Monday, December 31, 2007
The final half month till the end of FY 2007 was also slow, as trading volumes on the SGX dwindled because of fund managers and retail investors going on vacation. The slew of public holidays and “half” trading days also did nothing to boost liquidity in our stock market. SGX had changed the bid system on December 24, 2007 to enable the bid-ask spreads to be reduced and to encourage more trading in counters. All counters below S$10 now trade in bid increments of $0.01 (except penny stocks which remain status quo) while counters above S$10 trade in bid increments of $0.02.
A forumer by the nick of cif5000 on Wallstraits forum has kindly introduced me to a website which can help to compute the annualized compounded rate of return (CAGR) on my investments. This will make it easier to track my return on investment using a time-adjusted method, rather than absolute rate of return (which does not take time into account). Thus, for future portfolio reviews, I will be including the CAGR to date.
Below is the summary of my investments and related news as at December 31, 2007 (STI at 3,482.30 points):-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $3.32, Gain 414%, CAGR 108%. Nothing much happened in the half-month ended December 31 except that I attended Ezra’s AGM on Christmas Eve which I had blogged about some time back. The counter went ex-dividend today and the dividend was 3.55 cents per share, giving me a dividend yield of 5.5% based on my purchase price.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.41, Gain 86.1%, CAGR 66.3%. There was no news regarding Boustead for the half-month ended December 31, 2007.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.43, Gain 239.6%, CAGR 301%. Swiber had clinched an extension to their mega Brunei Shell contract of US$146.6 million announced in February 2007. This time, the contract value is around US$53.4 and will be recognized in FY 2009. This further affirms Brunei Shell’s confidence in Swiber’s abilities as an EPCIC contractor. I also attended the EGM on December 28, 2007 which I blogged about earlier.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.71, Gain 54.1%, CAGR 15.5%. There was no news for Suntec REIT during the half-month ended December 31, 2007.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.63, Loss 3.8%, CAGR -3.5%. There was no news from the company during the half-month ended December 31, 2007.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.85, Gain 23.3%, CAGR 492%. There was no news from the company during the half-month ended December 31, 2007. I think the CAGR computation is a little strange for CFG, at 492% ! Perhaps the I added in the wrong figures ? Anyway, since this is such a recent investment, perhaps the simple ROI of 23.3% will suffice.
My overall portfolio has increased by 99.4% from a cost of S$58.3K as at December 31, 2007. The market value of my portfolio is S$116.3K. Realized gains have increased to S$4.55K as a result of the dividend from Ezra.
Comparison against STI
The STI was 3,037.74 on January 3, 2007. It has a year-end close at 3,482.30, representing a gain of 14.6%.
Adjustment of cost to ensure consistency of comparison – My cost and market value were S$33.9K and S$46.0K respectively as at Jan 3, 2007 while my adjusted current cost is S$58.3K. Therefore, my adjusted market value will be about S$79.1K. The market value of my holdings as at today is S$116.3K. This represents an increase of about 47.2%.
Thus, for FY 2007 my portfolio has outperformed the STI by 32.6 percentage points. It may be difficult to outperform the index consistently as I had read that value investors do have some very bad years, but hopefully over the long-term my annual returns will still be better than the STI.
My next portfolio review will be on Tuesday, January 15, 2008 after market close.
Year-end FY 2007 Summary and Comments
For the financial year 2007, my investments generally did well and the companies which I own saw their businesses growing at a healthy clip. As we move in FY 2008, I will continue to monitor and read up on the businesses which I own and their relevant industry in order to get a better picture of whether their earnings can continue to grow; while at the same time researching into other possible investment opportunities. The central tenets of my investment philosophy remain the same: preservation of capital and margin of safety are paramount. I will NOT take unnecessary risks in punting and speculating, but will do things the slow and steady way. Though this method may seem silly and downright stupid in a roaring bull market, it will surely limit my losses in a correction, crash or prolonged bear as I have a margin of safety as cushion.
During FY 2007, I made a total of 3 purchases of shares in companies (not including the Pacific Andes rights issue and repeat purchases to average down). These include Swiber in Feb 2007, more Pacific Andes in August 2007 and finally China Fishery in Nov 2007. There were 2 sales made during the year: that of UTAC (which I had originally purchased in June 2006 using technical analysis, then realized it was a mistake) and Global Voice (which was purchased as a turnaround play in Nov 2005 before I undertook a value investing philosophy). These mistakes and others can be found in my “Investment Mistakes” section of my blog. I will continue to be patient and wait for the right opportunities to purchase shares in good companies. If the price is not right, then I will wait indefinitely.
Overall, I am pleased with my performance in FY 2007, which represents the first full year in which I have practiced value investing. Hopefully, as I move into the future, I can improve and refine my knowledge of value investing in order to become a much better investor than I am now.
Wishing all readers a very Happy, Healthy and Prosperous New Year and may 2008 be a fruitful year !
Note: I will be going on a leisure trip to Bangkok, Thailand from January 1, 2008 and will be back on January 5, 2008. Thus, there will be no updates during this period, but feel free to leave comments on ANY post and I will promise to respond when I return from my trip.
Sunday, December 30, 2007
This may sound ambitious, but I am starting a new series on behavioural finance as I feel it is very relevant to value investing and investing in general. I will be updating my investing sins and research series at the same time, so readers, kindly be patient. Most people actually lose money in the markets through their own mental faults, rather than a result of not being able to analyze a company objectively. Humans are natually emotional creatures (we are not robots !) and we tend to over-emphasize the emotional aspects of money in an unconscious manner. When dealing with the stock market, this can be counter-productive and extremely disruptive to wealth building. Charlie Munger (Warren Buffett's partner in Berkshire Hathaway) understood the basics of behavioural finance long before the experts took it up as a serious topic. Now, there is a whole field of study relating to it and experts acknowledge that a lot of research needs to be be done in order to ascertain the effects of behavioural finance on investing. Examples of topics I will be covering under this category are over-confidence, over-reaction bias, loss aversion and mental accounting.
The topic I would like to touch on today is mental accounting. Mental accounting is the process by which we tends to mentally segregate our money into various "buckets" for spending and utilizing. This can create problems because after all, money is money right ? Why should we separate money into distinct categories ? This is due to the fact that human beings like to compartmentalize money, and we do it unconsciously in everyday life. For example, we tend to mentally set aside $100 for meals every month, $80 for transport and say $200 for entertainment and leisure activities. Thus, it will not pain me if I spend $150 on a good concert because I had already mentally accounted for it. Assuming I am effective at budgeting, this will not be a problem; problems arise only if the mental accounting map had set aside $1,000 instead of $200 !
The above was a simple example of mental accounting, but the more pervasive effects can be found in stock markets and casinos. To illustrate, imagine a person winning $1,000 in a casino on his first few rolls, due to sheer luck. This $1,000 is then perceived as "bonus" money which can be spent frivolously as the gambler will not be fazed if he lost all of it as he did not have this extra $1,000 to begin with. In the end, the house always wins in a casino and he may very well lose the $1,000 he initially made, and probably his pants too if he is not careful ! The point here is that the extra $1,000 is still money, though it came from a windfall; but our minds automatically segregate it as "additional" money which can spent freely and with abandon. The wise thing to do would be to stop playing and keep the extra $1,000. (Better still, invest in and get a 5-10% yield !).
I have seen mental accounting very often in stock market behaviour, and have been victim to it myself (though I recognize it better now and take steps to tell my brain NOT to mental account). I often hear from friends who have gains in the stock market that these gains can very well be left to evaporate as "they were gains in the first place". Put another way, my friends feel that it is OK to lose money in a lousy company as the losses were originally made up of profits in the first place. This example is akin to the casino example I gave above, in that we tend to feel that profits can be lost without a blink rather than our own initial capital. If we put it in a rational perspective, and using value investing principles, every single cent of gain should be preserved as capital preservation is a cornerstone of value investing. This means that all gains should be retained and compounded to produce even better returns, instead of using those gains to "gamble" just because we have mentally accounted for it.
To conclude, mental accounting is a very subtle and insidious way of losing money which many people do not realize. It is time to ask yourself if you are guilty of this aspect of behavioural finance, and whether you can actively choose to prevent it from occurring again. In this way, we can all be better investors !
Friday, December 28, 2007
I attended the EGM today at Swiber's new office location at Cyberhub @ IBP. It was actually quite an adventure for me to locate the company as I had to take an MRT train to Jurong East, then hop on one of those IBP feeder buses (at S$0.20) in order to drop off at Bus Stop 5. Cyberhub @ IBP was one of the buildings beside M1 and Hi-P (both listed entities on SGX), and Swiber occupied about 2.5 floors (3rd floor partial, 4th and 5th floors). The office was spacious and brightly lit and the EGM was held in a conference room on the 4th floor. See picture below for a glimpse at Swiber's new lobby>>>
2) Charter Rates (rationale for Sale-and-leaseback) - One shareholder did query the Management on why Swiber did not prefer to use third-party vessels for their EPCIC work, but instead to rely on their own vessel fleet. Mr. Wong mentioned that spot charter rates are very high now and it would not make economical sense for the company as it would lower their GP margins. On the other hand, operating lease payments for sale and leaseback vessels is only 20 to 40% of the spot rate and therefore yields a much better cost structure for the Group.
3) Risk of Vessel Delivery Delays - One of the risks is that vessel deliveries get delayed, thus impacting on the start dates of the project or contract and undermining confidence in the Company. This could potentially result in loss of revenue and goodwill as well. Mr. Wong mentioned that Swiber has personnel who work closely with the shipyards and engine manufacturers to ensure that delays are minimal and are anticipated way before they occur, so that some contingency plan may be conceived. This gives them better operational control over their vessel delivery schedules and minimizes the impact of nasty surprises should there be any delays or faults with the vessel. In my opinion, this was a mitigating factor and it is commendable that the Company takes pains to monitor its new vessels under contruction in addition to its current ones.
4) Mechanics of Sale and Leaseback Transaction - The exceptional gain arising from this round of sale and leaseback transaction is US$33 million; but this will be progressively recognized as each vessel is delivered. Thus, the entire US$33 million will be smoothed out over FY 2008 and FY 2009. The cash will be received in full (100%) once the vessel(s) are delivered, and a 20% downpayment is to be received from those currently under construction. I would expect to see at least part of this reflected in the FY 2007 cash flow statement.
5) Prospects for Deepwater Drilling - Mr. Wong mentioned that currently, the market for offshore oil and gas consists of 90% shallow water, 10% deep-water. This is expected to change to 80% shallow water, 20% deepwater in 3 to 5 years time. Thus, Swiber is preparing itself for deepwater drilling as a separate business segment in order to complement their EPCIC activities. Their new vessel orders such as the equatorial driller are specially designed to handle South-East Asian's benign waters, and this will give them a competitive advantage as they also operate on a lower cost base as compared to Norwegian companies which also have the requisite assets and expertise.
6) Kreuz Shipbuilding and Engineering - Originally known as North Offshore Pte Ltd, this company was wholly acquired by Swiber in August 2007 and renamed. With field development activities growing in the region, the Company felt the need to have their own base to carry out in-house repairs, store equipment, perform maintenance work and also carry out some fabrication. These activities, if outsourced to third-party shipyards, will increase Swiber's costs. Thus, the acquisition of a shipyard cum fabrication yard enables better cost synergies to be achieved for the Group.
7) Joint Ventures in Brunei and Vietnam - As announced in their press releases in Sep 2007, Swiber has entered into JV with companies in Brunei and Vietnam. For Brunei, this allows them to bid for local projects which they otherwise are not allowed to bid for as a foreign company, thus opening up their opportunities for more contract wins. In Vietnam, the partnering is with state-owned companies which have a foothold in the O&G industry there, thus it will open up more chances for Swiber to work with their local partners on contracts (more of a collaborative process).
8) Territorial Expansion - When quizzed about which other regions Swiber will be targeting, I got the reply that Thailand, Middle East and India were potential hot spots. Swiber have already clinched their maiden drilling contract in the Gulf of Thailand some time back, and Mr. Wong mentioned that 40% of the world's oil and gas reserves are found in South East Asia. When asked about China though, he said that most of the time they preferred to do it themselves and did not like outside companies to take on projects. Swiber is currently bidding for US$800 million worth of projects for FY 2008 and FY 2009.
9) Order of US$53.13 million Derrick Crane - The crane would be one of the largest in the world and is capable of lifting loads of up to 4,180 tons, a rarity among the cranes these days operating in EPCIC projects. Mr. Wong explained that cranes which can lift heavier weights help to cut costs as they reduce the time taken to dissemble the object into parts, lift them and then re-assemble them back again. For conventional cranes, this has to be done and it can be tedious and time-consuming. Thus, it is my understanding that Swiber will have a definite edge in bidding for higher value projects once this asset comes on board.
10) Demand and Supply for Newly Ordered Vessels - Mr. Wong clarified that even though the Group orders vessels with no firm contract or definite customer demand on hand, these orders are benchmarked to what oil majors require for field exploration and Swiber keeps in close contact with these oil majors to see what their requirements are. Therefore, the orders follow the requirements of oil majors closely and this will mitigate the risk of the vessels lying idle in the shipyard or not being put to use. Note: Swiber's business model is inherently different from Ezra as Ezra operates on a long-term charter basis for their vessels (thus ensuring steady revenue streams) while Swiber's vessels are utilized for specific contracts by the company themselves. Thus, people should be wary of comparing these two companies as they operate differently, possess different assets and are targeting different aspects of the oil and gas supply chain.
All in all, the feel I got was not so much of undue optimism, but more of guarded and cautious optimism. The Management is confident of their 3-prong approach to building the business and so far the fruits of labour have been very good, seeing their financials so far. Whether this can carry on and whether they can clinch another deal of similar or higher value than their Brunei Shell deal remains to be seen.
Monday, December 24, 2007
I attended Ezra's AGM today at 10:00 a.m. and it was held at Raffles City Convention Centre Function Room "Bras Basah". The turnout was pretty good and there were about 30-40 shareholders. The directors and chairman were also on time except for Mr. Ngo Get Ping (Indepedent Director) who was conspicuously absent from the meeting. The Chairman Mr. Lee Kian Soo mentioned that he would turn up "in a while" but in the end he did not arrive and no further explanation was given.
The meeting proper went as scheduled and all resolutions (including those under special business) were proposed, seconded and passed. I managed to catch up with Mr. Tan Tat Ming and also Mr. Tay Chin Kwang (Finance Director) after the AGM to clarify my questions and discuss the prospects of the Group moving forward. Below is an excerpt of the topics covered:-
1) US$888 million sub-sea installation project - Mr. Tan has confirmed that this project will be under EOCL and thus only 48.9% of revenues will be recognized by the Ezra Group. It is slated to start in 1Q 2008 and Lewek Champion has already begun the intial phase for the project. Note that the value of the project is not US$888 million, but only part of this.
2) Stake in Ezion Holdings Limited - This has been diluted from 21.83% to 18% due toEzion's share placement to raise capital for expansion, and as a result of the 1:2 share split in Ezion's capital, Ezra now owns a total of 10 million shares of Ezion. Ezra is making use of Ezion to charter 2 self-propelled jack-up rigs to augment their well engineering services division. Recall that Ezra previously had joint ventures with KS Energy for oil rigs in 2003 and 2004 (these have since been divested) but are only now taking up the mantle again to expand this area of business. They have the hardware and the software for making this work and currently they also have funds to invest in this area, thus this may become a growth area for Ezra Group in time to come. Mr. Tan was also kind enough to explain the salient aspects of oilfield and well engineering services, and how the equipment needed to be loaded onto the rig in order to be cleaned and how this was part of the extraction process for oil majors. Ezra is, of course, playing a pivotal supporting role in this.
3) Vung Tau Yard - Ezra has leased a piece of land with GFA of 88,726 square metres in Dong Xuyen Industrial Zone in Vung Tau Province, Vietnam. The main function of this future yard is to develop it into a ship building and ship repair yard, so that the Ezra Group can be less reliant on third parties for their shipping repairs and hence reducing costs (and hence improving margins) for the Group. Currently, the piece of land is only a greenfield and Mr. Tay had mentioned that it would take at least a year to year and a half (1.5) to develop it. Construction will commence in 1Q CY 2008.
4) Orders of 4 Multi-Functional Support Vessels (MFSV) - The MFSV, as explained by Mr. Tay, are specialized vessels which are ROV-enabled such that they can operate in difficult deep sea conditions, and Mr. Tan has also mentioned that vessels of higher bhp (e.g. 14,000 and 18,000) have seen very good charter rates and that the industry is sorely lacking in newbuilds for such vessels. All these culminate into better, stronger demand for such vessels and Management is confident of good charter rates moving forward. Recall that Ezra will NOT order a vessel unless there is confirmation of demand from an oil major or a customer, thus the 4 MFSV currently on order are confirmed to be chartered out once they are completed. Financing should take place via financiers or through bank loans and using the funds from the listing of EOC Limited. Mr. Tay said that the Group is watching their cash flows on a weekly basis and I have confidence that they are closely monitoring their cash to avoid sudden cash crunches which may occur should payment be delayed by their customers. Cash Management is integral to any company and I have confidence that the Management can handle this aspect well, as they have done so since 2005.
5) Training Base in Vietnam - Mr. Tan has confirmed that Ezra has plans to set up an in-house training base in Ho Chi Minh City, Vietnam in order to train personnel for sailing and handling of the larger and more complex vessels which are coming on board. Scholarships will also be given out to entice good talent to apply for jobs in the maritime business, and this training base will be used to upgrade and enhance the skills of current technicians and sailors in Ezra's employ. There are also plans for a mentoring system whereby industry veterans will coach the new recruits on how to handle the larger bhp AHTS and MFSV, and personnel from Rolls Royce may also be engaged to give technical updates on the new engines/technical specifications which come with increasingly sophisticated vessel technology. All-in-all, it will be an on-the-job training centre for personnel to be equipped with the right skills set to enable the Company to have sufficient manpower at a time when the industry is facing a growing acute shortage. I see this as a positive move from the company to prevent a skills shortage and also retain talent through appropriate incentives.
6) EOC Award of AIS Status - Mr. Tay has confirmed that Ezra has already been awarded the AIS status some time back, but now it is EOC which was granted the status. This would mean that all income derived from Singapore-flagged vessels operating in overseas waters would be exempted from tax. Furthermore, Mr. Tan had also mentioned that Section 13A of the Singapore Income Tax Act exempts the Group from a certain amount of tax derived from activities of some of their vessels, and my impression is that this award to EOC will further reduce the future tax liabilities of the Ezra Group, as it covers even revenue from the FPSO.
7) Bidding for FPSO Contracts - Ezra is currently bidding for another FPSO deal after they announced their maiden FPSO contract in October 2006. As I understand from Mr. Tay and Mr. Tan, the process to bid for an FPSO contract is long drawn out and tedious as many suppliers of various parts of the FPSO have to be consulted with regards to delivery schedules and parts availability before the contracted can be formally awarded. Even then, there is te question of whether the FPSO can be customized to the customer's specifications. It is good that the Company takes a step by step approach to bidding for the FPSO contract to ensure that all conditions are fulfilled, so as to not rush into it. Such a contract will take up valuable resources and manpower and proper planning has to be undertaken, thus I am sure the Group will not wish to rush headlong into another contract without doing the requisite cash flow planning. I remain cautiously optimistic about Ezra's chances to clinch another FPSO contract, as they are up against industry giants like Prosafe and Solstad.
8) Delivery of FPSO - This has been confirmed to be around June to July 2008 (hence it is the 4Q FY 2008, not 4Q CY 2008). Thus, FY 2008 will see the recognition of about 3 to 4 months of revenue from the chartering of the FPSO.
9) Charter Rates and Demand for Vessels - Charter rates have been on an upward trend and are expected to be sustainble as more oil and gas E&P activities shift to deeper waters. Mr. Tan did mention that India was already drilling to 3,000 metres (which the new vessels will be able to handle) while there was news that a driller in the Middle East had hit 10,000 metres ! Apparently, more oil deposits can be found at such depths than intially anticipated due to the tendency for oil to run to lower and deeper areas (due in part to its viscosity). Thus, shallow oilfields are expected to run dry by about 2030 to 2050, and more E&P will thus shift to deeper waters where more oil deposits are expected to be uncovered. This will bode well for the Group as they have already secured their orders for such vessels which will be delivered in FY 2009 and FY 2010. Moving forward, Mr. Tay did hint that Ezra will continue to order more vessels in time to come, to augment their present fleet. With such buoyant conditions, demand should remain high for such sophisticated vessels and charter rates should remain high.
10) Sale and Leaseback Mechanism - For sale and leaseback, the Group has to sell its vessels to the financier who will then receive monthly regular payments or operating lease payments from Ezra. Ezra will, in turn, charter out the vessel to a customer for charter revenue. Thus, the difference between charter revenue rate (per day) and the per day operating lease requirements forms the basis for gross margin for each vessel (less personnel costs in operating each vessel). Mr. Tan acknowledged that this is the case and assured me that the charter rates are usually about twice the operating lease payments, thus ensuring a very healthy margin. This margin if sustainable because part of the costs and taxes which have to be paid by Ezra in operating the vessels can be passed on to the customers, as is customary in the industry; and oil majors should have no problems in acceding to such requests due to their need for these high-end vessels to support their deep sea E&P activities in future.
The overall feel I got while chatting with Management was that there was still room to go for Ezra's expansion, and they are still in the midst of growth even though they had already shown 5 consistent years of growth. Since most of their larger vessels will only be delivered from FY 2008 onwards, there should still be significan upside to earnings. I will be keeping track of the progress of the company as the months go by, and I am confident that Ezra will continue to pleasantly surprise on its path of growing its revenue and earnings base.
Saturday, December 22, 2007
It's been a while since I had a post, but that's due to the fact that nothing much has been happening with regards to the companies I own, till now ! Also, I have been busy at work clearing my pile of stuff before the Christmas and New Year's Day holidays. Anyhow, on December 19, 2007, Swiber announced that Brunei Shell Petroleum Company ("Brunei Shell") had awarded them a contract extension for the transportation and installation of offshore facilities off the coast of Brunei which forms part of the major project developments by Brunei Shell in that region. The work is expected to be completed by FY 2009, implying that the revenues from this contract extension will only be recognized in FY 2009.
Readers would recall that on February 13, 2007, Swiber had announced their largest contract to date of US$146.6 million with Brunei Shell. Of the total contract value, US$70.5 million was to be recognized in FY 2007 while the other US$76.1 million would be recognized in Fy 2008. In the latest announcement, it was reported that the total new contract value (in addition to the US$146.6 million) would be approximately US$200 million, which means that this contract extension is worth at least US$53.4 million which will be recognized in FY 2009.
This extension is very good news for Swiber in that it demonstrates that Brunei Shell has faith in the company and are willing to continue to use them 2 years into the future. Also, Swiber has shown that it can deliver larger projects on schedule, which is probably why the contract extension was given. This speaks volumes about the Company's ability to handle larger projects for oil majors as more of their new vessel fleet comes on stream. Mr. Goh also mentioned that the oil and gas sector is fiercely competitive, but that Swiber will offer value to customers by offering a range of services which are catered to the specific needs of each customers (customization), and this will afford them a suitable competitive advantage. It remains to be seen, of course, if Swiber can manage to outflank the competition and clinch larger projects in time to come. The company has already bidded for projects worth a total of US$800 million for FY 2008 and FY 2009, and their joint ventures in Brunei and Vietnam should act as catalysts which could see them clinching projects in these countries very soon.
One concern is that the new vessels which are coming on stream (including the drillers) may see a lack of demand or rates that were not as high as anticipated. It would be good if Management can support their optimistic prognosis with more concrete and substantial evidence; otherwise the high capex associated with ordering vessels would surely be a drain to cash flows, unless the company can derive suitably high revenues from future drilling and EPCIC operations. The FY 2007 results and presentation should cast some light on the company's direction and future plans, and I will be keenly tuning in to this over the next few months.
In terms of contracts, the company seems able to clinch at least 2 to 3 contracts on a regular basis every quarter. Note that the last "batch" of announcements of contract awards were from the period of May to July 2007, and involved three contracts/LOI worth US$21.3M, US$31M and US$12M. The more recent batch of contracts were announced from mid-November (Nov 13) to date and involve the amounts of US$25M, US$31M and US$53.4M. One quick glance should tell the reader that the value of the contracts is generally higher than the previous batch, while the time period for reporting contract wins has also shortened considerably. Assuming the company is able to secure 2 to 3 contracts every quarter, one can only hope that the value of these contracts continues to increase, and hopefully it will culminate into another large contract either equalling or exceeding the US$146.6 million one from Brunei Shell.
I see good potential for growth for the company, assuming they play their cards well, leverage on their strengths and make clear their objectives and goals. I should be attending the EGM on December 28 and will offer readers some updates if I manage to speak to the Management again.
Sunday, December 16, 2007
While surfing EOCL's website for more information on the company, I chanced upon the latest news release from EOCL (which is now a 48.9% associated company of Ezra). Apparently, Ezra has not deemed it necessary to have a press release to announce the news that one of its associated companies has been awarded the AIS Status by the Singapore Ministry of Transport (SMOT). According to the press release by EOCL, the Approved International Shipping Enterprise (AIS) status award will take effect from August 1, 2007 (FY 2008) for an initial period of 10 years, subject to a review at the end of the fifth year.
With this award, EOCL's subsidiaries (which include most of its vessels as each vessel has a company incorporated in the vessel's name for tracking of vessel costs and revenues) will enjoy tax exemption on a wide range of shipping income. This also includes income from the soon-to-be-delivered FPSO in FY 2008 and will be a great boon of the company as revenues from the FPSO are expected to be significantly higher than their current vessel fleet, thus necessarily incurring more income taxes. In addition, the award also includes tax exemption on gains from ship sales into YA 2009 (i.e. FY 2008) and hedging gains into YA 2010 (i.e. FY 2008 and FY 2009).
As the CEO of EOCL Mr. Lim Kwee Keong said, this award effectively recognizes Ezra and EOCL as major international shipping vessel operators and acts as a seal of quality for the Group. The SMOT had established the AIS scheme as part of its goal to develop Singapore as an International Maritime Centre, and only established shipping companies with worldwide networks (as Ezra Group has built up over the years) and a good track record are eligible to apply for this award.
Queries for Ezra FY 2007 AGM on Dec 24, 2007
I have come up with a brief list of queries to address the Management during the AGM on December 24, 2007 (Monday):-
1) What is Ezion's future role for the Ezra Group of companies ? Will it have anything to do with the chartering of oil rigs for use by Ezra in expanding its revenue stream ? Will this constitute a separate business unit ?
2) Oilfield and Well Engineering Services - The AR mentions this, so please elaborate more. Ezra will charter 2 oil rigs for delivery in FY 2009, but what has this got to do with their core operations ? Will this tie in with HCM Logistics and will it be part of the planned fabrication business ?
3) Ezra has leased a piece of land of GFA 88,726 square metres in Dong Xuyen IZ, Vung Tau province in Vietnam on a 39-year lease. The principle activities are ship building and ship repair. Kindly give details of this new proposed yard. Will Ezra Group be using this new facility to build and repair their own vessels instead of relying on third-parties ? Will this help to reduce costs and improve margins for the Group ?
4) How will the 4 MSFV on order be financed and will they be injected into Ezra proper or into EOCL ? Also, will the option for the remaining 6 MFSV be exercised, and if so, where will the funding for these vessels come from ?
5) Please elaborate on the training base which was reportedly set up by Ezra Group in Vietnam to train personnel due to a lack of human resource for the oil and has sector. This was also reported in a recent issue of The Edge Singapore.
6) More details on the AIS Status award for EOCL.
7) How hedging is performed by Ezra Group in order to avoid the fiasco which occurred with Semb Marine and Labroy Marine.
I will be coming up with a more comprehensive list of questions during the coming week, as there are only about 7 days left till the AGM and I am still reading through the AR in detail.
Friday, December 14, 2007
Mid-December 2007 Portfolio Review
It has been a slow month for me during the half month ended December 14, 2007, as there have been no news updates from the companies I own. I am quite content to sit back and let Management do their job in growing the company, and am not worried as long as there are no unforeseen events negatively impacting my companies. The recent fishmeal report for December 2007 for CFG and PAH did indicate rising prices of fishmeal surpassing US$1,000 per ton, and this bodes well assuming the price can stay constant due to limited supply.
The market did suffer sudden, unexplained bouts of extreme volatility, as is characteristic of a jittery bunch of speculators who will buy at the hint of good news and sell the moment things appear to be turning sour. Such activity is, of course, very conducive for the pockets of brokerage firms but can hardly be said to benefit the retail investor. One should not let Mr. Market’s moods dictate if you should buy or sell, instead one should observe the fundamental characteristics of each company to decide if it offers value. The proponents of Modern Portfolio Theory will of course stress diversification in such volatile times, as it offers protection against downside. But diversification is also a barrier to exceptional returns, and the theorists have often neglected to mention this. Companies with stable fundamentals and good growth will ultimately outperform market averages over an extended period of time, so patience is needed for an investment to grow in value.
Below is the summary of my investments and related news as at December 14, 2007 (STI at 3,466.38 points):-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $3.18, Gain 393%. I received Ezra’s Annual Report FY 2007 a while back, and have been spending time digesting its contents. There is really a lot to learn about a company from its financial statements and detailed Notes To The Accounts, and I already have several queries in mind to approach Management during the AGM. Incidentally, the AGM will be held on December 24, 2007 (Christmas Eve) and I will provide an update on the proceedings on my blog. Ezra is currently on cum-dividend for 3.55 cents per share, ex-dividend date is on December 31, 2007.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.38, Gain 83.8%. The only news concerning Boustead was that director Mr. Loh Kai Keong had purchased 135,000 shares from the open market, at around S$2.35 (exact price is unknown). It has certainly been a while since a director of a company increased his stake, and it could signal more positive developments to come in future. There has been virtually no further positive newsflow from the company since their announcement of the mega S$300 million project in Libya (of which the Group will take a 65% stake in), but I do expect more growth in CY 2008. The dividend of 3 cents per share was received on December 13, 2007.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.30, Gain 226.7%. Swiber has toned down its newsflow as well, after releasing a slew of press releases in Nov 2007. It will be holding an EGM to approve the second round of sale and leaseback, and this will be held on December 28, 2007 10 a.m. at its office at International Business Park. I am considering if I should take the time to attend this meeting, as it could reveal good insights about Management’s direction for FY 2008; and I do have some questions on Equatorial Driller as well which I hope to bounce off Mr. Raymond Goh. In the meantime, I will be reading the circular for the EGM which I just received this evening.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.65, Gain 48.6%. There was no news for Suntec REIT during the half-month ended December 14, 2007.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.62, Loss 5.3%. There was no news from the company during the half-month ended December 14, 2007.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.90, Gain 26.7%. There was no news from the company during the half-month ended December 14, 2007.
My overall portfolio has increased by 95.5% from a cost of S$58.3K as at December 14, 2007. The market value of my portfolio is S$113.9K, up slightly from S$113.8K for end-November 2007. Realized gains remain at S$4.3K, pending the ex-dividend date of Ezra.
Comparison against STI
The STI was 3,037.74 on January 3, 2007. It is currently at 3,466.38 today, representing a gain of 14.1%.
Adjustment of cost to ensure consistency of comparison – My cost and market value were S$33.9K and S$46.0K respectively as at Jan 3, 2007 while my adjusted current cost is S$58.3K. Therefore, my adjusted market value will be about S$79.1K. The market value of my holdings as at today is S$113.9K. This represents an increase of about 44.0%.
Thus, as at December 14, 2007, my portfolio has risen by a gain of 29.9 percentage points higher than the STI.
My next portfolio review will be on Monday, December 31, 2007 after market close. I will also do a special year-end review and there will be a general commentary on what to expect in FY 2008 for the companies I own (though I may decide to do a separate posting on this).
Tuesday, December 11, 2007
Interestingly, the topic of trading and investing competitions first came up on another investor's blog. He was commenting on the salient aspects of such competitions and how they did not create a very real-life scenario for people to learn investing. For myself, I have always felt that the term "investing" was too loosely used in such education "seminars" and "competitions". The reason for the quotation marks (") is because I feel such events are thinly veiled attempts at trying to get people hooked to the business of trading, rather than investing. I shall elaborate further.
There have been a number of such competitions and games organized by I-Cube, SMU, NTU and NUS, in which investment clubs or societies team up with brokerages to offer students and the general public some information on the stock market and investing. The reporting and coverage of such events has always been skewed towards winning a prize or obtaining some monetary reward or recognition for being able to generate the most cash out of a virtual portfolio. Normally, contestants are given about 8 weeks of real time to "invest" (I use the word loosely) their money and generate returns. The ones who can "grow" their portfolio the most during this period of time would qualify to be the winner, and he or she will win a cash prize from the sponsors. The game platform will be set up to simulate a real-life trading platform, with live prices obtained from direct SGX feed blinking on the screen. Anyone from students, retirees to housewives can spend 8 hours a day frantically buying and selling stocks in the hopes of churning up the best portfolio, and the contest here is to see who can "hit it big" by buying (or shorting) the right counter.
I must say all this frantic activity is the total opposite of investing ! When the organizers mention that such contests teach participants about the virtues of investing, they are indeed doing them a great disservice. By constantly confusing trading with investing, the poor contestants will think that the way to make money easily in the real world is through frantic trading ! Note that in the virtual world, there are no brokerage costs and no SGX clearing fees. Not only that, but one can even buy as much as they like even when there is no seller (thus distorting the actual concept of "queueing" for the shares of a company at a specific price). With such rules to "simplify" the game, it is no wonder that participants think that profits are so easily made in the real world, and their impression of proper investing may actually equate with the frantic buying and selling on the stock market. In value investing terms, this is a pure fallacy and it has been shown that frantic trading reduces gains in the long-term because of frictional costs, and constantly trying to second guess which are the best counters in terms of price will lead to at most average returns. Plus, some people risk a lot of capital in such games when they do a contra, which should NEVER be tried in public unless you wish to risk bankrupting yourself.
The strange thing is that the winners of such trading games (ok, I have quit using the word "investing" when referring to such games, as I think it's a farce) normally do not do very well in the real world. I remember reading some examples given where a winner of such games enjoyed a less than mediocre gain in the real stock market. This is because the element of emotions has been taken out of the game, and most contestants do not realize this. Trading within the game is "fun" and "stimulating" as it does not involve REAL money. Imagine putting your hard earned money on the block; suddenly the game seems a lot less fun. This is the sinister side of trading games which most organizers do not mention; the emotional aspect.
I had better stop here as I can go on and on about such games, which I feel are a complete waste of time as they are designed to teach people how to trade and enrich the brokerages, and do not impart any useful life lessons with regards to proper investing. Thus, to summarize, these are the reasons for my vehement dislike of such "game":-
1) Confusing "Trading" with "Investing" - This is of course done on purpose, for the primary motivation for a brokerage is to encourage churn; and what better way to increase churn rate than to educate a bunch of people that making money through trading is so easy ?
2) Unrealistic Trading Platforms - Virtual trading platforms are free of brokerage costs, which is like saying in physics that "please assume all surfaces are frictionless". In an ideal scenario created for an ideal world, the only imperfection is the human, right ? Cynicism aside, let's all get real and show people what the REAL world is like, instead of hyping up trading in a false and pretentious environment. Buying when there is no sell queue and selling when there is no buy queue is like saying you can create matter from nothing. In reality, illiquid stocks are hardly tradeable and their bid-ask spreads may be very wide.
3) The Psychology of Trading - The most gnawing difference between real-world trading and virtual trading is the absence of emotions such as stress, greed and fear. This distorts the true nature of trading and makes it look fun, easy and even entertaining. Nothing could be further from the truth. In forums where people trade shares, many people are constantly observed to be nervous, angry, disillusioned, fearful, greedy or euphoric. This cocktail of emotions can severely affect your ability to execute a proper trade.
4) Lack of Proper Education for Investing - There is virtually no proper method of teaching for value investing or even investing in general. No brokerage firm I know of talks about the virtues of buy and hold and most books in the bookstore (I would say 80-85%) talk about timing the markets and trading feverishly. For the uninitiated, this would seem like the "correct" way to make money from the markets. Singapore does not have a proper framework to educate the general public about investing, and everyone seems to go around in a half-dazed state wondering what investing is all about. Let's say it's an uphill task trying to explain to people about investing, let alone value investing !
I must say this post is quite a rant, but I had to get this topic off my chest for a while, and what better time than this, when there is little newsflow from the companies I own ?
Note: I will be travelling to Vietnam on a business trip from Wed Dec 12, 2007 till Friday Dec 14, 2007. My portfolio review will be done as usual on Friday.
Sunday, December 09, 2007
There was a very interesting article in the Sunday Times today, which wrote about how couples shared their finances and how they went about maintaining separate or joint accounts. Basically, it discussed about the language of money between couples, and how some spouses insist on maintaining separate accounts while others have purely joint accounts. The "middle-ground" or hybrid couple actually had a mixture of separate and joint accounts. While the article did give some detail on how couples segregated their bank accounts, expenses and decision-making on money, it did not really go in-depth into how investment decisions were made in each case. A few real-life examples of couples were quoted, with the most prominent one being a certain Ms. Tan who works in the IT line and who earns "several thousand" a month. I think a better way to approach this topic will be to segregate it into the 3 distinct categories as defined by the Sunday Times (while commenting on each) and then to give my own personal spousal financial arrangement and to opine on why it works well for me.
One Extreme - Separate Bank Accounts
The case of Ms. Tan was that she and her husband kept their own salaries confidential as well, and did not reveal how much was in their respective bank accounts. So I guess it was sort of a marriage without revealing any financial details, and it had lasted for quite a number of years, till Ms. Tan got into S$80,000 in debt due to her mother's medical expenses and was forced to go to CCS to settle her debts. Another jet-setting couple (Ben and Pam) also kept completely separate bank accounts as they travelled frequently and both had their own separate residences as well in different parts of the world. Thus, each had his/her own independent earning (and spending) power and so did not need to interfere or know about the others. In these 2 cases, I would assume there is an implicit trust between husband and wife that each will not over-splurge on items and blow their bank account. The pros as mentioned are that it cultivates and promotes independence as each spouse will be able to exercise total freedom on how he or she spends. But I feel that in the long-term, this may not be the most healthy way to go about things as there will be little communication on important financial issues which require a joint decision, and there is also the question on how to properly apportion joint expenses (you can't just use 50:50 unless you know each other's salaries, as one may be earning way more than the other !).
Another Extreme - Joint Bank Accounts Only
The other extreme is for the couple to maintain strictly joint accounts, which means that either spouse can effect transactions with just one signatory (either, or). The example given in the paper featured Mr. Andrew Wan and Ms. Joy Teh who are getting married in Jan 2008, where they had already "ironed out the details for merging their finances". This means that each of them will not have a separate bank account anymore, but will lump sum dump their individual balances into the new joint account of which each will have access to and knowledge of. This promotes transparency between and couple and eliminates the concept of "my money" and it now becomes "our money". Of course, this may also lead to disputes especially if each person has different lifestyles or spending habits which the other objects to, since each is free to dip their hand into the till. Also, in the event of any financial or legal disputes, it may be difficult to separate out the assets belonging to each party, as the joint account was in operation all this time.
Middle-Ground ("Hybrid") - Joint and Separate Accounts
The hybrid situation will be where the couple maintains their own individual bank accounts, while at the same time opening a joint account for common expenses. This is the practice I have been personally following for the last 3 years I was married, and so far it has worked very well for me. My wife and I retained our own separate personal bank accounts even after ROM, and we also opened a joint account under UOB where either of us can sign for or withdraw monies. The joint account is for expenses relating to our HDB flat, which includes utility bills (SP Services), HDB conservancy charges and any other expenses. For expenses on big ticket items, we will apportion the amount according to a pre-determined ratio (e.g. 60% myself, 40% my wife) and we will pay our proportionate share. Our salaries and spending are fully known to each other as I am the principle cardholder for our credit cards and my wife is the supplementary cardholder. This allows us to review our combined expenses every month and we discuss on how to budget or cut down on areas where we feel we had spent too much.
As for investment decisions, my wife leaves it solely to me to make the decisions about the buying and selling of shares. All I need to do is to get her permission for funds transfers to be made from her personal bank account to pay for the shares; and for the sale of shares, I will similarly credit her bank account through internet banking for the sales proceeds (this works for dividend distributions as well). At the end of the month, I give her a summary of all transactions involving shares including an update of dividends, and I also prepare a summary of our financial situation for our mutual discussion.
It is my personal belief that such openness will engender more trust and communication for a couple, and enable them to properly plan for their financial future. In the Sunday Times, it was mentioned that 9 out of 10 couples split due to financial differences (that's a whopping 90%!), thus it is important to prioritize money matters before a couple ties the knot, in case it leads to a lot of marital problems later on.
Wednesday, December 05, 2007
I notice one very distinctive trait of many investors, which is the flawed view of the "buy and hold" strategy. Many investors believe that as long as the fundamentals of a company are sound and that the company is making profits, they can simply hold on o their shares forever until they are "above water" again (meaning they can break even or make a small profit). A lot of traders and speculators also unwittingly become "long-term investors" when a stock they buy tanks below their cut-loss point, making it much too painful to realize the loss. They then hold on to dear life wishing for the stock price to rise to their buy price in the future. Others simply buy and hold because they believe that one should go long-term for shares, irregardless of how the company's underlying business is doing. Thus, they may end up with a dud company trading at 3 to 4x PER languishing in a commodity business and giving a paltry dividend yield of less than 2%.
Let us not get this wrong: there is nothing fundamentally flawed with the principle of buy and hold, and this strategy has proven to be effective through market volatility and different economic conditions. However, what I wish to clarify is that one should not buy and hold BLINDLY. There are several key points to note which make "buy and hold" different from value investing per se, and these involve a close look at the price you pay for an investment, as well as the quality of the underlying business. Let's examine these factors more closely:-
1) Price Paid - An investor must always examine the fundamentals of the company and its earnings, including future earnings and dividend prospects; in order to decide how much to pay for an investment. If the price paid is too high (refer to my posting on Investment Mistakes under "Asiapharm"), then it will take a long time for the value of the business to catch up with its price (if ever !). Eventually, the buy and hold may turn in a very small gain if the original price paid was too high (like in the dot.com bull run which saw valuations reaching stratospheric levels).
2) Deteriorating Fundamentals - No amount of buy and hold can save the investor from a permanent loss of capital if the company's fundamentals deteriorate. It may be anything from higher cost of goods sold, entrance of a powerful competitor, loss of monopolistic pricing or lower barriers to entry for the industry (e.g. liberalization of certain rules or laws); but the effect may be debilitating and permanent. An investor has to constantly keep up with news on the industry which affects his investment, in order to be able to react accordingly and sell if he sees long-term trouble ahead. Admittedly, this takes some skill and foresight; but an investor cannot afford to be passive, otherwise if he checks back 10 years later he may end up with only a fraction of his original investment left !
3) Opportunity Costs - Another demon associated with buy and hold which is often overlooked by investors is that of opportunity costs. This means your money is "locked up" in a useless investment generating sub-par returns which cannot even exceed the inflation rate (currently at 3.6% p.a.); while other opportunities whizz by you. Opportunity costs are the single most insidious aspect of a flawed buy and hold strategy, as it deprives the investor of much needed funds to channel to a more promising investment with good growth potential. During the subsequent bear market after the dot.com bubble burst, many investors were saddled with useless investments in which they could not bear to divest, thus depriving them of much needed cash to buy when prices were depressed.
Thus, the above illustrates the dangers of "buy and hold" when applied wrongly, and this is frequently seen on stock forums where people claim that as long as they "buy and hold", they will eventually make money or recover their losses. Remember that a stock does not know that you own it, thus there is no emotional or logical reason for a share price to move back to your BUY price, as it is totally unaware of you as a person. The bottom line is not to get too emotional about your investments, and to view them objectively as investments which should give you an adequate rate of return.
Sunday, December 02, 2007
To continue the series from the introduction where I had left off, I will be introducing the first "sin" of investing and elaborating more on it, as well as giving my personal views. Envy is something which is familiar to most people, especially Singaporeans. In a rat-race society where the most kiasu (i.e. scared to die) fight for survival, comparisons are inevitable. Just look at the throngs of parents fluffing their peacock feathers while boasting about their sons' or daughters' achievements; it's enough to make one cringe. Many children have the competitive spirit ingrained in them from young, and along with it comes envy; as not everyone is blessed enough to have either good looks, money or big brains. Thus, envy should be a part of everyday life unless one is either very blur, very ignorant or simply lives in his own world (hermit).
So how does the concept of envy find its way into investing and behavioural finance ? Envy occurs when an investor looks to another's portfolio or investment decisions, and always feels that the other person is better. This envy causes resentment to build up, as well as jealousy and probably even impotent rage as to why the other investor consistently does better. The envious investor does not bother to look inward and within himself to examine his own flaws and inadequacies; instead he attributes most of his failures to his object of envy, and starts to build resentment towards the person. Being envious can severely cloud your objective thinking and judgement as it will make one so smitten with "beating" the other person that you can lose track of rationality.
To give an example, suppose Larry (all names are fictional) always sees John as a friend and they engage in friendly rivalry, whether on the soccer field or in school. Larry has always been the better one at sports as well as grades and feels proud that he does better than John in most things. However, when they grow up and go into the adult world, John's investing acumen and patience sees him scoring multi-baggers and earning him lots of money; while Larry has made significant losses by trading without basis and succumbing to bouts of emotional distress. Increasingly, Larry feels that he is "losing out" to John even though he is thinks he is supposedly smarter than John, and as a result he feels more and more resentful. Eventually, he begins mimicking John's each and every move, buying when he buys and selling when he sells. As a result, he ends up losing even more money due to his indiscriminate behaviour. Envy has caused him to follow John's investment decisions blindly and he fails to understand that each individual should have his own unique method of investing.
For myself, when I first started out, I was also wondering why others seem to be making money while I was either making less, or losing money. There was a tinge of envy present as I was always wondering what the rest had that I did not. Fortunately for me, I managed to analyze my mistakes and realize that I should not go down the path of envy as it is self-destructive and serves no good purpose. Nowadays, if I hear someone doing better than me or having a higher % gain, I just shrug it off as I am satisfied with my own investment philosophy and pleased with my own personal progress. Letting envy take control would unravel my carefully prepared plans for building wealth slowly but steadily, and I did not wish to let that happen.
Friday, November 30, 2007
The half month from mid-Novembe 2007 to end-November 2007 was equally turbulent, with the resurgence of the sub-prime credit crisis sparking panic and fear in global markets. Many mortgage companies in the USA such as Wells Fargo have had to make large write-downs to reflect the losses for sub-prime debt. It did not help that Sears, a popular retailer in USA, also reported a 99% drop in 3Q 2007 net profit, which led economists to conclude that perhaps spending was dropping and USA is in greater danger of falling into a recession. On the Singapore front, inflation hit a 10-year high of 3.6%, while unemployment also fell. There was no particularly earth-shattering news about the companies I own, but the economic news was certainly interesting to follow !
I did take the opportunity to purchase shares in China Fishery Group Limited (CFG) as a result of Mr. Market’s manic-depressive mood swings. This was done on November 16 and subsequently again on November 20 to average down. With a historical annualized PER of less than 10, dividend yield of more than 5% and good growth prospects moving forward, this has made it an attractive purchase. CFG has a strong competitive advantage in that they are one of the few big seafood players in the world, and the Management has a good track record of growing the company for the last 8 years. I have thus included CFG in my current portfolio review.
Below is the summary of my investments and related news as at November 30, 2007 (STI at 3,521.27 points):-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $3.34, Gain 418%. Ezra has concluded their share buy-back scheme for now, it would seem. In total to date, they have repurchased 5.436 million shares from the open market to hold as treasury shares, at an average price of S$3.4603, costing them a total of S$18.8 million. On November 23, Ezra also announced the placement of 28.879 million shares in Ezion holding, in which they have 50 million shares, at a price of S$1.21 per share, thus netting a gross cash inflow of S$34.9 million. At this point, it is unsure if Ezion will issue Ezra with an equivalent number of shares to cover back this sale and at what price, as the announcement did not make it clear. I will be clarifying this as well at the AGM. Subsequently, on November 28, Ezra announced that EOC had snared its first major regional contract worth US$148 million, of which I had done a posting on just 2 days ago.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.38, Gain 83.8%. There was not much news from Boustead, except to announce on November 28 that they had incorporated a new subsidiary company known as Boustead Infrastructures (Labuan) Pte Ltd and that its principal activity would be building construction. This could possibly be a prelude to the Group snaring some construction contracts in Labuan, perhaps ? It remains to be seen if this will come to pass. On November 29, 2007, Boustead went ex-dividend for its interim dividend of 3 cents per share, representing a dividend yield of 2.3% based on my buy price. If annualized (using last year’s final dividend of 4.5 cents per share), the total dividend would be 7.5 cents per share for a yield of 5.8%.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.48, Gain 244.6%. There was no news from Swiber other than the announcement, on November 19, 2007, that it had incorporated a subsidiary company called Kreuz Offshore Marine Pte Ltd principally engaged in offshore marine support business. Recall that Kreuz International Pte Ltd is the renamed company after Swiber acquired North Shipyard Pte Ltd on August 6, 2007.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.55, Gain 39.6%. There was no news for Suntec REIT during the half-month ended November 30, 2007. The dividend of 2.8268 cents per share was received on November 29, 2007.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.635, Loss 3.1%. There was no news from the company during the half-month ended November 30, 2007.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.58, Gain 5.3%. There was no news from the company during the half-month ended November 30, 2007. However, Pacific Andes did buy shares in CFG over a number of days. This totaled about 1.254 million shares through Golden Target Pacific Limited.
My overall portfolio has increased by 95.2% from a new cost of S$58.3K as at November 30, 2007, as a result of the purchase of shares in China Fishery Group Limited. The market value of my portfolio is S$113.8K. Realized gains have increased slightly to S$4.3K as a result of the ex-dividend for Boustead.
Comparison against STI
The STI was 3,037.74 on January 3, 2007. It is currently at 3,521.27 today, representing a gain of 15.9%.
Adjustment of cost to ensure consistency of comparison – My cost and market value were S$33.9K and S$46.0K respectively as at Jan 3, 2007 while my adjusted current cost is about S$58.3K. Therefore, my adjusted market value will be about S$79.1K. The market value of my holdings as at today is S$113.8K. This represents an increase of about 43.9%.
Thus, as at November 30, 2007, my portfolio has risen by a gain of 28 percentage points higher than the STI.
My next portfolio review will be on Friday, December 14, 2007 after market close.
Thursday, November 29, 2007
This is part 2 of my analysis of Pacific Andes’ 1H FY 2008 results. I will be analyzing and commenting on the Cash Flow Statement as well as the prospects and plans for the Group moving forward.
Cash Flow Statement Analysis
Pacific Andes generated a lot of cash inflows from operating activities for 2Q 2008, amounting to HK$856 million, as compared to a much lesser HK$255 million for 1Q 2008. This caused the net cash inflow for 1H 2008 to total HK$1.11 billion. However, this was still about 11.2% lower than the total 1H 2007 operating cash inflow of HK$1.25 billion. This was due mainly to the larger decrease in inventories for 1H 2007, lower trade receivables as well as an increase in bills receivable for 1H 2008 as compared to 1H 2007 which had a decrease (and hence recorded a cash inflow). As PAH scales up their operations in Peru, it is understandable that they have higher inventories and also higher trade receivables, thus causing a slightly lower net cash inflow. The interest paid was HK$173 million for 1H 2008 compared to HK$61.7 million for 1H 2007, a 180% increase; which was due largely to the increased amount of debt which PAH took on. Income taxes were also much higher at HK$33 million due to taxation on their Peruvian operations, all of which ate into cash flows. These 2 items alone accounted for nearly HK$144 million increase in cash outflows, which is more than the difference of HK$141 million between 1H 2008 and 1H 2007.
For investing activities, PAH had acquired property plant and equipment worth HK$364 million in 2Q 2008. However, the main cash outflow was the acquisition of additional interests in China Fishery Group Limited (CFG), effectively raising PAH’s stake from 28.8% to 63.9% currently. A total cash outlay of HK$2.22 billion was paid to acquire the additional interest in CFG. The goodwill recognized for this transaction was HK$2.11 billion, which will be reflected in the Balance Sheet. For 1H 2007, PAH had spent money acquiring PPE, investment properties and paying for charter hire of vessels. The total cash outflow for 1H 2008 was HK$3.32 billion, as compared to only HK$339 million for 1H 2007. I see this move as PAH crystallizing more value from CFG at a good price, thus the positive effects should only be felt some time in the future.
There was quite a lot of “action” within the cash flows from financing activities. For 1H 2008, PAH had a 1:1 rights issue at 52 cents per rights share, thus raising an amount of HK$1.78 billion. This resulted in the issued share capital doubling and caused dilution in earnings per share. However, the rationale for this exercise was to raise PAH’s effective stake in CFG so as to recognize more value from the fast-growing CFG. Thus, I do not expect the earnings dilution to be overcome so quickly. In fact, it will probably take at least half to one year before the increased earnings from their present 63.9% stake kick in to overcome the dilutive impact. Another positive note is that they have repaid more bank loans for 2Q 2008 amounting to HK$97 million. For 1H 2008, they had repaid a total of HK$255 million worth of bank loans, and I hope that their operating cash flows can continue to stay strong for them to gradually reduce their gearing, so as to also reduce their interest costs. A dividend was not declared for 1H 2008 as I believe the Group wishes to conserve cash; instead, a scrip dividend scheme was proposed to allow shareholders to choose between a share dividend or a cash dividend. More details on this scheme should be out in due course.
Prospects and Plans
PAH has plans to grow their fishing division through CFG, as this is the division which shows the fastest growth and most promise. In the fishing industry, getting access to more supply of fish is critical, as the industry is more or less dominated by a few major players and there are also quotas set on the amount of fishing allowed. By purchasing more purse seine vessels and securing more VOA, CFG and hence PAH can increase its fishing fleet and get access to more supplies of fish in order to expand the business. From what I read, PAH and PAIH have a leading position within the global seafood industry, and PAIH’s supply chain management provides fish for about 20% of China’s market, thus this makes PAIH one of the dominant players in the industry. With greater access to fishing vessels and by obtaining their third and fourth VOA, PAH and CFG can then grow their business further. Management should be on the lookout for more earnings-accretive acquisitions of vessels or fishmeal plants, as well as attractive VOA opportunities. These will be the catalyst to further grow the business.
Another aspect which PAH intends to improve on are its margins. CFG is currently upgrading its super-trawlers to increase hold capacity, and this can help to bring back more fish to process at fishmeal plants using the same vessel, thus PAH will benefit as well as it provides the supply chain management services for the fishing division. The upgraded vessels will also be used to hunt for Chilean Jack Mackerel, which is a new species PAH has not utilized yet. Other improvements on operational efficiency will also help to improve margins, and Management is actively working on this.
For 1H 2008, the Group acquired 16 vessels and 3 fishmeal plants in Peru. Another was recently acquired in Chimbote and was announced on October 10, 2007. This gives the vessels greater access to fishmeal plants to unload their catch so that they can be re-deployed to catch more fish.
For their frozen fish SCM business, PAH is working towards reducing chartering expenses by growing their own fleet of reefer vessels. PAIH is also working towards harvesting under-utilized species of fish in order to grow the Group’s product lines, and to avoid over-fishing for the more “popular” species. As such, the Group has also engaged a qualified international audit firm to audit its practices with regards to over-fishing, and so far the report has been positive on all aspects.
Note that PAIH has constructed a new processing complex in Qingdao, China which will be operational by December 2007. This is a 333,000 square metre sprawling complex with state of the art facilities and equipment, built at a cost of US$85 million (about HK$663 million). Once operational, it can greatly enhance the Group’s seafood processing capabilities and help the Group to attain new levels of efficiency and quality.
The future looks positive for PAH and CFG, assuming they can scale up the business and also maintain or improve their margins. The key risk is if they cannot secure more VOA or acquire more vessels in future, thus limiting their ability to grow their supply side. I will be awaiting PAH’s 3Q 2008 as well as CFG’s FY 2007 results, after which I will do another review.
Wednesday, November 28, 2007
This evening, on November 28, 2007, Ezra announced that its 48.9%-owned associated company, EOC Limited, had clinched a milestone first major regional contract worth US$148 million to jointly provide transportation and installation services for the Malaysian-Thailand Joint Development Area (MTJDA). The contract was awarded by Carigali-PTTEPI Operating Co. Sdn Bhd (CPOC), which is a joint operating company between PTTEP International Limited and Petronas Carigali (JDA) Sdn Bhd. Thus, the contract value will be jointly shared between EOC and CPOC, which means EOC will recognize US$74 million from it.
This contract will involve the provision of various offshore support vessels including Lewek Champion (heavy lift accommodation pipe-lay barge) in order to transport and install platforms. Actually, it is EOC's 100% owned subsidiary, EMAS Offshore and Construction, which had won the contract from CPOC and CPOC is acting as the main contractor; thus EMAS is the sub-contractor for this project. The project is slated to being in 3Q 2008 (from July to Sep 2008) and end a year later (i.e. around July to Sep 2009), thus impacting the financials for FY 2009.
A quick computation shows that the profits accruing back to Ezra Group are not that significant after all, due to the fact that they now own only 48.9% of EOC Limited (and thus can only recognize that portion of profits attributable to associated company). EOC will recognize US$74 million from the contract over a period of about 12 months, but since Ezra holds 48.9% of EOC, this means that only US$36.2 million of the contract will be recognized in the Group's books. Assuming a net profit margin of 15% (to be conservative), this works out to be about US$5.43 milliion or S$7.87 million; which will appear as part of "Share of Profits of Associated Company" in Ezra's consolidated accounts. Profit attributable to shareholders ex-gains for FY 2007 was S$34.5 million (from my earlier analysis), thus this contract does represent about 22.8% of the recurring earnings for Ezra. It remains to be seen if the Group can scale up their core net profits for FY 2008 significantly, with the delivery of the FPSO Kitty Knutsen. We shall find out on January 9, 2008 when the 1Q FY 2008 results are released.
Regarding the prospects of the Group now that this contract has been clinched, I would say that Ezra also wishes to cover their home base of Asia instead of merely looking for contracts in other parts of the world, which is a good thing. But if the vessels are utilized for such contracts in Asia, will this mean that they will not be available for charter to other parties during the whole FY 2009 ? Will this negatively impact financials and "tie up" their capacity ? For FY 2009, there should be more new vessels coming in to ease this lack of supply, and Ezra should see more contracts coming in as they had ordered the vessels based on customer demand in the first place. It will be good to enquire this of the Management during the upcoming AGM, which should be held in the later part of December 2007.
Sunday, November 25, 2007
With Mr. Market currently being so manic-depressive and seeing only bad days ahead, it is important to remember that he is there to serve you, not to instruct you. The pervasiveness of his mood swings has the ability to affect all but those who inherently understand the true value of a business. Market watchers and pundits who are paid to say something about the market everyday will come up with a myriad of reasons why Mr. Market is pessimistic, and a dearth of bad news will continually stream in to reinforce this perception. Thus, the resultant effect is a massive sell off by hedge funds and mutual funds because they too are affected by the fear and panic which is spread by Mr. Market. Oh, what mischief this man can do ! Sometimes, when I glance at the market, I can almost see Mr. Market’s evil face grinning at me as he waves his hands over the market, causing millions to panic and dump their holdings at the lowest possible price (no, I am not schizophrenic, I am just using a metaphor !). This hardens my resolve not to listen to him but to focus on the true worth of the companies I hold.
A falling market is the ultimate test for a value investor. It is mentioned in value investing books that you never know if the companies you pick have the ability to survive Mr. Market’s manic mood swings, and there is no way to know if your portfolio is sound until it is tested by fire. Thus, when I view the current market situation, I see myself facing the “exam” which I have been “studying” for these past 18 months. All the research, reading, analysis and thinking has gone into identifying good companies selling at a fraction of their true worth; but now the time has come to see if the buy-and-hold strategy will ultimately win over the “fast profit” strategy of churning your portfolio.
With this in mind, I would like to reiterate to readers that the goal of sound and intelligent investing is not for quick gains or huge profits. If you want those, please go to the nearest 4-D or Toto booth, put down a few dollars; then hope and pray for yourself to strike the lottery ! In fact, the most important tenet for value investing should be capital preservation. With this, I mean that one should invest with such a wide margin of safety that losses are largely minimized, while gains are almost certainly assured. Too many people throw their money into the market with only the upside in mind; they never think of the potential LOSS they may face, and always end up shocked and stunned when the market turns against them.
It is also prudent to note that one can actually make a lot of money by avoiding losses. What do I mean by this ? It simply means you don’t go out there and take unnecessary risks, like buying into a company you don’t understand, subscribing for IPOs (which subsequently tank) or chasing a company’s share price just because it has just rallied. Please note that avoiding such mistakes can actually make you much richer even if you do NOT know a thing about value investing; as compared to people who keep chasing the next hot tip, or buy at the peak of a bull market, or simply buy indiscriminately. This may sound quite incredible, but one can actually compound their money better in a bank (earning a paltry 0.25% interest per annum for POSB) than letting the market eat up their money through poor judgement and bad decisions.
To conclude, I would say that for one to really practice value investing or go down the path of value investing, one has to change one’s mindset radically. Most investment professionals or fund managers will preach about how their fund has generated the highest returns or how a particular sector is “hot” or “growing at an exponential rate”. Just try asking them about capital preservation and they will become evasive and uncomfortable, and tell you that “in investing, there are always risks, so we must assess if you are high, medium or low risk; so that we can tailor the portfolio to suit your needs”. What I say is: investing is only risky if you do not have capital preservation in mind, and fund managers who invest only thinking of gains are not doing their clients a favour. In order for an investor to do well in the long-run (yes, not short-term !), one has to make capital preservation the central concept in one’s investment philosophy.
Saturday, November 24, 2007
This is part 2 of Boustead’s 1H FY 2008 results review, and I will be concentrating on the Cash Flow Statement and also discussing the prospects and strategies for the Group.
Cash Flow Statement Review
Boustead’s cash flow from operations has traditionally been very strong, as they have an established set of core businesses which generate good cash inflows consistently. Their geo-spatial technology arm, for example, is a cash cow for the Group even though it has limited growth, as it is used by government agencies and researchers. Engineering services and real estate solutions also rakes in the cash by completing projects in a timely manner and ensuring they contract only with reputable clients who have lower risk of default. Part of the net operating cash inflows of S$18.5 million was also due to the stronger deal flow for 1H 2008, as compared to 1H 2007, as the Industrial Real-Estate Solutions Division headed by Boustead Projects had snared a record number of contracts. This is evident from the increase in receivables resulting in cash outflows of S$32.8 million and consequent increase in payables resulting in a cash inflow of S$40.2 million (again, this uses the indirect method of cash flow statement preparation). The result was a significant increase (more than 400%) in cash inflows from operating activities from S$4.1 million in 1H 2007 to S$18.5 million in 1H 2008.
For investing activities, the company had purchased a higher amount of fixed assets (at S$9.5 million, presumably for use in their engineering contracts) as compared to the same period last year (at S$4.9 million). However, the major cash outflows in 1H 2007 was from the consideration paid to minority shareholders in order to acquire more of Boustead Projects (55% to 95%) and Controls and Electrics (from 60% to 75%). For 1H 2008, the acquisition of shares from minority shareholders will include the remaining 10% stake in Boustead International Heaters Limited (payable in 4 installments on June 23, 2007 onwards). There was a net cash inflow of S$10.4 million from Boustead disposing of assets held for sale, and recognizing the S$6.5 million as gain on disposal in the Income Statement as well. All these transactions helped to lower the net cash outflows from investing activities to only S$1.4 million, as compared to S$28.7 million in the previous period.
Looking at financing activities, the Group had mainly spent cash on giving out dividends (4.5 cents per share less 18% tax in the previous announcement). Some cash was also used to pay off bank loans and dividends to minority shareholders, resulting in a net cash outflow of S$9.4 million. The lack of activity within this section shows that Boustead need not rely on financing activities to generate cash, implying that most of the cash is generated from operating activities and this is enough to keep the Group going. Of course, the argument is that too much cash is not a good thing unless the cash is properly utilized, which is why I am curious to see how the Group is planning to use its cash hoard of S$127.5 million in the months to come.
Prospects for the Group
Since Boustead has three main core divisions, I will comment on the prospects and plans for each and give my views accordingly.For the Energy-related Engineering division, prospects continue to look very positive as the world grapples with record oil prices (as at the time of writing, oil prices have hit an intra-day peak of US$99.29 per barrel, just a whisker away from US$100 per barrel) and a higher demand for energy due to the growth of China and India. Alternative energy systems developed by Boustead to convert waste-to-energy should continue to be highly sought after. With oil prices predicted to surpass the US$100 mark and continue their climb, Boustead’s expertise will continue to provide the Group with contracts and opportunities. Mr. FF Wong had mentioned that the Group was in the midst of negotiating several mid to large contracts in the coming months, so shareholders can sit back and wait for some good new to flow in.
For their water and waste-water division, Management is candid enough to admit that the division can hardly manage to expect to turn around this financial year (FY 2008) as competition has been stiff and margins have been low. During the AGM, Mr. Wong had already indicated that he was approached for many BOT water projects in China, but had rejected all of them due to low margins which made the projects unattractive. This is one aspect I highly admire about Management, which is their ability to say “no” if a project does not add value to shareholders and also their honesty in admitting that things are not going well. I hold integrity and honesty in high regard and Boustead has not disappointed me on these aspects thus far. Salcon’s eventual turnaround will definitely take some time and shareholders should be prepared for this, as Management turns their attention to the Middle East to try to secure contracts with better margins. It was also reported in their press release that they would continue to work on cutting-edge technologies to keep themselves one step ahead of the competition, and hopefully, these measures will churn up some worthwhile contracts for Salcon in the coming months.
Boustead Projects has been on a roll, and this division should continue to do well for the foreseeable future, as the construction industry in Singapore takes an upswing from the IR and the BFC. Property rates are rising and this will bode well for Boustead Projects in future as they plan to build and develop a few properties per financial year for sale. They still have several plots of land remaining for development and this presents untapped potential in this division. Their focus has shifted to building high-end tech buildings for multi-national clients and this has paid off for them, as Boustead Project’s order book swells to a new record high. Moving forward, the division looks very promising indeed as they continue to seek out opportunities to expand their order book.
For geo-spatial technology, the growth rate may not be impressive (only 5% per annum) but it can remain as Boustead’s “cash cow”, generating good cash for possible use in investing in other ventures or even to be used for a potential acquisition.
All in all, the prospects look bright for Boustead as their continue their sixth year of increased revenues and profits; possibly culminating into a very good dividend for FY 2008 as next year will be Boustead’s 180th anniversary celebrations.
Wednesday, November 21, 2007
Part 2 of my analysis is continued here, and it will focus on the cash flow statement as well as discuss the strategies, prospects and plans for the Group moving forward
Cash Flow Statement Review
Due to the scaling up of operations and the completion of several contracts, Swiber has generate a healthy operating cash inflow of US$14.5 million for the 3Q 2007. This is up almost 300% from last year’s 3Q 2006 amount of US$5.3 million. It can be seen that the increase in trade receivables of US$20.7 million (due to expanded operations) was more than offset by the cash generated from an increase in payables of US$25.1 million, using the indirect method of cash flow statement. Other payables had also increased by US$10.4 million which helped to provide support as well. For Swiber, having a healthy operating cash inflow is integral as it operates in a capital intensive environment and is also increasing its gearing through the issuance of notes and taking up of bank loans. Thus, in time to come, interest expenses will be higher and will eat into their cash flows. As more projects are anticipated to flow in, operating cash flows should remain healthy for the foreseeable future.
Most of the cash outflows belonged to investing activities, as the Company scaled up its vessel fleet aggressively during 3Q 2007. Proceeds from the sale of vessels came up to US$47.1 million, but this was offset by purchases of more assets and additions to non-current assets amounting to US$73 million. A further US$5.2 million was spent in acquiring the interest in a subsidiary (I would suspect this is their 100%-stake in North Shipyard, now renamed as Kreuz Engineering and Shipbuilding Pte Ltd). All these transactions led to a net cash outflow of US$30.4 million.
The Group had sought to raise cash through financing activities during 3Q 2007, and it shows in this portion of the cash flow statement. US$71.1 million was raised through a bond offering as part of their S$300 million multi-currency medium-term note facility with CitiCorp Investment Bank (S) Ltd. Another US$78.6 million was raised as proceeds from the issue of 55.35 million new shares at S$2.1748 per share, as part of a placement to institutional investors back in June/July 2007. A further US$6.7 million was raised through additional bank loans obtained, while US$13.9 million was used to repay other bank loans. Moving forward, Swiber has indicated that they will resort to more debt funding for the purchase of their new drilling vessels and support vessels (derrick crane, subsea support vessels and Equatorial Driller).
Prospects and Future Plans
For Swiber, prospects look positive as they have recently recruited veterans such as Mr. Glen Olivera to helm their deepwater drilling unit, and also conducted a very successful notes issue. The Group’s move into subsea and deepwater signifies their commitment to grow the business beyond what it is today, and shows the Management’s drive to stay abreast of changing trends and to adapt and react accordingly. Swiber’s core strength is in EPCIC activities for the offshore oil and gas industry, and they are leveraging on this to extend their capabilities to the deepwater segment as well.
Swiber’s strategy for the future remains a three-prong approach: build up their vessel fleet capabilities, extend their presence into new, untapped markets; and hire experienced and capable Management to lead the business and take it to new heights. Thus far, they have been very aggressive on the vessel acquisition front, with many announcements and press releases detailing the extent of their plans for purchasing; and committing a lot of funds in the process. The key risks here are the demand and supply cycle of the EPCIC and deepwater drilling market. It is one thing to make forecasts and predictions about how things will pan out in the future, but another matter when it comes to the actual scenario and whether good value can be capitalized upon to grow revenues and profits. There would be uncertainty at this point over the level of competition present in the industry and also the margins to be enjoyed in new segments such as deepwater drilling. You can summarize by saying that Management are taking a calculated risk by expanding their fleet, and much of their future success still depends on uncertain future events.
As for entering new markets, thus far Swiber has demonstrated that they are able to forge strategic alliances to extend their footprint within South-East Asia, with JVs in India and Brunei as well as a co-operative agreement inked in Vietnam. As mentioned in my previous posts, whether these alliances will translate into actual dollars and cents will depend on whether Swiber can leverage on their network of contacts to secure more contracts and LOI. Much of their anticipated success comes from building their “brand name” and the CEP Mr. Raymond Goh personally flying over to engage in negotiations. The progress thus far is encouraging and it is hoped that the Company can continue to forge ties with other countries where Swiber has yet to establish a presence, in order to build up the Group’s reputation in South-East Asia.
The hiring of experienced Management has been a key factor in Swiber’s growth; good Management has the expertise and experience to ensure projects are executed on time and with no cost overruns, and it is critical to put someone experienced in charge so as to create goodwill as the Group is expanding. Delays and hiccups are not only financially costly, but also reflect badly on the capabilities of the service provider and may hamper future business. Swiber understands this aspect very well and knows that timely project execution is not merely about financial numbers, but also about reputation and recognized skill. I see this year (FY 2007) as Swiber’s year of building their reputation and credibility, in order to bid for more projects of higher value. Thus far, they have placed bids for US$800 million worth of projects to be carried out in FY 2008 and FY 2009.
In summary, things look bright for the Group but there are also significant risks moving forward as mentioned above. I will be closely monitoring developments within the industry as well as on the Company level, and will report such news here from time to time.