. And the fourth stock (Vicplas) has a medical device section.

There is a reason why I put them together. Incidentally, Vicplas dividend payout is highly infrequent. So, that leaves us with RHT Health, First REIT and Parkway Life REIT.

After looking at the sector, I will look at their balance sheets. Of the three stocks (RHT Health, First REIT and Parkway Life REIT) – RHT Health Trust has the lowest gearing and the lowest debt / equity ratio.

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However, its payout ratio through the years has been consistently more than 100%.

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  • RHT Health Trust‘s portfolio comprises 12 Clinical Establishments, 4 Greenfield Clinical Establishments and 2 Operating Hospitals across India.
  • ParkwayLife REIT‘s portfolio comprises 49 properties totaling approximately S$1.7 billion, located in Singapore, Japan, and Malaysia (predominantly in Japan).
  • First REIT‘s portfolio consists of 17 properties across Asia, with a total asset value of S$1.27 billion. These include 13 properties in Indonesia comprising hospitals, an integrated hospital & mall, an integrated hospital & hotel and a hotel & country club, as well as three nursing homes in Singapore and one hospital in South Korea. 

In terms of fundamentals, there are many things I like about RHT Health in comparison to First REIT and ParkwayLife REIT:

  • As mentioned earlier, balance sheet wise, it appears stronger (the gearing and debt/equity ratio are relatively lower).
  • It also has the highest dividend yield (at 8.7%!).
  • Growth is good (better than the other 2). ROE at >20%.
  • Valuation (trailing PE and Price / Book) is low.

Well, 8.7% may seem suspiciously high, but considering that the India 10 year Government Bond yields 6.9%, 8.7% yield is alright (relatively ok). 

However, as with most REITs and Trusts, there are a lot of loopholes when I think about the sustainability of the dividend payout:

  1. RHT Health Trust was only listed on SGX mainboard not too long ago on September 25th 2012. Hence, base on the table above, there is only a short history of the dividend payout… It is really hard to gauge the longevity of its payout base on the short history (as a listed company).
  2. With the disposal of 51% of the compulsory convertible debentures (CCDs) in Fortis Hospotel, and the impact demonetization in India, the DPU will be under pressure (both long and short term).
  3. In addition, with such a high payout ratio (more than 100%), the sustainability of the high yield is questionable.
  4. Consequently, unlike First REIT & ParkwayLife REIT, RHT Trust is subject to forex risks as its income is in Indian rupee.

 

More importantly, there are a few questions which I felt are unanswered:

a) There are a number of development projects as stated in its recent 3rd quarter financial results:

  1. Ludhiana Greenfield Clinical Establishment to be completed by April 2017,
  2. BG Road Brownfield Clinical Establishment to be completed by April 2017,
  3. Expansion of Mohali Clinical Establishment to be completed by March 2020,
  4. Jaipur Clinical Establishment to be completed by April 2017,
  5. Mulund Clinical Establishment to be completed by March 2018,
  6. Nagarbhavi Clinical Establishment to be completed by March 2018,
  7. Amritsar Clinical Establishment to be completed by March 2018,
  8. Noida Clinical Establishment to be completed by March 2018,
  9. Shalimar Bagh Clinical Establishment to be completed by Sept 2017.

Of these, there are 4 Greenfield Clinical Establishments (total development costs are estimated at SGD 66 mil).

Where is the construction cost coming from? Private placement – resulting in the dilution of dividend payout? Perpetual Bonds? More loans (after all, the gearing has more headroom to ‘grow’)? I have no idea? Will the relatively low gearing change overnight?

Just out of curiousty. The dividend payout for 2015 was S$0.0761 per share (Total yield was 8.7%), while dividend payout for 2014 was S$0.0775 (Total yield was 8.86%). It did consider the dividend payout for 2016 as the yield during that year was just too high 36.82% (probably due to a one-off sale of the asset).

Total share outstanding now stands at 799.59 mils. So the ballpark figure of the total amount for dividend payout is approx. S$62 mil. That is just around S$4 mil below the construction cost. And payout ratio is already more than 100%… The impact of construction cost is a big question mark. 

Why would a company give out dividend money to investors and take on more loan to pay for construction?

 

b) It was always stated that healthcare need in India is great and RHT is well positioned to take advantage of it. That may be true, but I have read that there also many other healthcare clinics and hospitals located near to RHT’s clinical establishments.

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A huge market doesn’t mean there is no intense competition (perhaps more so – given all the hype about the huge India market). How is RHT going to compete with so many competitors like Vijaya Hospital; Apollo Hospital, Manipal Hospitals and to a lesser extent, government-owned hospital, smaller private hospital groups, and new entrants?

In RHT’s recent third-quarter earnings report, the occupancy rate of RHT Health Trust’s portfolio came in at only 75% in the reporting quarter.

In comparison, in the case of First REIT as at 31 December 2016 (as stated in First REIT website), the reported occupancy is at 100%. For the case of ParkwayLife REIT, the committed occupancy as at 24 February 2017, is at 99.96%.

Incidentally, in the case of First REIT, the predominant tenant is its sponsor, PT Lippo Karawaci Tbk .

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Am I missing something here? Given the huge market in India (middle class and upper class), and with RHT’s ‘award winning’ hospitals and quality assets (see below)- it only managed 75% occupancy?

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And when I checked back in the 3rd quarter financial results report, since 3 quarter FY 2014, the occupancy rate for RHT has always been hovering about 72% to 84%. Mostly below 80%. (See below)

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Nevertheless, RHT is a stock worth looking into…. still on the list. Oh yeah, this is not a recommendation to buy. Just some random thoughts from a blogger.

Posted in REITS | Leave a comment

Short list on ‘dividend’ stocks

I think this desire for dividend income is always there. The idea of passive income is always alluring. And why not? What’s wrong with investing for the sake of having passive income? Why invest in something that doesn’t produce much dividend (with no income – it is not even an asset).

My approach to stocks emphasized more on the growth and balance sheet of the companies. Perhaps the idea of peace of mind is more important to me.

However, like I said earlier, I do like to expand my portfolio to include higher dividend yield stocks. Nowadays, with rising interest rates and a slowing world economy, we don’t get many high yielding stocks. In the past, a decent yield would be in the range of 3% to 4%. Nowadays, 2% to 3% yield are considered good.

The markets have been buoyant, with markets around the world reaching new highs. The STI is no exception. I guess it is due to the expectation that the US President Trump will lower corporate tax from 35% to 15%.

Trump’s Promises to Corporate Leaders: Lower Taxes and Fewer Regulations (read here)

Well, I am not a ‘top-down’ investor, but I do from time to time take a cue from the global market trends esp. when the Dow Jones industrial average recently reach the highest level since 2009 (just can’t ignore).

I have been using this period to sell off some stocks and I do intend to sell off more in the coming weeks. For these stocks, I believe the upside is limited (again I could be wrong). The markets could be in for higher high in the future, especially if what President Trump promised materialized. I have no doubt about it. I would still be in stock (just not as much as in the past).

I do know of people who have been totally in cash since 2015, expecting a big crash to happen in 2016 or 2017… Well, I probably would never be totally in cash. I still like many of my stocks such as Riverstone, Colex, ISOTeam, Vicom etc… and intend on collecting more of them in the future.

In the meantime, I have been reading up on a no. of ‘high dividend’ stocks. This is a bit different from how I normally approach stocks. In this instance, I place more importance on dividend yield. For instance, I would select these stocks because of their dividend yield first, then I would look at their balance sheet, fundamentals, and possible growth story (ROE).

By ‘dividend yield’, like I said earlier, it is not easy to find really high yield stocks these days with ok fundamentals. I consider a min 3% yield as acceptable. Well, the key is to ensure that the dividend is sustainable or growing.

Having said all these, I do not foresee myself buying a lot of stocks in the near term (unless there are some sudden crashes or opportunities).  I always keep these stocks in my mind, and a ready war chest, to capitalize on possible opportunities in the future.

There are some fundamentally strong stocks which I have disregarded due to the possible disruptions in their growth story. For instance, Straco has always been a fundamentally strong stock (ROE: 20.32%, in net cash), and it has a dividend yield of 3.29% in 2016. However, with the opening of the future Haichang Polar Ocean Park, a marine-themed park developed by Haichang Holdings Ltd, in Shanghai. This might impact the revenue of Straco’s Shanghai Ocean Aquarium.

Did a table of these ‘dividend’ stocks for my own record. See below.

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My recent portfolio spring cleaning

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I recently mentioned in my previous post, that I have sold my Fasternal Co stocks. Subsequently, I was on leave on Friday. On that day, while running my errands, I took some time to further sell some of my stocks, namely CapitaLand and SIA.

To be frank, I have been wanting to sell the SIA stocks I own for a very long time.

I have previous sold Sun Hung Kai many months ago -what is left are the odd lots I received (in lieu of dividends) previously. So techincally I am now left with 8 stocks in my portfolio.

Table

 

To put things in perspective:

  1. I bought the Fasternal shares on Aug 2015 (Holding period was approximately 1 yr 6 months);
  2. Last bought CapitaLand shares on July 2015 (Holding period was approximately 1 yr 7 months);
  3. Last bought SIA share on Nov 2010 (Holding period was approximately 6 yrs 3 months).

 

There are various reasons why I wanted to sell them:

  • Big but slow growth

I consider CapitaLand and SIA relatively fundamentally weaker stocks as compared to the other stocks in my portfolio. Yes, in terms of Enterprise Value, they are giants, but in terms of growth they are not (CapitaLand has a recent ROE ttm of  6.11%, while SIA has a recent ROE ttm of 5.44%).

  • Dividend (ok, but not high yield)

I did not buy these stocks due to their yield.

  1. CapitaLand has a reasonable yield and frankly, I don’t mind keeping it just for the yield. In 2016, CapitaLand had a dividend yield of 2.55%. This yield value has been fluctuating between 1.7% to 2.55% from 2011 to 2016.
  2. SIA had a yield of 4.44% in 2016. That is actually quite good. However, its dividend yield is highly inconsistent. It reached a high of 13.10% in 2011 but dropped to 1.61% in 2012. Moreover, its stock price has dropped much more (since 2010) than the total dividend received.
  3. Fasternal had a yield of 3.14% in 2016. Between 2011 to 2016, the dividend yield fluctuated between 1.49% to 5.28%. However, non-resident aliens face a dividend tax rate of 30% on dividends paid out by U.S. companies. So given the low amount that I have invested (plus the fact that the yield wasn’t very high) and the tax rate, the resultant dividend income wasn’t fantastic.
  • Cyclical stocks (with cloudy growth forecast)

Typically, cyclical stocks do not make very good long term buy and hold stocks – unless you can time the cycle correctly. I do a terrible job at this.

However, the compelling reason isn’t because these are cyclical stocks, but rather the growth story behind these stocks.

Actually, I am optimistic about the long term growth story of CapitaLand and Fasternal. I think in the long term, there will an upward cycle. These are long term plays. However, near term wise – I am not sure about the growth prospect.

  • With CapitaLand, there are growth opportunities in China and regional Southeast Asia market. Yes, the price to book value is relatively low (0.88) – but it has been that low since 2011.
  • With Fasternal, it is a wide-moat company. A distributor like this is dealing with hundreds of thousands of customers and thousands of vendors for individual products. Its current price to book value is also low (7.75), but it has been hovering around that level (8.06 to 6.63) since 2013.

I bought SIA a long time ago. I think as an airline company, it faces intense competition in this industry and consequently, its fundamentals have deteriorated ever since. Its stock price has reflected that. I do not see much growth for SIA moving forward, and was really glad that I finally managed to sell the stock (although at a huge loss).

I do not see much growth for SIA moving forward, and was really glad that I finally managed to sell the stock (although at a huge loss). There was a slight uptrend in SIA stock price when oil price plunged. But the macro trend of the stock price is still downwards.

 

 

Why Spring Cleaning Now?

By selling these 3 stocks, there is a net loss. Not much, if I factor in the dividend received. The dividend received previously would cover for this loss. The recent surge in CapitaLand & Fasternal stock prices also helped.

I felt that given that the US market has reached new high recently, the odds of the markets correcting has become more.

In view of these, I like to take a more defensive position and try to reduce exposure to the weaker stocks (with relatively weak fundamentals). I do consider SIA and CapitaLand (and to a certain extend Fasternal, Sarine Tech, Golden Agri and Super Group) stocks as being more likely influenced by economic conditions.

As per the old Wall Street Adage: “let your winners run, and cut your losers.” In terms of stock price performance, if I sell my Riverstone, Colex, ISOTeam or even Vicom stocks, I would have locked in a significant amount of realized gain. Not a bad thing, given the odds of a market correction moving forward.

However, ultimately I am a bottom-up investor, not a top-down investor. If company fundamentals did not deteriorate much and overall growth story remain intact (or did not deteriorate significantly) – I would like to hold on to my ‘flowers’. My overall strategy will always be to average down as much as I can.

I also acknowledge that I can never accurately time the market crashes (ever) and will always be invested in stocks when markets correct or crash.

“It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds.  If you’re lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it.”        Peter Lynch

Realistically speaking, I don’t see much problem with me holding on to stocks such as Riverstone, Colex, ISOTeam, Vicom and Fu Yuan Shou even during market crashes. To me, these stocks pass the ‘sleep test’ eg. I can sleep soundly when their stock price head south.

A significant part of their business is naturally resilient to adverse economic conditions eg. people would still use their services or products even if macroeconomic conditions turn south.

In this aspect, Vicom business model may be slightly arguable given that a significant part of its revenue comes from the Non-vehicle inspection (SETSCO), which is very correlated to the economic conditions.

Nevertheless, most of the remaining stocks (Sarine Tech, Super Group, Riverstone, Colex, ISOTeam, Vicom and Fu Yuan Shou) have good balance sheets, plus good growth (eg. relatively high ROE) —Not all, but most.

In gist: Defensive & Resilient business model / industry + Good balance sheet + Growth. In fact, I might buy more of their shares if their share prices drop during a correction or crash. So having an ample cash war chest ready is very important.

The only downside for some of these stocks is the lack of overseas exposure or expansion. For many, they derive most of their revenue from Singapore (eg. Colex, ISOTeam, Vicom). And also not very high dividend yield.

On another note, I might consider divesting my Super Group stocks if opportunities arise. (Growth story is debatable given the competitive instant coffee market).

However, as of now, I am quite comfortable with the amount in my war chest.

 

More income-driven approach

While I do not see myself plunging head first into actively buying high dividend yield stocks, I would definitely consider stocks with acceptable fundamentals and reasonable yield. The dividend yield factor would slowly make its way up my evaluation criteria.

If opportunities allow (eg. having a larger margin of safety during sharp market corrections plus other factors), I might consider slow growth companies with relatively weak fundamentals but with a long history of consistent high dividend payouts. I consider these as “Perfect Storm” situations eg. Market corrections or crash coinciding with temporary industry down-cycle or slow-down, and temporary internal company bad news. These I know is beyond my control, and I have to patiently wait.

I consider these confluences of bad news as “Perfect Storm” situations eg. Market corrections or crash coinciding with temporary industry down-cycle or slow-down, or/and temporary internal company bad news. However, provided the long-term fundamentals and growth story of the companies are still intact, and not deteriorated significantly.

I am sure a lot of people do not like market crashes or these so-called “Perfect Storm”. However, to me these are rare. I treat these as golden opportunities. For someone who has been waiting on the sideline for months (the market peaks kind of creates a psychological barrier preventing me from buying)… these might not be a bad thing, seeing it from the long term perspective.

I view these as more risky ventures (hence the need for a high margin of safety) eg. Yangzhijiang, Global Investment Limited, HPH Trust, Accordia Golf Trust and the various REITs (esp. Viva Trust, AIMS AMP Capital Industrial REIT, LIMRT, etc).

Having said that, there is a certain amount of resilient of high dividend stocks to market declines (probably due to their high yield)… well, one can never know. With no or little earnings, free cash flow or not in a net cash position, dividend payout is not guaranteed.

Lastly, I don’t just justify my purchase of these high yielding stocks by the high yield…. that is NOT a reason to purchase.

 

 

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First trade done in 2017

It has been a while since I sold any stock.

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Today I have sold the Fastenal Co. stocks I owned. It is still a relatively new stock in my portfolio. I bought these stocks in Aug 2015. After selling the stock, I booked an approx. 42% profit.

Frankly, I do not enjoy selling any stocks. However given the run up in the US market, I reckon it would be prudent to trim down my stock holding and increase my cash holdings.

The stock price of Fasternal itself has been on a tear over the past three months plus.

Fastenal shares spike after earnings, hit 52-week high (read here)

The P/E TTM of Fasternal is 29.59, slightly over the stock PE 5 yrs average. Not particularly high, but not cheap either. 2015 and 2016 are not exactly great years for this company.

The good quarterly earning is a welcome change from previous quarters. This together with the US market rally helped to lift the stock price up.

However, I do not know if this is a turning point or one off, and anyway, 1 good quarter doesn’t mean much, and I do not view macro market trends as permanent (I view these ups and downs in US markets as cyclical).

Is the Worst Over for Fastenal? (read here)

Psychologically, there is always this little voice inside me – fear of losing out. eg. what if I sold too early (even after I sold, within the next few minutes – price kept climbing). However, I know I can never anticipate the future.

Opportunities will come again. I do hope to buy back Fastenal Co. at a lower price in the future. It is still a long-term play for me.

I have also tried to sell some of my Sg stock holdings…. typically I don’t actively try to sell. I will just probably try once for the whole day (on an irregular basis). If my order expires at the end of the day (due to my selling price too high), so be it.

There are some Sg stocks which I have been trying to offload as well. I guess their fundamentals aren’t as strong as I hope them to be. I may be off-loading at a loss for some of them (but overall should be a net gain), but I do hope to use these cash to purchase stocks of better-performing companies at the next correction or crash (and also to reduce the pain when the crash does come). Perhaps I might be able to get some good dividend income shares as well then.

The last time I bought any stocks was in June – Aug 2016 period and Jan – Feb 2016 period. Kind of lumpy – I don’t really trade frequently.

I am not in a hurry to sell. The Singapore market is still some way off from its recent peak in April 2015. Not sure if it will ever cross it…. but used to waiting.

The US markets, on the other hand, is another story.

Dow closes above 21,000 as stocks post best day of 2017 after Trump’s speech (read here)

The bulk of my net worth is in these Sg stocks – and if I can sell these, my war chest will increase significantly.

I like to have lots of money when I go ‘shopping’. The last time I check in Feb 2017 (read here),  I have approx. 13% of my net worth in cash. Kind of low. With the selling of this stock, it would just increase marginally. However, part of my P2P loan & Invoice Financing portions are in cash, so this helps as well.

 

 

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REITs and this thing called Perpetual Bond

I have been reading posts by fellow financial bloggers and articles online pertaining to investing. Every so often I would come across the term investing in dividend stocks.

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I don’t consider myself good at evaluating dividend stocks. Nevertheless, I hope to use this post to sort out my thought process. Feel free to correct me on any mistakes you see.

How to evaluate dividend stocks

My general view is that these are typically mature companies’ stocks, which typically choose to distribute portions of their free cash flow to investors in the form of dividends rather than invest for growth (given the lack of possible further expansion).

There are many ways to evaluate these ‘dividend stocks’. Yes, it is important to study the business of the company and make an intelligent forecast of the future prospect of the company. However, there is always a limitation in accurately predicting how policies may change and if a new competitor would emerge (as highlighted by Budget Babe in her post on Starhub – read here).

On the other hand, we can look backward (in history) into the past performance of these companies and estimate if these companies can continue paying such high dividends moving forward in normal times (without any crisis) or in times of crisis (eg. sudden rise in interest rates). After all, the history is the only fact we can actually lay hands on.

Since, like I said earlier, to me these are typically mature companies (not high growth small companies), to value these companies’ intrinsic value via EPS growth or DCF models would not be appropriate. In addition, these companies also would fail as high growth stocks if you look at them from the point of view of a GARP investor (ROE typically less than 25%).

There are numerous ways to skin a cat. I am aware that there are many seasoned dividend investors in the local blogosphere. And each of them has their own ways of evaluating dividend stocks. Ultimately for each of us, we need to find our own individual way (in evaluating a dividend stock) which is best suited for ourselves. The worst is to just blindly follow what others are buying (or selling) – and worse – blame others when things fall apart. After all, we are our own worst enemy (in investing).

A few ways which I think offer us investors confidence in purchasing the dividend stock (and holding onto it) are:

1) Studying the Balance Sheet of the company.

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AK’s recent post on his purchase of Centurion Corporation Limited shares is a good example (AK, I hope you don’t mind me using your post here :p). He mentioned that Centurion had about $700 million worth of debt (eg. add $146 mil of current borrowing with $559 mil of non-current borrowing), and investment properties worth $940 mil. See below table.

He thought about what would happen in the event of 1% increase in interest rate (eg. would the reduced EPS be sufficient to cover the dividend payout, etc). It is kind of like a ‘stress test” so to speak.

Centurion.jpg

Ultimately the primary interest of the company will be to ensure that there is sufficient liquidity to continue to operate (Not to pay out as much dividend to shareholders).

However, having said that, a reduction in dividend payout will inevitably cause a drop in the company share prices, and if share prices drop too low, there will be a risk of takeover by external parties.

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.” Warren Buffett

 

2) Dividend Payout Ratio and Free Cash Flow

Another common way is to study the historical trend of the dividend payout ratio (read here).

Dividend Payout Ratio as calculated as:

dividendpayout.gif

A good indicator of whether falling earnings pose a risk to dividend payments is the dividend payout ratio, which simply measures how much of a company’s earnings are paid to shareholders in the form of dividends. If the trend of the dividend payout ratio is upwards over the years (despite a constant dividend payout) – it would typically mean that the earnings and net income are declining, and over time, it will reach a point when earnings would be insufficient to cover the dividend payout. Yeah, you can literally see the ‘train’ coming towards you.

Dividends are paid from a company’s cash flow. Free cash flow (FCF) tells investors the actual amount of cash a company has left from its operations to pay for the dividends.  Budget Babe in her post on Starhub (read here), highlighted that Starhub’s dividend payouts have outstripped its free cash flow for the past few years, so that was a sign that the company was struggling to keep up its dividend payments (even without the 4th Telco coming in).

 

3) Applying bond valuation to REITs

In this article, the author mentioned that assuming REITs are like bonds, and knowing what the spreads are in comparing the REIT’s yield to the 10-year government bond.

Different factors affect the share prices of REITs:

  1. Spreads between REIT yield,
  2. Bond yield,
  3. DPU,
  4. Bond yield rate.

Spreads get higher in times of crisis (people are factoring slower growth rates for REITs), and with higher 10-year government bond yield (given the rising interest rates), plus lower DPU – all these will cause the share prices of REITs to drop.

 

My thoughts on Real Estate Investment Trusts (REITs)

REITs are a favourite among many dividend income investors. Ever since the end of the Great Financial Crisis, given the low-interest rate environment, REITs have offered many investors a great way to earn high passive income. In fact for some investors, their portfolio consists mainly (or only) of REITs.

Ok, personally, I do view stocks with very high dividend yield with a fair amount of suspicion (eg. too good to be true). And in fact, the higher the yield, the more I would study it. Frankly, given the choice, I would go for a fundamentally strong company with a moderate yield (3 to 4%) vs a company with high leverage (weaker fundamentals) but high dividend yield. And this principle, by default,  would make me strike off a lot of REITs from my radar. They are after all highly leveraged instruments.

On another note, REITs are required to distribute at least 90% of taxable income each year to enjoy tax-exempt status by IRAS (subject to certain conditions). Hence, as a whole, it would be unfair to dismiss REITs due to their high payout ratio.

While I look with envy at how much dividend others have collected from their REITs investments (some receive payouts almost every month), there is a certain reluctance within me to purchase any of them yet.

A lot has been said about what REITs can do for a normal retail investor. But let’s think first – why do developers want to create REITs in the first place. Being in the construction industry, I would inevitably meet people working for developer companies. And in many cases, in very simplistic terms, to the developers, REITs is an economical way to raise the much-needed cash (via an IPO of the REITs) while at the same time allow the Developer to retain ‘control’ of their assets via the REIT’s manager.

I am sure being beneficial for retail investors would not be at the top of the developers’ lists when they created the REITs.

Prior to the creation of REITs, developers often would have their cash tied down to their heavily leverage property assets, which would prevent them from further investing in future developments. A property is, after all, a very expensive item – most developers would need to borrow heavily from banks to purchase the land, construct, market it, sell or rent, etc… there is only so much they can borrow from the banks.

REITs can help both developers and investors, says Cushman and Wakefield’s Sanjay Verma (read here)

To quote from the article above:

“For developers, it is an avenue to raise capital. Today, a developer can go for an IPO but it is not advisable based on the legacy of some of the IPOs. He can raise debt at high rates because the balance sheet is not healthy. He can go for private equity but that is also expensive. REITs will probably be the most economical capital.”

It appears to be a win-win situation for both the developer and the retail investor (at least from the period after the Great Financial Crisis till now).

However, before I continue further: There are ‘sponsored REITs’ and ‘non-sponsored’ REITs. Well, so far I have been talking about ‘sponsored REITs’ eg. those REITs spun off from developers. Nevertheless, the link between the seller and buyer (eg. REIT manager) of the property isn’t always clear to us retail investors. That’s probably a topic for another post.

Why my reluctance to invest in REITs yet…

Ok, besides the fact that markets have been reaching new highs…

Now, there are 2 cases which I have read recently, which made me think hard about what might cause this relationship between the developer / REITs & retail investor to sour.

 

Case 1: The case with Lippo Malls Indonesia Retail Trust (LMRT)

I am sure most would be aware of Lippo Malls Indonesia Retail Trust and its high yield.

Lippo Malls Indonesia Retail Trust Has A Yield Of 9%: 3 Things Investors Should Know (read here)

There are many things to like about Lippo Malls Indonesia Retail Trust (yes, there are many reports on its rising DPU). To be fair (before I go further), the last time I checked, Lippo’s gearing is not at the super high level (eg. at 35%) – read here.

However, there are some questions which I personally felt unanswered.

In this Nov 2016 report by OCBC, there was a mention of a debt fuel growth (emphasis mine): “As a REIT that pays out most of its earnings through dividends, we estimate that most of the revenue growth that LMRT has seen over the years was due to acquisitions, as gains from rental reversions were eroded by currency losses. Since 2011, LMRT has undertaken SGD1.16bn of acquisitions, boosting total assets to SGD2.13bn as of 3QFY16. The acquisitions were funded with a larger portion of debt, as LMRT only raised SGD467.6mn in equity and SGD140mn in perpetual since 2011.”

In another report by Moody’s dated 26 Feb 2016 (read here), it mentioned that (emphasis mine): “the trust has no further headroom for additional debt-funded transactions, although the credit impact of two new announced acquisitions will depend on how they are funded.”

So in very simple terms, here is a REIT which has been embarking on a debt fuel growth and has not too long ago reached the point whereby it cannot further fund the acquisitions via debt. So how does, the manager continue the revenue growth when most of its income is paid out via dividend?

Perpetual debt the new equity for landlords in Singapore (read here)

Can REITs use perpetual bonds to outsmart leverage rules? (read here)

Perpetual Bonds: Equity in Disguise (read here)

The Monetary Authority of Singapore capped borrowings of REITs at 45 percent of assets from 2016 and debt that can be considered equity offers landlords a way of complying with the stricter rules. With the lower leverage threshold, there might be more Singapore REITs who will look to tap this source of funding given it is still treated as equity instead of debt

Under global accounting rules, bonds with no fixed maturity that allow the deferral of coupon payments may be treated as equity. A perpetual bond – sometimes referred to as a “perpetual” or “perp” – is a bond that has no maturity date. The agreed-upon period over which interest will be paid is forever. Because of this unique characteristic, perpetuals are commonly treated as equity rather than as debt, even though they’re really debt instruments.

Ah yes, the use of Perpetual Bonds. Investment Moat did a great post about Perpetual Bonds all the way back in March 2012.

In other words, Perpetual bonds blur the boundary between debt and equity. They provide capital without having to raise equity. (read here)

They are also technically not termed as debt on the balance sheet.

In this article, it states that (emphasis mine): ” Subject to certain requirements, a perpetual bond issue will be treated as equity on the company’s balance sheet, which will not have an impact on its reported debt levels (which has implications for the REIT�s gearing ratio).”

Frankly, if you ask me, debt is debt (whether you call it Perpetual Bond or otherwise). Perpetuals are classified as fixed-income securities, coupon payments are mandatory (although they do allow for deferral of coupon payments). One key difference is that borrowings are something we as the retail investors can see on the balance sheet, while Perpetual Bonds are not reported as debts or borrowings.

So if I am to use the balance sheet as mentioned above to evaluate the risk of the REIT, perpetual bonds (as borrowings) would not be included (not be detected at all). By the way, AK is well aware of Perpetual Bonds (read here).

And also, people seldom use Free Cash Flow to evaluate REITs (eg. as per Budget Babe’s post above about Starhub). After all, we know that 90% of the net income are paid out as dividends. They typically use funds from operations (FFO) and adjusted funds from operations (AFFO) (read here).

Paying more for something less

Now let’s go back to LMRT, using this article again. It states(emphasis mine): “Since 2011, LMRT has undertaken SGD1.16bn of acquisitions, boosting total assets to SGD2.13bn as of 3QFY16. The acquisitions were funded with a larger portion of debt, as LMRT only raised SGD467.6mn in equity and SGD140mn in perpetuals since 2011.”

For a REIT, gearing ratio is the total borrowings (both short-term and long-term) divided by total assets.

Now let’s look at LMRT’s Gearing Ratio over the years (see below):

  1. As Reported in its 2011 Annual Report: Gearing Ratio is 8.7% (Gearing remained conservative as at 31 December 2011)
  2. As Reported in its 2012 Annual Report: Gearing Ratio is 24.5% (Gearing remained moderate as at 31 December 2012 )
  3. As Reported in its 2013 Annual Report: Gearing Ratio is 34.3% (Gearing as at 31 December 2013)
  4. As Reported in its 2014 Annual Report: Gearing Ratio is 31.2% (Gearing remained conservative as at 31 December 2014)
  5. As Reported in its 2015 Annual Report: Gearing Ratio is 35.0% (Gearing remained conservative as at 31 December 2015)

And the Net Asset Value vs Purchase price of their Property Portfolio in 2011 and 2015 respectively (see below):

  • Net Asset value as reported in 2011 Annual Report is S$1.545 billion, while purchase price was S$1.3135 billion.
  • Net Asset value as reported in 2015 Annual Report is S$1.83 billion, while purchase price was S$2.0877 billion.

 

Working backward (in very simple mathematics, excluding all other misc. costs), let’s calculate the total borrowings in 2011 and 2015:

  • In 2011, the Gearing Ratio was 8.7% while NAV was S$1.545 billion. So total borrowings would be S$0.134415 billion (Total Borrowing / Total Asset Value x 100 = Gearing Ratio).
  • In 2015, the Gearing Ratio was 35% while NAV was S$1.83 billion. So total borrowings would be S$0.6405 billion.

So in other words, between 2011 to 2015, LMRT borrowed an additional of S$0.506 billion (0.6405-0.134415) to increase NAV by only S$0.285 (1.83-1.545). I do not understand why any company would borrow more to acquire assets that are valued less. 

To further highlight this point, in its 2015 Annual Report, the purchase price of its asset is much more than their NAV. (S$2.0877 billion vs S$1.83 billion)

Also, on a minor note, why would they term a gearing ratio of 24.5% (in 2012 AR) as moderate while a gearing ratio of 31.2% (in 2014 AR) as “conservative”?

There is a reason why MAS adopts a unified gearing cap of  45% recently (read here) “the effect of rising interest rates on gearing. Property asset values are calculated based on the total income derived from the rental of said properties, which means that rising interest rate and total debt costs will affect gearing ratios by lowering the asset value if rental yield increases do not keep pace with the increase in interest costs. This will lead to the gearing ratio increasing for the REIT, even if there is no increase in net borrowings.

In fact, at current low-interest rate environment, a gearing ratio of 35% is already high. Even if they (LMRT) do not borrow more, a higher increase rate in the future would indirectly increase this ratio.

However, let’s hold on to these thoughts here first….

 

Nevertheless, LMRT keeps on ‘borrowing’ via Perpetual Bonds. In Sept 2016, LMRT issued SGD140 million in 7% perpetual bonds.

Lippo Malls Indonesia Retail Trust sells perpetual bonds offering at 7% (read here)

Lippo Malls REIT issues SGD140 million in 7% perpetual bonds (read here)

Distribution payments at a rate of 7% per annum for the qualified investors are very tantalizing. However, I do wonder why a company would want to issue bonds at such a high rate? For what benefits to the company? And to add to the puzzle, portion of the proceeds (from the issuance of the 7% perpetual bonds) is used to redeem its maturing S$150m bond at 4.25% distribution rate (read here). Why borrow at a higher rate only to pay off a debt which is at a lower rate? What’s more, in recent times, more and more of these debts are in the form of Perpetual Bonds which are ‘invisible’ to most retail investors reading the balance sheet.

I can think of a few reasons:

  1. For Perpetual Bonds, because there are no maturity dates, the interest required to compensate the bond holder will typically be higher. So technically, LMRT is paying more interest for the sake of a long or indefinite duration debt.
    • Perhaps, it might be, still be a good time to take advantage of the low-interest environment to issue a long or indefinite duration debt.
  2. In comparison to other sources, this 7% is considered reasonable or low. As highlighted in LMRT 2015 Annual Report (AR),  the Interest rate – Central Bank Rate (Indonesian) in 2015 is 7.5% while the 10 Year – Indonesian Government Bond Rate is 8.9% (and both rates seem to be increasing over the years). See table below.
  3. If LMRT can borrow at a high rate to acquire assets generating income at an even higher rate, it might not seem that bad. In general, the property yield of LMRT is 8.75% (read here) which is higher than 7%. NPI as shown in LMRT 2015 AR for FY 2016 is S$171.86 mil, while asset size is S$1.9 billion (however, I think we should be using purchase price – which I read in AR 2015 is S$2.0877 mil). Yield estimated at approx. 8.23% – seems about there.(read here)
  4. However, let’s look deeper, at the assets LMRT recently purchased:
    • Dec 2016: LMRT acquired Lippo Mall Kuta at a price of S$59.8 million. Based on the pro forma financial statements for the financial year ended December 31 2014, the net property income (NPI) contribution from LM Kuta would be S$7.3 million. So assuming NPI won’t change much after purchase, the yield is approx. 12%. (read here)
    • July 2015: LMRT acquired Lippo Plaza Batu (LPB) and Palembang Icon (PICON) for a total consideration of S$106.8m. Given its estimated NPI yield of c.8.0% (read here).

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So 7% interest for borrowing in perpetuity might not seem that bad. Actually, I do wonder why would someone invest in Perpetual Bonds (Perps) of LMRT at 7% when they can get a higher rate by investing in LMRT stocks (yield 7.95%)? Perps have no potential for income growth and high-interest rates can wreck havoc on their values. REITs, on the other hand, have the ability to increase income in line with inflation, and also offer the potential for capital appreciation. Well… I think things may not be that simple…

However, having said that, there are still risks and questions:

  1. LMRT is subject to Forex risks. In simple terms, LMRT borrows in SGD to buy Indonesian properties which produce income in Indonesian Rupiah which LMRT need to convert back to SGD annually to pay back the debt holders. So if SGD rise against the Rupiah, it may erode the gain in profits in Rupiah. There appears to be a drop in the value of SGD against the Rupiah in 2016.. but from a macro long view of 5 or even 10 years, the trend is up. Then again, I am not good at predicting trends.Chart.jpg
  2. What is announced in the news about possible NPI yield prior to the acquisition of the asset by LMRT may be inflated? And the NPI drop after the purchase (probably due to the expiry of short term leases engineered prior to the purchased). Let’s look at one property that LMRT purchased in Dec 2014: Lippo Mall Kemang. The purchase price was S$362 mil. NPI for YR 2015 is S$27.8 mil (as shown in 2015 AR). So NPI yield is approx. 7.7%. Nevertheless, in this report dated Sept 2014, it stated that based on the pro forma financial statements for fiscal year ended 31 December 2013, the Net Property Income contribution from Lippo Mall Kemang was $33.6 million. (From 33.6 drop to 27.8 mil).
  3. Issuers are often forced to pay a “penalty” for not calling back a perpetual bond issue (read here). This penalty usually takes the form of a higher rate of interest to be paid to the bondholder, in the event that the bond is not called by some pre-determined date. Also common is the resetting of the coupon rate to another based on a combination of prevailing interest rates (at some time in the future) plus a predetermined spread. In the case of LMRT 7% Perpetual Bond (read here), there are reset dates. Reset distribution rate will be the prevailing five-year SGD interbank offer (SIBOR) rate in addition to an initial spread of 5.245%. So, in gist, the 7% might not stay that ‘low’ forever.
  4. Most of the demands for SGD perpetual bonds have been from retail investors. However Perpetual bonds are typically bought by institutions and high net worth individuals. If these bonds flow heavily to the retail investors, the results (for the investors) may be bad – I am not sure if most of the retail investors are aware of the risks involved in a rising interest rate environment, and do they have the long term holding power & mentality. For a 10-yr bond, a 1% rise in interest rate will cause it to drop 10% in price. For perpetual bonds with no maturity, the drop can easily be more than that. I really don’t know how the Perpetual bond market situation will pan out when rates increase significantly (and frankly I don’t think it looks pretty). In 2015 alone, Singapore REITs issued a record S$700 mil worth of perpetual notes with no maturity dates. In this article (read here) dated Aug 2016, the 6% Perpetual Bond sold by Hyflux to mom-and-pop investors have declined to 95.4 cents from about 100 cents as recently as Aug 12. Yeah, in the short term, it may be good for the companies issuing the perpetual bonds, but when these bonds get a really bad name by the public, the house of cards may fall. Fewer buyers – higher rates – spread wider.

In gist, Forex fluctuations and NPI values are not constant. While the purchase price is more or less constant. In a difficult environment, with lower occupancy rates (which equates to lower rent income), NPI will drop.

Perpetual Bond rates are significantly higher than bonds with maturity dates… For the REIT, a sudden rise in the amount of Perpetual Bond issuance in too short of time would not be good for it. LMRT average property yield and its recent acquired assets NPI yield are pretty close to 7%… and I doubt future issuance of Perpetual bonds by LMRT will be at a lower rate (than 7%), and will property yield increase in the future? And like I said, if LMRT ensures that its assets generate better yield than the perpetual bonds, things would be fine. Fail to do that, in a rising rate environment, and with a unified gearing cap of  45% by MAS, the balance will tilt to LMRT’s disadvantage. A fine balancing act.

And who is Lippo Malls Indonesia Retail Trust buying these assets from? If I am not wrong – it should be from PT Lippo Karawaci Tbk. PT Lippo Karawaci Tbk. (“LK”) is LMRT’s sponsor. LK is Indonesia’s largest listed developer by total assets and revenue.

LMIRT announcement on 8 January 2016 that it had entered into an agreement with its sponsor, PT Lippo Karawaci Tbk (Ba3 stable), to acquire Lippo Mall Kuta for IDR900 billion (SGD82 million).

 

Case 2: The case with Sabana Shariah Compliant REIT

I am sure people would have by now know about the saga between the REITs manager and a group of unitholders: “Besides a removal of its manager, unitholders are also calling on the Singapore-listed industrial REIT to rescind its three most recently announced acquisitions.”

Investors reiterate calls to remove Sabana REIT’s manager despite assurances of review (read here)

As stated by Lepak Investor in this post (emphasis mine) “having a REIT with a sponsor is a double-edged sword; particularly if the REIT made some purchases which are of a questionable nature in terms of valuation and yield accretion…………… In essence, this deal seems to heavily favour two parties – the sponsor (including the REIT manager), and new investors…”

I would like to focus on this issue about the overvaluation of the Changi South property.

Disgruntled Sabana REIT unitholder lodges complaint with CAD overvaluation of Changi South property (read here)

Sabana Reit says book value of property to be acquired not relevant for current deal (read here)

I admit that I know very little about the valuation of properties.

“The worst thing you can do is invest in companies you know nothing about. Unfortunately, buying stocks on ignorance is still a popular American pastime.” Peter Lynch

Nevertheless, reading this article (read here) from NRA Capital, it states that “Property asset values are calculated based on the total income derived from the rental of said properties…” That sounds fair. An asset is, after all, something that puts money in your pocket; rents are income.

The use of NAV (Net Asset Value) is a favourite among investors in evaluating the value of REITs. This I reckon is often obtained from property valuation houses in Singapore. However, in the case of Sabana’s Changi South Property, unitholders are questioning the valuation reports by the property valuation houses of Colliers, Savills and Knight Frank.

There are a number of points worth noting in the issues raised by the unitholders:

  1. Valuation houses are engaged by the seller and the buyer (in this case Vibrant and Sabana REIT’s manager). There would be an issue with a conflict of interest, after all, these valuation houses are engaged by the seller & buyer respectively.Would anyone bite the hand that feeds them (in a small market like Sg)?
  2. All three valuation houses concluded that the property was worth exactly $23 million, which is also the price at which Vibrant will sell the asset to Sabana REIT. The property was acquired by Vibrant Group in Mar 2011 for S$10.9 million. Sabana Real Estate Investment Management said that Vibrant Group had purchased the property for its own use, and hence the S$10.9 million book value represents the original cost of acquisition without accumulated depreciation. I still don’t understand the statement: You mean a property is valued less because it is for the company’s own use, while it is more expensive when it is not? I am sure if Vibrant rent out the building, it would get about the same rent as if it is under the REIT’s management.

Would this be a case of money coming in from one hand and going out from the other? The REIT’s sponsor selling at a higher price / questionable valuations to the REIT’s investor (who as passive investors have very little say in the decision). Profits end up in the (REIT’s sponsor) developer’s pockets.

On paper, the NAV appears favourable, but who are we to question these valuations? Also why would we – unless DPU dropped (resulting in share prices dropping as well).

And what are the chances of a unit holder lodging a complaint to the white-collar crime department of the Singapore police against the property valuation houses?

If I do not know, then I think it is wise that I do not invest.

 

In Summary

Like I said earlier, I felt that some of these questions remained unanswered (at least for me).

From the start, I mentioned it is not easy to evaluate dividend income stocks. Often we read about the increase in NAV and DPUs for REITs in the news, but one must always focus on how sustainable the dividend payout (or even earnings) is in the long term.

Although the use of balance sheets, dividend payout ratios and free cash flow is useful. These by themselves are not perfect.

The use of Perpetual Bonds often listed as Equity under the balance sheet is often not obvious to us retail investors. The rise in DPU may sometimes mask the fact that the borrowings are increasing at a higher rate than the actual asset value of the properties purchase. When interest rates rise, REITs may be hit by both the increase in interest payments pertaining to its debts and also the mandatory coupon payment to the bond holders.

And one should question if such purchases (assets acquisitions) are beneficial to the retail investors / unit holders or the REIT’s manager / REIT’s sponsors.

All is rosy when both parties (investors and REIT’s manager & sponsor) benefit. But as we can see in the case of Sabana- it ain’t pretty when things come crashing down.

“No one can see a bubble, that’s what makes it a bubble.” (click here).

Nevertheless, I am never against REITs, and in fact, am always on the lookout to invest in REITs or other high dividend yield stocks (for passive income) with strong fundamentals at the right price. And yes, need to study more into the different REITs and these stocks more…

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Change is the only constant

I haven’t been reading much into individual companies. I just felt that with markets hitting new hits, the is now very little room for errors. Why go against the tide?

I think in investing, one must really ‘know’ oneself. No pointing kidding yourself and acting all gungho and take on more risk than you can stomach. Sure when markets are rising, the profits are magnified when you invest more.

However, can you accurately time the crash and be out before the profits vaporize? In a rising market, psychologically there is this reluctance to sell, as you do not want to lose out on the gains (as compared to others).

In a crashing market, how much loss can you stomach, people may be able to endure a 10% or even a 20% decline, but a 50% decline? Very few can. And when your chips are all in (after all, the more you put in, the bigger the ‘gains’) – it is really very hard to stomach the loss (well at least I know that is for me – hence, for now, that is all I can ‘afford’ to be in the market).

It is ‘fun’ tabulating up the unrealised profits week after week. However, as any investor would know, unrealised gains are as they are – unrealised. Capital gains are fickle, passive income gains not as much – but if you stick to a fundamentally weak company with deteriorating business, it too would be gone.

There is, after all a difference between getting rich and staying rich. I think the below post put across this point very clearly.

Getting Rich vs. Staying Rich (read here)

The fortunes of people, companies, and even countries change.

This Taiwanese video (click here) shared by another blogger about the future of Singapore and China Rail Silk Road masterplan (which connects Southeast Asia via China to Europe) and China Maritime Silk road masterplan (which includes the Kra Canal through Thailand bypassing Singapore), is a sobering wake-up call that even future of nations are not guaranteed.

The London – Yiwu freight train has successfully been launched (click here). While news of the commencement of the Kra Canal has recently surfaced again (read here). I do not know what the future holds for Singapore Inc, but as China grows, it would continue to seek a more economical, faster and cheaper link between it and the west. Singapore might be an unfortunate casualty. Frankly, in simple economics, the real beneficiaries of this connection are the landlocked cities along the route (rather than the coastal cities of China or London).

I do not know what the future holds for Singapore Inc, but as China grows, it would continue to seek a more economical, faster and cheaper link between it and the West. Singapore might be an unlikely casualty. I think the political rational highlighted in some of the news and Taiwanese video is a bit overblown. Ultimately it all boils down to economic…perhaps I can see the day when the transportation of goods flow the other way round (from the west to the east) :p.

Let me digress a bit – it kinds of remind me of the 2006 American computer-animated comedy-adventure film ‘ Cars’. In the film, we learn about a place called Radiator Springs which used to be a popular stopover along the old U.S. Route 66, but with the construction of Interstate 40 bypassing it, the town literally vanished from the map.

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Having said that, as the time goes by, the ‘world’ in many ways get smaller – national boundaries may slowly blur (ok, maybe not that small with the new Trump protectionism and Brexit). People with marketable skills (and the right attitude) may find it easier to find jobs in many other countries.

And as investors, the world is literally your oyster (ok, there are some restrictions, eg. dividends from other countries may be taxed. If I am not wrong US stock dividends are taxed 30%). If someone living in far out Omaha can be one of the richest men in the world…..

In addition, I always feel that for some businesses unlike hard assets (eg. properties), these tend to be mobile (if location A doesn’t work out, they move on to location B).

 

 

 

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Yangzijiang Shipbuilding (Holdings) Ltd US treasury yield curves

I have been reading the blog posts from fellow bloggers and my own older posts. Yeah, the fingers are itching for some actions (buying some stocks)… be it for capital gains or dividend income.

Now may not exactly be the right time.

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Actually, I am not really good at being a ‘hybrid’ investors. I do know some investors who do value investing and stock trading (momentum investing) at the same time. Well, some do more of the first than the second (and vice versa).

I tend to feel that I lose my directions when I engage in the different modes of investing… after a while, I don’t really know my principles anymore and don’t really know what to believe (or what am I really doing — investing or gambling).

Yangzijiang Shipbuilding (Holdings) Ltd

Yangzhijiang came into my radar. It has a dividend yield of 4.79% in 2016.

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Given the collapse of the shipbuilding industry in China and the consolidations of various shipyards to  (with many smaller less competitive shipyard companies disappearing) – it is likely that Yangzhijiang will still remain standing in the long run. It is after all,  the largest and most cost-efficient private shipbuilder in China.

With more than 3,000 shipbuilding enterprises, mostly speculative yards, counted at the start of 2010, that number has drastically dwindled to only around 300 today, and only a little more than 100 yards have active day-to-day operations. (read here)

Although there are many things I do like about YZJ:

  • Strong balance sheet;
  • Management willing to cut loss quickly on losing enterprises and lay-off workers;
  • Managed to get major government contracts (in contrast to other smaller shipyards);
  • Consistent & high dividend payouts, etc

Yangzijiang shipbuilding lays off 6000 men plans 2000 more (read here)

I have my reservations over a few points:

  • Cyclical stock or business. They don’t tend to make good buy and hold stocks in the long run. Hard to predict their earnings.
  • The payout ratio has increased rapidly in recent months / year (see below);
  • And that is on top of the fact that revenue, operating income, earning per share all show a downtrend in recent years (not surprising given the slow collapse of the shipbuilding industry in China). Well if you search deeper, ROE, ROIC, ROA all downtrend in recent years.
  • Free Cash Flow is erratic in recent years.

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I came across an interview from Glenn Greenberg of Brave Warrior (formerly Chieftain Capital).

I’ve always like his general approach, specifically the following two points:

  • Focus on the quality businesses (he lived through the stock market crash of 1987, where the market tumbled over 20% in one day, and he wanted to ensure that if that ever happened again, he would feel comfortable with the businesses he owned)
  • Position Sizing: If it’s not worth putting 5% of your portfolio in the stock, then it’s probably either too risky, outside your circle of competence, or doesn’t have enough upside.

I feel that YZJ is a quality business, however, at the moment, I need to read more about it.

Being a big company does not make it recession-proof.

And not sure if I am willing to put 5% of my portfolio in it… given the market situation now. Frankly, I am not really sure how YZJ stock will perform in the event of a

Frankly, I am not really sure how YZJ (as a stock) will perform in the event of a market crash. I reckon that would be like a perfect storm (together with the collapse of the shipbuilding industry, O&G industry slump and Trump protectionism.

The sudden increase in payout ratio is worth noting (I hope management is not trying too hard to keep up ‘appearances’)….and any sudden drop in dividend payout will have an over-reaction to the stock price (esp. from investors who view this as a dividend yield stock).

 

US treasury yield curves

Well, I was reading my old posts, I recalled a post done in May 2016 (read here). There was the mention of US Treasury yield curves by Mr Tng:” A sign that a correction is coming is that the US treasury yield curve is close to as flat as what you see before previous crises.”

I recall that there was a market correction in Jan 2016 (in S&P 5oo & STI).

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So I will use that period as a benchmark and compare today’s US treasury yield curve to the curve then. See below.

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However, can’t really see any difference in steepness of the two curves. Well, am not really a big picture or top down kind of investor. Guess I just wasted 10 minutes. :p

“The way you lose money in the stock market is to start off with an economic picture. I also spend fifteen minutes a year on where the stock market is going.” and “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” Peter Lynch

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Risks (Love It Or Hate It, We Can’t Live Without It)

You know, recently I came across the important concept of “Taking Risk”.

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In the video below, Tom Sosnoff talks about his interaction with this golf Caddy Master – Jimmy Rocko (who is around 40 or 50 yrs older than him) when he was 15 or 16 years old.

Passive Investing is Broken. Here’s how to fix it | Tom Sosnoff | TEDxUChicago (click here).

While he was working as a Caddy, during break time, they would take turns taking shots at a bucket which is filled with money. The caddies have to put money (a quarter) in every time they take a shot at it. It is like in a sense a form of gambling ‘venture’. Over time Jimmy made thousands of dollars from this gambling venture because he would only take a shot at the bucket when it made ‘sense’ to gamble. Jimmy understand the concept of “Pot Odds”.

Well, for one, Jimmy is a better golfer, but most importantly, he would only take a shot when the bucket is full of money and the odds are in his favor. Eg. the payout is much more than what he put in.

From Jimmy, Tom was able to learn about taking risks, quantifying risk (Pot Odds) and golf.

 

Then there is the below blog post by cheerfulegg. Like him, I used to gamble during Chinese New Year. Now as I get older – I tend to do this less often during CNY. Having known the risk-odd equation (not in my favor). There are better odds in stock investing if one is patient enough… and I have been quantifying risks the whole year (looking at stocks), CNY is for me a break from this :p

Teach Your Kids To Gamble by cheerfulegg (read here)

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However, I do agree that it is important to teach your kids to gamble. Well not to be addicted to it, but to understand that luck does play a part in life and that there are more important things in life than winning.

However, I would add one more point – which I feel many of the youths in Singapore are lacking, and that is to take risks and from it, learn how to quantify risks.

 

My thoughts

Frankly, if I can get rich and comfortable by going through life without having to as much lift a finger, I would have never touched stocks or taken any risk with my money. There would be no need to.

“When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.” Warren Buffett

I am a very risk-averse person by nature. So it is extremely weird to find me, investing the majority of my net worth in stocks most of the time. Or to try some other wacky ventures like Amazon FBA or P2P loans / Invoice Financing (in the earlier years, it would be insurance linked products, growth funds or unit trusts).

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When I first started investing in stocks, I thought it was the ‘hardest’ way to make money. It still is. After all, when you have a job – your earned income is more or less guaranteed (well, you can be sacked or demoted etc, but you get my drift). My job is like an extension of my school life eg. if I stay within ‘the line’, do as I am told, put in as much effort as I can, do all the right things, I will get rewarded (pay + bonus). Simple. To many, that is all they do to get money (who has time and energy to do anything else…read annual reports? No way).

On the other hand, there is no “Right” or “Wrong” in investing. The concept of risk and quantifying risk was new to me when I first started investing.

In fact, I hardly made any profit for many years. Actually, come to think of it, the time spent on investing (studying companies and financials or even trading) just does not add up to the returns (profits). I think I lost more than I make for many years. And what about the time spent worrying and feeling sorry for your losses? Isn’t working life + family life stressful enough?

However, over time, I learn to quantify the risk (weight the odds vs the possible returns). I had to. In retrospect, I had no choice. It is either a loss or a gain. I am not rich, I earned my money the hard way. I am not born with a silver spoon in my mouth. I started my working life in a 5 figure debt (student loan). In one of my earliest trade when I started working – I lost close to my month’s pay in 2 weeks.

Every time I look at the stock price, the company details, and financials… I had to think about the possibility of a higher stock price, better future business prospect, regular or increasing dividend in the future. The losses I had in the past are still fresh in my mind.

As you get older, your saving should naturally increase – and the odds may get higher (the amount you invest in or may lose). However, hopefully, we should get better at quantifying the risks.

Or put it in another way – Is flying a plane risky? To many it probably is. But to a seasoned pilot doing this every day for the past 10, 20 or 30 years, it is no risk at all. However, if you are to ask the same pilot to ride a motorbike and if he doesn’t have a license to do so – he would be taking a big risk with his life.

“Risk comes from not knowing what you’re doing.” Warren Buffett

I don’t consider trading as investing. I may not be buying or selling stocks at the moment (or actively doing that since early 2016), but that doesn’t mean I don’t have my eyes on the stocks which I want to invest in. I reckon I am like Jimmy Rocko who always have his eyes on the bucket.

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I don’t think we can avoid risk altogether. Taking a risk, by itself is not right or wrong. Perhaps, Tom Sosnoff managed to put it in a funny and witty way: ” God loves all of you, but God loves the ones who take risks a little bit more”.

 

 

 

 

 

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