Thursday, May 31, 2007

End-May 2007 Portfolio Review

Below is a month-end review of share prices and and update of my companies' status:-

1) Ezra - Buy Price $1.30 (bonus adjusted), Market Price $5.65, gain 334%. On May 23, 2007, the company announced that it had awarded a US$25.6 million contract to Labroy Marine Limited to construct a 125m pipe-Laying, accommodation, well service & maintenance vessel. This comes as no surprise as CLSA had already mentioned that Ezra was planning to add 3 new vessels to its fleet for FY 2009. What is interesting is that these 3 vessels are going to be equipped with the latest technology to handle deep-sea O&G exploration. Management are indeed gearing up for the future and it is hoped that O&G activities will really move towards deep-water in time to come.

2) Boustead - Buy Price $1.295 (average), Market Price $1.93, gain 49%. As reviewed in one of my posts, Boustead still has a lot of potential moving into FY 2008 because they are well-positioned in the right industries at the moment. They have operations in energy recycling, wasterwater management as well as properties. The buoyant market for their services will surely see improved earnings and hopefully margins in time to come. Gross dividend is 4.5 cents/share and I am awaiting the Annual Report and AGM to be held.

3) Swiber - Buy Price $1.01, Market Price $1.72, gain 70.3%. Nothing much to report on Swiber except that it appears the price is trending towards my estimated intrinsic value for the company (in my previous post). This bodes well for investors who have assessed the long-term prospects of the company and wish to enter at a good price to ensure margin of safety.

4) Global Voice - Buy Price $0.1775 (average), Market Price $0.195, gain 9.9%. Just yesterday, GV has announced a contract with Deutsche Bourse to provide dark fiber connections. This is yet another contract snared (contract value not mentioned as per usual) by GB since my last review on May 15th. Investor relations has also improved with personal emails being sent to inform shareholders of the latest developments and contract wins. Capacity USA is coming soon on June 25-26, 2007 in USA New York and CEO Noel Meaney is expected to speak about the importance of good private fiber networks. Hopefully, this will further raise the profile of the company and land them more significant deals.

5) Suntec REIT - Buy Price $1.11, Market Price $2.00, gain 80.2%. No significant updates. The dividend of 1.965 cents/share was paid to me on May 29, 2007.

6) Pacific Andes - Buy Price $0.81, Market Price $1.16, gain 43.2%. As reviewed in yesterday's post, PAH has enjoyed good earnings growth and has declared a dividend of 1.08 cents/share pre-rights. A special general meeting is being held at the Grand Hyatt Hotel at 10.30 a.m. on June 18, 2007 to seek approval for the rights issue. I will try my best to attend this meeting as it gives me an opportunity to talk to the Management.

My overall portfolio has increased by 83.4% from cost as at May 31, 2007. Looking forward, nothing has fundamentally changed about any of my companies, and I will continue to monitor industry news about the fishing industry, network requirements in Europe, oil and gas industry as well as the property market. I do not expect much news in June 2007 as it is traditionally a quiet month. Positive catalysts would be new contracts from Ezra or Swiber (unlikely in June, maybe later in the year), more contracts for Boustead (Salcon is the one I am eyeing for FY 2008) and of course, even more contract wins for Global Voice. For Pacific Andes, there should be some write-ups by analysts in the next few trading days and I will review them accordingly.

My next portfolio review will be on June 17 or 18th (the day I return from my honeymoon). In the meantime, I have not done further research into any companies as I wish to review my financial position after my honeymoon (I expect to spend a significant amount in Europe !).

Wednesday, May 30, 2007

Pacific Andes Holdings Limited - FY 2007 Financial Statement Analysis and Review

Pacific Andes finally released their FY 2007 financial statements today. Revenue was up 48.9% from HK$3.55 billion to HK$5.29 billion. Gross profits increased by 67.8% and net profit attributable to shareholders increased by 49.7%, from HK$257.4 million to HK$385.4 million. However, after stripping out exceptional items (such as a gain on dilution of interest in CFG after the latter did a placement of 29 million shares to institutional investors at S$3.98 per share), net profit would have increased by 38.1% from HK$176.1 million to HK$243.2 million. This represents a significant step for PAH as it has shown consistent growth over the last 2 financial years, aided in part by their aggressive expansion into Peruvian waters and the building up of their fishing division.

Let’s do a quick numerical analysis for PAH:-

Profit Attributable to Shareholders (less exceptional gains) = HK$243.2 million (equivalent to about S$48.6 million)

Issued Share Capital = 662,215,616 shares

Earnings Per Share (cents) = 7.34 cents/share

Price-Earnings Ratio at S$1.16 closing price = 15.8 times

Thus, I would conclude PAH is reasonably valued according to FY 2007 earnings, and some may argue that it is a little high at 15.8x, but this is rather subjective as Synear Foods is trading at 20-30x PER.

Gross margins are 18.2% for FY 2007 as compared to 16.2% for FY 2006, an increase of 2 percentage points. Management has mentioned that they are in the process of negotiating the terms of the 4th VOA, and if successful, they should be able to reduce costs further. Net margins have dipped slightly for PAH, at 4.60% for FY 2007 as compared to 4.95% for FY 2006. This is probably due to higher costs incurred in acquiring new vessels, operating costs relating to these vessels as well as interest expenses on the convertible bonds and senior notes.

The company has declared a dividend of 1.08 cents per share pre-rights, and together with the interim dividend of 1.3 cents per share, makes up a total of 2.38 cents/share. The dividend yield at the closing price of $1.16 is thus 2.05%. For myself, being vested at 81 cents, the dividend yield will be 2.93%.

Balance Sheet Comments

Non-current assets had increased significantly from HK$850 million to HK$3.476 billion. The bulk of the increase can be attributed to an increase in property, plant and equipment as well as deferred charter hires for their vessels; as well as vessel permits. If I am not wrong, these vessel permits can last for a period of 50 years and so will remain in the balance sheet for quite some time. Goodwill on consolidation of CFIL also contributed to the increase.

Current assets increased by only 26.8% in total and most of the increase can be attributed to increases in receivables as well as advances to suppliers. Disappointingly, cash and bank balances only improved by about HK$8.695 million due to the large amounts of cash needed to secure the new vessels.

For current liabilities, trade and other payables saw a significant jump, which was in line with increased operational capability (there was also a corresponding jump in receivables). Finance leases also appeared on the balance sheet as I suspect the charter hire is structured as a finance lease and capitalized, rather than treated as an operating lease and expensed (this is opposed to the sale and leaseback system practiced by Ezra and Swiber which uses operating leases). Total gearing is now 116.9% which is frighteningly high, up from 82.3% a year back.

Key risks

The key risks will include massive dilution from the conversion of the CB as well as the high gearing for PAH, thus increasing interest expenses and hitting the bottom line. Also, it remains to be seen if the fishing and fishmeal division for the company can grow steadily and capture more market share.

Other risks include a worldwide ban on fishing activities due to over-fishing in certain parts of the world, which may affect revenues. Costs may also go up if appropriate equipment needs to be installed in order to remain environmentally friendly (e.g. no bottom trawling is allowed in certain areas of the ocean). Another risk is that of the demand for fish and fishmeal decreasing although this is remote considering that fish has always been a staple diet for many cultures and countries. A final risk I can think of is that of natural disasters which may damage or capsize the super-trawlers and/or purse seine vessels.

Growth Prospects

- CFG and PAH will manage to re-negotiate the terms of the 4th VOA and lower costs so as to improve gross and net margins
- The fishing and fishmeal division under PAH grows significantly as a result of more vessel acquisitions for fishmeal processing in future.
- Signing of additional VOA for CFG which will increase the allowable catch above 270,000 tons.
- Improved earnings as a result of higher margins from economies of scale in combining the operations of the expanded fleet of vessels
- Rising prices for fish and fishmeal products worldwide may give PAH a better edge in pricing their catch and reaping higher margins as a result
- PAH acquiring 63.9% means that net profits attributable to shareholders will increase significantly from FY 2008 onwards. It remains to be seen if this will translate into a higher intrinsic value. I do not expect better dividends because of the high gearing the company has got itself into. It should try to conserve cash as much as possible unless it has sufficient operating cash flows to justifying a dividend increase.

PAH have called for a SGM to be held at Grand Hyatt Hotel on June 18, 2007 (Monday) at 10:30 a.m to approve the rights issue. Assuming the rights issue is approved, the company’s share capital will double and its earnings per share will drop. Thus, unless the company significantly scales up earnings, it may not offset the benefits of an increased share float; and this will ultimately cause shareholders to weep.

Execution and cost-control are key elements for success for PAH and CFG, as the company is very aggressive in its expansion, thus exposing itself to much risk.

Note: My end-May 2007 portfolio review will be posted tomorrow as PAH’s results takes precedence over the discussion of my portfolio. Stay tuned !

Tuesday, May 29, 2007

Pan-United Marine - The S$2.38 per share offer

It is with much shock, surprise and ultimately disappointment that I report this. Dubai Drydocks World LLC (DD) has, through HSBC, offered to purchase Pan-United Marine (PUM) at S$2.38 per share, valuing the company at S$647.7 million. As at the date of the announcement, 70.08% of the institutional shareholders had already accepted the offer; thus it is an upward task for minority shareholders to say "no". If DD obtains >90% of the company, they have to make a compulsory takeover offer for the remaining shares and delist PUM from the SGX-ST.

A little bit of history first....PUM was initially one of the companies which fell into my radar for value investment. My research began about 6 months ago (around Dec 2006) when a fellow shareholder of Ezra (whom I met at the Ezra FY 2006 AGM) recommended this jewel of a company. He told me he had bought shares at $1.30 and was also a value investor (incidentally, he also recommended Amtek to me, which was trading at 55 cents at the time and which is also subject to a takeover offer at $1.10 per share). My curiousity was piqued as I had also seen announcements from time to time on SGXNet of the company securing ship building and ship repair contracts of significant value. In addition, I knew it had a very generous dividend policy as well. At the time, the stock was trading in the range of $1.20 to $1.30.

Subsequent to the Ezra AGM, I began my research in earnest. I looked at every financial announcement made by the company since 2005 through to 2006, and read the annual reports, visited the website and examined its competitors such as Labroy Marine and ASL Marine. I did an extensive review of the numbers, its prospects, current yards (Singapore and Batam) and also read the chairman's MD&A. Everything seemed to point to a good investment as the company had a lot of latent potential and its intrinsic value was perceived to be much higher than the current market price as the PER was only about 7-8x at the time. In addition, it was growing its order book very quickly and was aiming to expand capacity by building another yard in the near future. Net margins and ROE were also healthy as compared to sector peers.

However, I made the mistake most value investors make, which is a mistake of omission. Not being confident enough of my analysis, I hesitated to buy with the reason that its competitive advantage could not be sustained. However, in time to come, PUM would clinch major deals including the S$98 million deal to build the world's first 30,000 bhp AHTS offered by none other than Ezra (what an irony !) as well as other contracts to boost their order books further past S$500 million. A simple calculation would yield a forward PER of only about 10-11x base on their burgeoning order book.

Which brings me to my next point: that DD is offering a ridiculously low price for PUM ! With the growth rate experienced by PUM and the fact that it can capture such significant contracts, this means that it has a strong competitive edge in snaring such contracts. Surely DD could give the Management more "face" and offer a much better price of at least S$2.80 to S$3.00 ? Offering S$2.38 values the company at close to 11x forward PER, and assuming PUM is able to capture more contracts, forward PER can easily fall to 7-8x again. This, coupled with a generous dividend policy, good ROE and earnings growth, is more evidence that the offer is under-valuing the company. My suggestion is that minority shareholders should reject the offer and wait for a higher bid, though with 70.08% acceptance level, I am not sure if this can work. Will any reader care to enlighten me ?

The lesson to take away from here is: have confidence that you did enough research and identified a potential gem, and make sure to establish that it is being offered by Mr. Market at a significant discount to intrinsic value to offer a good margin of safety. I corrected this mistake of omission in Feb 2007 by analyzing and promptly purchasing Swiber after doing a review and intrinsic value estimation for it (i.e. after it announced the Brunei Shell contract).

Pacific Andes FY 2007 results and End-May 2007 Portfolio Review

As of May 29, 2007, Pacific Andes has yet to release its FY 2007 results. This is rather uncharacteristic of the company as it usually releases results by the second last week of May. Last year, results were out by May 23, 2006. As tomorrow is the final trading day of May 2007, I will be doing my twice-monthly portfolio review and commentary. However, if Pacific Andes announces results tomorrow, then it will take precedence over the portfolio review, which will then be postponed to Vesak Day on May 31, 2007.

Wishing everyone a Happy and Prosperous June 2007 !

Monday, May 28, 2007

Signs of Irrational Exuberance ?

One of the many signs of irrational exuberance is excessive optimisim in the common man on the street. As retail investors, we are exposed to a myriad of stimuli from our colleagues, friends, peers, relatives, family and the general public. All this stimuli culminate into a general feel of the "ground", meaning the psychology of the market and the optimism level of the people.

In the last week alone, I have had experiences which point to mild signs of irrational exuberance. OK, perhaps we should not use the word "irrationa;" just yet; let's call it rational exuberance then ! The key word I wish to highlight is "exuberance", which means unbridled optimisim and enthusiasm (this is NOT a webster definition).

I have a meeting up with 3 other friends once a month to discuss our lives and investment strategies as well as the market in general. Recently, these 3 friends (2 are active traders and one is a laid-back investor) have expressed much optimism in the Singapore as well as China market. One friend even quipped that she felt like quitting her job just to trade in the market, as anything you buy now will go up ! I cautiously pointed out to her that buying lemons or duds in a bull market can also land one in trouble; looking at the sad cases of GEMS TV (new low of 77 cents today) and OSIM (new low of 68.5 cents). I have also noticed a marked increase in trading activity among the 3, with frequency of trades and number of counters increasing by the month. This is a rough gauge of optimism and opportunism as they wish to catch the "trend" and "ride the momentum". Of course, buying a stock just because it is going up is, according to Mr. Warren Buffett, the stupidest reason to buy a stock. I kept that knowledge to myself as I did not wish to offend anyone at the table.

Another instance was when I went out with another guy friend. Over dinner, he mentioned that he and his 2 other friends have been egging each other on to "buy and buy". This was to capitalize on many money-making opportunities as they traded their way up the stock's price. My friend had made many rounds from a single counter and he credited this to the bull market. Also of mention was another friend of his who supposedly (I can't verify this) mortgaged his parent's landed property for S$1.7 million last August 2006 so that he could pump ALL of it into the market ! As of this writing, he reported that his friend proudly proclaimed that he had made S$900,000 out of his initial investment, giving a return of roughly 50+%. The problem I realized was that people don't see things ni % terms, but rather always look at absolute numbers to judge performance. To my friend, S$900,000 is a lot of money and yes, it is a heck lot of money to most of us who are earning a monthly salary of between S$2 to S$5k. But when one looks at the capital involved, it is just over a 50% gain. I mentioned that his performance was not good if he only managed a 50+% gain during a massive bull run, and my friend gasped in surprise. This actually ties back to the phenomenon where people judge stocks based on their absolute price rather than seeing the value behind an investment. Commonly, I have heard of friends who can pump 100 lots into a 10 cent counter with zero potential, yet only manage a miserly 3 lots on a $2.00 company with a lot of latent potential. To me this is plain skewed ! If the company has value you should simply buy more (as I did for Swiber and Boustead even though they were above $1); buying lots of a DUD company is much worse than buying a little of a fantastic company.

Anyhow, I digress again. There are apparent signs of slight exuberance and optimism and stories of people plonking tons of cash into an over-valued market (let's face it, most companies are either fairly valued or over-valued now). In a major correction, these people are more likely to be subjected to emotions because they were so excited in the first place buying all the way up. Thus, the key is still to purchase after objective analysis, and leave yourself a margin of safety.

Ezra Holdings - CLSA Corporate Access Forum (An Update)

A brief update on Ezra Holdings. I managed to obtain a short report on Ezra from CLSA which held their corporate forum recently. Mr. Lionel Lee, MD of Ezra and Mr. Chan Eng Yew (Assistant General Manager) briefed the analyst who prepared the report. The salient points are:-

1) Ezra have recently (on May 1) opened an office in Aberdeen and this will help it to focus on business in Europe and America. I see this as a good platform and springboard for them to extend their reach beyond Asia, but take note that they face major players like Solstad and Tidewater.

2) It is adding 30 vessels this FY and most will be delivered in 2H FY 2007. Today's BT also featured a full-length article showing Ezra unveiling the Lewek Penguin, which is a 12,000 bhp AHTS vessel. Thus, it would appear that vessel delivery is on track and Ezra's corporate communications is willing to spend the $ to enhance their visibility to the public and to shareholders.

3) The vessels are increasingly catered towards deep-water and Ezra will be bidding for another FPSO in the next 12-18 months. It also started an engineering division in London which will employ and research on technology for deep water capabilities. This point is promising as it shows Management is investing for the future (i.e. FY 2009 and beyond).

4) The company sees good potential in China and hopes to increase contribution there by 10x from US$10 million to US$100 million with enlarged bhp capacity. This point is a little ambiguous as I did not think that China had contributed much to Ezra's top line in the past. What the article is saying is that Ezra plans to grow revenue by 10x, which is a little too ambitious in my opinion. Perhaps a more conservative target could be 2-3x, in order to avoid over-optimism. This is because Ezra has not reported taking any concrete steps to capture a share of the China market, yet the Management seem to be making such optimistic claims. As a shareholder, it is natural that I have doubts on whether they can deliver.

A little note: KS Energy announced today that they are purchasing Norway's Atlantic Oil for US$80 million. This will allow them to diversify their product offering into support vessels as well, thus making them effectively a direct competitor of Ezra. Also, this acquisition opens up new markets for them and broadens their reach. It remains to be seen if the acquisition is earnings-accretive as they did not disclose the earnings for Atlantic Oil (also, I am unable to determine the PER used in the purchase, but it is likely in the low to mid-teens as most oil and gas companies are trading at such multiples on the Oslo Stock Exchange). Thus, this news does NOT bode well for Ezra as they have another potential competitor to contend with.

Saturday, May 26, 2007

Investment Mistakes Part 1 - Buying purely for dividend

Dear readers, this is the first of a series of write-ups regardig my investment mistakes which I had mentioned before that I would talk about. The importance of maintaining an investment journal to catalogue all mistakes and lessons learnt had already been blogged about by myself in a previous post. Now, I will attempt to go into detail on th various mistakes and how value investors should keep a clear, rational mind when going about the investment process. Also, I had just gone for a Europe Trip briefing today and am pleased to confirm that my honeymoon will officially begin on June 6 (midnight) till June 17 (early morning touchdown). During this time, I will NOT be blogging at all (obviously !) and will also be totally "out of the market". I will give all readers another reminder again when the time comes.

OK so let's begin. The first mistake I wish to talk about is to buy a company purely for dividend. First, I would like to say that if you are above 50, have very low tolerance for risk or have more than enough spare cash; then by all means this may be the right method for you. However, I am coming from the perspective that younger people would wish to purchase a company in order to extract more capital gains from it, rather than dividends. This is because dividends cannot be guaranteed (it depends on the cash flows and health of the company) and the so-called dividend yield may even be offset by capital loss; thus making it a bad investment.

The example which I quote is a real-life one which happened to myself back in Feb 2005 (when I first began investing). I had purchased MCL Land Limited due to a massive dividend declared of 68 cents per share (gross). After the XD, the price fell from my purchase price of $1.97 to $1.37, which was greater than the net dividend of 54 cents per share (at 20% tax rate) from this company. I sold it at a loss of about 3% from my total investment cost, which can be considered small but the lesson to learn here is that one should not buy purely because a large dividend has been declared. Sometimes, it is more important to dissect the company to see if it has growth prospects. Otherwise, you may just sit on your butt collecting dividend all your life while the stock price languishes (this does not apply to REITS which are good for stable income). For avoidance of doubt, I emphasize that this approach is for people who are going for growth or value companies in order to enjoy multt-bagger capital gains in 5-10 years.

Thus, dividend should be seen as a bonus rather than a requirement for investing in a company. I have often heard my friends mentioning how good it is to buy X company because they just declared a large dividend. To provide a counter-argument, companies which declare large dividends may not be good because they have nothing better to do with the cash ! Thus, they are returning it back to shareholders instead of using it to grow the business and to produce superior returns. Each company should be evaluated based on its merits, but in general, companies who propose large dividends or capital distribution have no other uses for their cash, which is why they are returning it back to shareholders. As a good example, I was pleased that Ezra Holdings Limited, in its April 9 GY 2007 results announcement, did not declare a cash dividend but instead proposed a bonus share dividend. This would help it to conserve cash yet expand its capital base to provide better trading liquidity and affordability for its shares.

The REIT I am holding now (Suntec REIT) is purely for dividend and I have no growth expectations for this REIT. Thus, I can safely say my 5 other companies are purchased for their growth prospects; dividends will be a good bonus.

Pacific Andes Holdings Limited - OCBC research head Carmen Lee's Stock Picks

On a side note, in today's The Edge Singapore publication, Pacific Andes was featured as one of Carmen Lee's stock picks for growth and value stocks. There was a glaring typo which said that PAH owns 63.9% of China Fishery; but the acquisition is essentially not complete yet ! In fact, only the CB has been issued, but the rights issue is still subject to shareholder approval and an EGM needs to be convened. The report is misleading as it assumes everything has already been finalized; it is also too short a write-up as it does not talk about China Fishery's recent purchases of up to 7 purse seine vessels for increased fishmeal holding volume and catch volume. OCBC's target price is $1.41, which I feel is kind of plucked from the air since PAH's FY 2007 results are not even out yet. Judging by the way the business is growing, I am hoping for better margins and better valuations in time to come.

Friday, May 25, 2007

Comparison between trading and investing - A personal view

Today I had the wonderful opportunity to view the inner workings of a professional trader, and to see how his mind works and also view the strategies and concepts involved. This person has been consistently posting on the CNA (Channelnewsasia) forum and his daily trades are almost always on contra. For privacy reasons, I will not be stating his nickname on my blog but most of you readers who visit and post on CNA forum will know who this person is.

Suffice to say that I observe and read his postings as a matter of interest, to so-called view the opposite side of the looking glass to see how life is as a trader. After all, value investing and trading are as different as night and day; so it can be very interesting for me to view another perspective. The even better part is that this person is articulate and not afraid to speak his mind about how he trades, and is even open enough to show the world his gain/loss record. I admire him for his transparency and his tenacity, as well as the hard work he has put in. Even though out methods are totally different, we both have a common goal which is to work towards a steady return and to achieve financial freedom.

What I would like to comment on is the difference in the nature of trading and investing (as observed from this person's comments), and why this difference has made me choose the path of value investing. It's more like a life choice which one undertakes because of his character and outlook; there is no "right" or "wrong" to it. It's a personal choice and I respect that.

The first distinctive difference is the amount of time devoted to the market. A trader has to be constantly watching the market in order to trade successfully. I have not met a successful trader who uses some built-in software to help him decide on buy/sell timings. Traders track prices, not companies; thus their attention must always be on the screen to look for breakouts or flags (I am not a TA person, so just quoting some terms. I apologize if I have misused them !). For investors, much of their homework is done at their own time, and once they buy into a company, they can usually just forget about the market and live their own personal lives.

According to the person's account, there is sufficient "emotional turmoil" and a deterioration of his personal life which transcends the money aspect. Thus, for those seeking quick wealth, just remember that sometimes life is really more than just about the money (and this top trader makes an average of about 40-50k per month, not a small sum by any standard). I have a wife who loves me and my family whom I still visit 3 times a week, and I truly enjoy my job now and the travelling opportunities it offers cos I am able to see the world around me. Sometimes, when I am in a reflective mood, I question what my objective in life is. Yes, investing can get me rich slowly, but ultimately I wish to enjoy what life can offer: food, friends, love, children, travelling, karaoke and many other aspects. By choosing the value investing path, I sincerely believe that I can have the best of both worlds, namely to build my wealth (albeit slowly and not as swiftly as the top trader) and to be with the people I love doing the things I love.

Thus, in summary, all I can say is that if you choose to be a trader, make sure you know what you will be sacrificing and also take note of the cost of your choice. Which is to say that investing will also take a toll (the research) and sometimes my wife will also complain that I am so busy researching companies that I spend less time with her. Currently, I have the ideal portfolio till the next market crash (during which I will pick up the companies which I have researched cheaply) and thus I do not have to spend time doing research. Another thing about trading: what I've heard is that about 5% win big (in this case, this top trader is part of the 5%), another 20-25% barely break even with a small profit or loss, while the rest end up with massive losses.

The reason is simple. Traders need the following to survive and be successful:-

1) The technical knowledge to read charts, interpret patterns and recognize trends
2) Mental fortitude to take advantage of crowd psychology and not succumb to it
3) A strict cut-loss rule, while letting your profits run (top traders have mastered this to near perfection)
4) Learning when to put down 10 lots to contra and when to put down 100 lots. In other words, the strength of conviction in your abilities (1 big bad trade can cancel out 10 good ones).
5) Be alert, nimble with a keen eye and fast fingers, not to mention in depth knowledge of how buy/sell queues work and market knowledge as well (this includes economic trends, inflation, Ben Bernanke spouting doomsday stuff etc.)
6) To give up most of your daytime (during trading hours) to constantly monitor the market. In other words, this MUST be your full-time job as one can't possibly trade if one already has a full time job doing something else.
7) The humility to accept mistakes and not get carried away with arrogance.

To be fair, to be a good investor, you would also require the proper psychology with regards to market movements. Generally, being an investor will require less actual time WATCHING the markets, and this is why I prefer it.

That said, I would like to take this opportunity to congratulate this top trader as his record is really impressive ! But, the bottom line is I would rather stick to what I am doing now as it gives me more personal satisfaction. Money is important yes, but it's not everything in life.

Thursday, May 24, 2007

Boustead Singapore Limited FY 2007 Results

I was expecting PAH to report its FY 2007 results today, but to my surprise it turned out to be Boustead instead ! Anyhow, a quick glance at the results showed strong growth in net profit, as it was up 41% from S$24.8 million to S$35.2 million. Revenues also showed strong growth of 18.9% from S$289.2 million to S$343.9 million. Gross margins dropped from 37.7% to 34.1%, and the company attributed this to the increased cost of sand due to the sand export ban from Indonesia, which pushed up prices of concrete for Boustead Projects, as well as higher global commodity prices which raised the cost of fabrication.

Net margins (excluding MI) were 10.2% for FY 2007, as compared to 8.6% for FY 2006. I feel this was primarily due to Boustead buying up a larger stake in their subsidiaries, thus reducing the MI portion of profits. If they can manage to lift up gross margins (the problems mentioned were temporary in nature and are not likely to affect long-term gross profitability), then they can probably achieve a higher net margin of about 12-14% (optimistic view).

Currently, the EPS based on FY 2007 results (and total shares of 254,837,000) is 13.8 Singapore cents. Thus, at a closing price of $2.05 the company is trading at 14x PER, which is very reasonable if you think of its growth potential. Boustead has three main arms: Engineering Services, Water and Wastewater Treatment as well as Industrial Real Estate Solutions. The demand for engineering services is increasing in many parts of the world and Boustead has an edge in terms of recycling various waste products back into fuel or electricity. For their wastewater treatment, they are involved in the Water Solutions Alliance to explore opportunities in the Middle East, and that should yield positive results in FY 2008. Also, with the property boom,the industrial real estate arm with its world-renowned expertise in designing industrial buildings is poised to benefit from the boom. Thus, taking into account the above factors, a higher PER of about18x should justify Boustead's growth. This would price the company at $2.63 base on FY 2007 earnings.

Earnings clarity for FY 2008 are not too obvious, but already there have been 2 projects secured since March 2007, which are going to be fully recognized in FY 2008. The Annual Report will probably yield more insights into the company's prospects and their current and future projects which may be partially or fully recognized in FY 2008. Mr. FF Wong has done a good job of selling off unrelated businesses and positioning Boustead for future growth. This is Boustead's fifth consecutive year of record revenues and profits, and FY 2008 is set to be its sixth if all goes well.

Currently, there is also the Binh Dinh power station awaiting approval from the prime minister. If confirmed, this could be Boustead's single largest contract and will significantly boost its order book and demand a re-rating of its intrinsic value. A final gross dividend of 4.5 cents less 18% tax (net 3.69 cents/share) was declared to utilize their remaining s44 balance, and it will be payable on August 20, 2007. More insights should be revealed at their AGM which of course I will attending. The date is as yet unknown as the Annual Report has to come out first. I will probably dedicate one whole posting to analyzing the Annual Report as I feel this is key to understanding a company and its strategies. Also, the next few days may find me posting more insights about Boustead based on analysts' comments and some experienced forumers' analysis, whichever is more relevant. Stay tuned !

Ezra orders new Deep-water vessel for FY 2009

Ezra continues with its fleet expansion plans by announcing today that it has ordered a pipe-laying, accommodation, well-service and maintenance vessel (the "vessel") from Labroy Marine for delivery in the first half of FY 2009 (i.e. anytime from September 2008 till February 2009). I was a little surprised by this as I had not expected another vessel order coming so soon after their May 3, 2007 order for 2 ultra-large 30,000 bhp AHTS. Initially, during the early part of FY 2007, I was worried that Ezra had fallen behind on ordering vessels for FY 2009 to spearhead their continued growth. Now, it seems that Management has got it well-planned by ordering vessels for deep-water oil exploration, a sign that they are looking to the future prospects of chartering out such vessels. There is a shift towards deep water exploration and this is becoming increasingly important as time passes. It is estimated that by FY 2009 more than 50% of oil exploration will move into deepwater (up from 10% currently).

This is Ezra's second pipelay vessel after their first order called Hull 600 which will be delivered in FY 2007. This would build up their capabilities in the pipe-laying area and allow for more deepwater support (as stated in their announcement which describes many technical aspects of the vessel in great detail). The cost of the vessel is US$25.6 million which will be funded by bank borrowings and internal funds. I suspect that some of the placement proceeds should also be used for this vessel, as I am concerned over Ezra's gearing and whether it has gone up too high.

The company will only report quarterly results from FY 2008 onwards, thus we must wait till about Oct 2007 before the earnings report is out. In the meantime though, it will still be possible to email their IR to enquire on their gearing. Also, the EGM for the bonus issue should be a good opportunity to engage the Management and chairman/CEO on issues.

Tuesday, May 22, 2007

China Fishery - Acquisition of 3 Purse Seine Vessels in Peru

China Fishery (CFG) is closely related to Pacific Andes (PAH) as it is a 28% owned entity, which will soon become a 63.9% owned entity of PAH once PAH completes its rights issue (see details in PAH's announcements). Thus, any news affecting CFG would directly impact PAH's prospects, and thus its valuations as well. In future, I will blog not just about news affecting PAH, but also give updates on CFG as well.

In this latest announcement, CFG acquires another 3 purse seine vessels for US$10.5 million. This expands its fish hold capacity (storage capacity for fish caught) by 692 square metres and the permits also allow CFG to fish in Peruvian waters. This increases CFG's fleet size to 26 vessels, after acquiring the previous 4 in a March 2007 announcement. These vessels are primarily used to catch Peruvian anchovy which is a key raw material used in fishmeal processing. As pointed out by a forum user on CNA forum, the prices of fishmeal are increasing as fishmeal becomes more scarce and valuable. Also, an article in TODAY online states that the incidences of fine-dining have also increased, thus increasing the demand for fresh fish. These 2 events portend well for CFG as they are able to generate better economies of scale by increasing their fleet size. Considering the vessels are valued at US$11.2 million by an independent valuer, this means that CFG got a US$0.7 million discount on the market value. The proceeds to fund the acquisition will come from the issue of the senior notes due 2013 by CFG, as well as internal funds.

This piece of news is positive as it will be earnings-accretive for CFG, and the earnings will also flow down to PAH once the acquisition of 63.9% of CFG is completed. In terms of valuation, I will do a more detailed valuation once the FY 2007 results are released for PAH. I am expecting an announcement from PAH tomorrow on its results as last year's results were released on May 23, 2006.

CSC Holdings - A Quick Analysis

CSC Holdings had announced a S$240 million contract win for the IR resort. Please get details from the company's website or SGXNet. Forums were abuzz with this new development as it seemed to affirm people's belief that the construction sector (which had been in the doldrums for the past few years) had finally woken up. Disclaimer: Construction is not within my circle of competence, but I am doing a simple valuation based on margins, PER and basic common sense.

CSC's profit for HY 2007 was about S$2.05 million out of a revenue of S$53.7 million, giving rise to a margin of 3.83% (after removing an exceptional gain on disposal of fixed assets amounting to S$3.092 million). Previously, for HY 2006, margins were even thinner at 2.64%. For simplicity sake, I will use a margin of about 3.83% for my future projection.

Assuming FY 2007's total revenue hit S$120 million, and that the contract adds S$240 million to its order book, this will bring its total revenues to about S$360 million. Applying the net margin % gives a net profit of about S$13.8 million. Thus, earnings per share is about 1.24 cents based on 1,112,392,000 shares. At today's closing price of 37.5 cents, this represents a forward PER of about 30 times. While I am not certain of the industry itself, all I can say is that 30 times forward PER is very demanding. If a PER of 15 was assigned, then the company should trade at about 19-20 cents at most. Investors who believe in the future potential of the company to secure more IR contracts may see a lowering of its prospective PER. Also, assuming it can raise margins past 5% (the sand ban may make this difficult), the forward PER may also be reduced.

Other qualitative factors are:

1) Does the company have any distinct advantage over other construction companies when it comes to bidding for projects ? What is its competitive advantage ? If it's cost leadership, then I must say it is hard to maintain when competition is so stiff for new projects.

2) The project clinched is for the IR which will be built by FY 2008. What happens next for the company ? I don't see much future earnings visibility to justify buying a part of this business, because most of the construction work in Singapore hinges upon the IRs. Once that is over, it is highly possible that the construction industry may slip back into the doldrums.

3) Management - are they clear and concise on their strategy for growing top and bottom line ? Shareholders should query management on how they intend to follow up on this contract. If there are no concrete plans, that would mean Management has no far-reaching goal for bringing the company to greater heights.

In view of the above factors, I will not be taking a stake in the business, no matter what price Mr. Market chooses to offer to me.

Monday, May 21, 2007

An Investment Journal - A Catalogue and Analysis of Investment Mistakes

As budding investors, we will surely, at some point in our lives, encounter instances whereby our analysis of a company was less than perfect. Our assumptions may have been wrong or flawed, the industry could have changed drastically over a period of time, or maybe an unanticipated legal or political change may have precipitated a drastic deterioration in fundamentals for your companies.

All these mistakes (some avoidable and some not) should be meticulously catalogued into a journal in order for us to reflect and to avoid making the same mistake twice. Personally, I have my investment journal saved as a Word document, which I periodically review to see the mistakes I have made.

An important thing for a value investor to do is to admit that he makes mistakes, instead of shying away from or covering them up. Being candid, honest and frank can help an investor to reflect upon his principles and to avoid costly mistakes in the future. Warren Buffett himself never avoids stating the mistakes that he has made for the past year to his shareholders in his Annual Shareholder's Letters. By being honest and open with yourself, you go through a learning process and emerge much clearer and confident. Hiding mistakes does not make them go away, in fact, they will most likely come back to haunt you when you least expect it.

Most mistakes are of 2 types: mistake of commission, and mistakes of omission. The latter is a lot more common for Mr. Buffett because many times, he misses out on buying a great company at a fair price. But when he started out, he made several mistakes of commission as well, like selling too early, buying a company with low look-through earnings, and over-looking several critical factors which made the investments unattractive.

Similarly for the man on the street, they can analyze mistakes based on these 2 categories. For me, mistakes of commission generally occurred early in my investing life, and consisted of many examples of buying for the wrong reasons, selling under the influence of emotion and not fundamentals, as well as grossly over-estimating the future potential of a company. In the next few postings, I will cover part by part each investment mistake and how it contributed to me being a better investor. Readers should note that it is not the $ value of the loss which is important, but the lessons learned. I can proudly say that I have not repeated any of my past mistakes so far, and endeavour never to repeat them for the rest of my investing life !

As for mistakes of omission, these will be discussed candidly as well. Most instances, it consists of me doing detailed, thorough research into a company. However, the company does not fit my strict criteria and thus I did not buy it. Subsequently, I was proven to be mistaken. I will give a few examples of such cases, but I will also insert a paragraph to explain why I did not commit and why I think the company may or may not still be worth buying.

To conclude, all investors should have an investment mistakes journal, to remind them not to repeat their folly and to help give you a clear, concise objective when it comes to investing. I dare say I am a much wiser person now BECAUSE I had committed those mistakes. Sometimes, life's lessons can only be learnt through experience; no amount of reading can ever replicate the knowledge that experience can bring.

Sunday, May 20, 2007

Misleading and Irresponsible Reporting on Stock Market "gains"

Today's Sunday Times featured an article in the main section (not the "Invest" section) titled 'Stock Boom can mean $100K profit in 4 months'. While scanning through the article, so many glaring omissions and inconsistencies were detected that I felt compelled to blog about it. It seems that whenever I see such articles in the papers talking about so called "huge windfall" in the stock market, I just feel like going on a rant as I feel it is irresponsible and preposterous.

For thos who may not have read the article, the article mentions 3 individuals who have "made money" in the current bull run (STI closed at a new all-time high of 3,512.40 as at last Friday May 18, 2007, not that I actually bother about STI, but just stating it as a point of reference). The first individual is named Mr. B.K. Tan and he is a self-employed 40-year old living in a 3-room HDB flat. Apparently, he has just made himself S$100k within 4 short months from share trading (note this word). The article goes on to say that he has plenty of company in the ranks of Singapore's "stock trading elite". And what may this elite be ? Those who excel in trading stocks which are moving up relentlessly ? Has someone somehow forgotten that in a bull market, even a 10-year old kid can pick a stock in the market and it will go up ? Thus, it would seem this group of elite may have scarificed success for actual critical thinking, considering that stock trading has now been made ever so much simpler with the bull run.

Mr. Tan had bought DBS at $9 back in 2003 and sold out at $24 last week, earning a profit of $15 per share. In addition, he has also made money from SingTel and ComfortDelgro. What was NOT mentioned was his initial capital and his % returns, which I feel is a more important gauge of his success as an investor. For example, if one started out with S$1 million to invest and obtained $100k, it is a 10% return, which is considered average in a bull run. Also, the article blatantly states that he bought DBS in 2003, yet it claims he made $100K "in 4 months". Maybe it should have been "in 4 years" instead ? If so, that would dilute the % gains he has made as it has to be divided by 4 per annum, and further expressed as a %, it may not seem that spectacular at all.

The point I am trying to drive at is this: journalists should go ahead and do their reporting, but this article appears to omit some very important aspects of a person's investing, and seems to glamorize short term quick windfall gains against long-term prudent investing practices. While people may argue that there is nothing wrong with a large gain in a short period of time, this kind of reporting may cause the ignorant and uninitiated to take larger than normal risks, in the mistaken belief that money is so easy to make in the markets. I guess the queues at the Toto and 4-D booths would thin out and everyone would just head on down to open their multiple brokerage accounts to begin trading for a living. Cynical ? Maybe. But it just may be an eventuality if this bull run continues !

The other 2 people featured are a Mr. Goh Tian Hin, 67 with 2 children, who has earned an average of S$20k per month since January (again, the % return and initial capital are not stated). What's more disturbing is the line which says "most of Mr. Goh's profits are re-invested in stocks". With high valuations running rampant and diminishing margins of safety, ploughing all the profits back into the stock market may turn out to be a bad proposition in the long run. This would imply that he had previously purchased with a good margin of safety, then cashed out for a S$20k profit every month, then re-invested that profit all right back into the market. Well, if that's the case, then we can't take the S$20k profit as "realized" can we ? Over the medium-term, if he can manage to consistently grow his earnings by S$20k per month, then we can safely conclude that he has managed to get "newfound riches". Remember that "riches" are fleeting especially when one follows the "greater fool theory", by investing at ever-increasing market prices without a good sense of the "margin of safety" concept.

Finally, the article mentions a 22 year old NTU undergraduate from the faculty of business called Mr. Terence Lim, who started trading (note the word again) in stocks in August 2006 and has since made S$1,500. Onec again (and I am tired of mentioning this), there was no mention of his initial capital or his % return on investment. But if he had really started in August 2006 and only managed to gain S$1,500 considering the super-bull run thus far, then I would say it is very likely that most of his gains were the result of numerous trades which cancelled each other out, leaving a net effect of S$1,500. Frictional costs such as brokerage fees and commissions would have further eaten into his profits, causing a further reduction in profits. Again, the article mentions that he has "re-invested" his money into stocks, another indication that a trading mentality was used, disregarding valuations.

The article seems to inter-change the words "trading" and "investing" as if they were the same thing. What irks me most is that most people do not even distinguish between the 2 terms ! To them, trading and investing are synonymous ! Let me quote exactly what Benjamin Graham said of investing: "It is a process by which thorough analysis will show a safety of principle and offer a satisfactory return, anything else is speculative". Quantitative analysis of numbers, financial results, income statements, balance sheets, ratios and cash flow statements have formed the basis of modern fundamental analysis of companies, and Benjamin Graham was advocating a thorough analysis to minimize losses and to ensure a reasonable rate of return. Thus, by this definition, trading will be considered speculation as it involves guessing the psychology of the crowd and whether they will continue to follow the greater fool theory; while investing is a methodical examination of a company's numbers to ascertain if it has the potential to reap returns to shareholders. Of the 2, I have chosen the latter because it offers safety of principle and a possible better than market return on my investment.

A quick comment on such articles periodically written by ST and BT. The way the words are construed would normally imply that quick gains and riches can be found through short-term trading methods within the stock market. Not many articles have been written detailing the value investing process and how long-term wealth can be achieved through carefu analysis, patience and proper temperament. Most articles, to my chagrin, are heavily skewed towards reporting on short-term results, glorifying quick gains, putting market pundits and punters on a pedestal, and harping on the ease of winning money in a bull market.

One can only observe that the significant increase of such articles in recent months points towards a disturbing conclusion: that of irrational exuberance, and imminent market collapse. While I would not go so far as to predict market conditions (I hate doing that, and try to avoid it if friends ask), I would say that a bull market is usually in its final stages when news reports are not longer cautious, do not have disclaimers (unlike this article) and offer endless, mindless optimism.

Saturday, May 19, 2007

Objective Thinking and Selective Perception

Often, the path towards value investing is fraught with doubt and uncertainty. To the uninitiated, I was once a person who did not have any value investing principles under my belt, and it cost me dearly; both in terms of losses and opportunity costs. Once I had established my circle of competence through analysis and research, I could step down the path of value investing proper.

The principle of objective thinking is perhaps the most difficult aspect of investing. Investing is essentially full of emotions, even without looking at a stock market. You will have feelings of doubt, uncertainty, hesitation, regret as well as moments of extreme sadness and happiness depending on how your investments perform. Remember that we, as investors, cannot be right all the time, but the trick is to make small losses and large gains so that in the long run, you earn a decent return on your investment. Objective thinking involves evaluating a potential investment as well as ongoing review for one in which you already partially own. Ultimately, this will involve lots of reading, research and fact-finding. If you own a company in the oil and gas industry, then follow up on the news for oil and gas, including the demand/supply for oil, oil prices and the like. Warren Buffett himself has a voracious appetite for knowledge, and remember that knowledge makes one wealthy, while money makes one rich. Being wealthy is much more important than simply being rich, because people remember you as a human being instead of just recalling "oh yes he was a RICH person".

How does one remain objective ? Most of the time, I use numbers in order to ground my thinking. As most readers will observe, when I analyze a company and its financials and/or any corporate announcement, I will usually provide some number-crunching. Numbers are in fact the most objective method of evaluating a company. Other ways include industry review, management review and company prospects, and these can be subjective depending on which commentary you read. People write articles in business papers, digests and newsletters about a myriad industries, and sometimes sifting through the pile of information to gather actual knowledge can be a tough call. Using Google or Yahoo to search does help somewhat, but the Internet is still voluminous enough to frustrate most users who wish to search for information.

For example, a simple search on the fishing industry (because I own Pacific Andes) turned up all sorts of hits, most of which were unrelated to the fishing industry. It's difficult to find a specific research report on, for example, the fishing resources in various continents and laws and regulations on over-fishing in these areas. Yet, this objective research can make a difference when one evaluates his investment in a company to see if the fundamentals have changed. So, my advice to value investors is: don't give up so easily, and try searching for information using different phrases or words.

Selective perception (and retention) is a marketing term used to describe consumers who unconsciously tune out advertisements which do not suit their personal preferences. For example, a person who is not into cars would mentally filter out information about car models, designs and prices while flipping through a newspaper. Conversely, if he were interested in watches, he would pay particular attention to adverts on watches and be on an active lookout for good bargains and designs.

That said, when selective perception is applied to objective research, it can be very harmful indeed. This would imply that the investor effectively tunes out all news which is negative to his investment, and only chooses to acknowledge the positives. An example would be to filter out the information on an over-supply in AHTS for FY 2009 because it would force a re-evaluation of your decision criteria for selecting a company which builds AHTS. Instead, the reader would only concentrate on articles/news that validate his assumptions. This could result in errorneous decisions being made and in the worst case scenario, holding on to a company whose fundamentals have changed drastically.

To conclude, my advice would be to objectively analyze all pertinent information relating to the investments you own, as well as investments you wish to own. Absorb the good + the bad, and then make a decision based on the positives and negatives. As they say in this world, nothing is perfect; thus, people who see only a perfect world are inadvertently deluding themselves.

Thursday, May 17, 2007

Investment Horizon and Returns

Most people who begin to invest in either equities, unit trusts or derivatives don't really have an idea of investment horizon. Neither do they actually have a concrete or realistic target for investment returns. This post will try to tackle some aspects of this decision-making process, and to share my own personal view of my horizon cum returns expectation.

Investment horizon can be defined as the period of time in which you wish to "lock up" your investment. This means that during this period of time, the investment basically stays dormant, either increasing or decreasing in value. This is akin to a fixed deposit where your money is "frozen" with a fixed interest rate until withdrawal. However, for equities, the time period can be anything from a few minutes (for day traders) to a tens of years (value investing). When one puts in a sum of money into a counter, one must be mindful of their investment period, for this has a bearing on their returns. For short-term traders, a few minutes is sufficient as long as they hit their profit % target. For investors, letting their profits run is common, and multi-baggers emerge among the good companies.

This all seems very simple right ? Short-term and long-term isn't exactly rocket science ! The problem surfaces when people turn a short-term trade into a long-term investment, or vice versa. To illustrate, take Mr. X, who plonked down 10 lots of Lottvision today at 65 cents (the peak) with a long-term view to seeing the company's lottery business grow and generate good earnings. However, when there was a massive sell-down to 56 cents, suddenly he panics and turns his long-term ambition into a short-term trade by selling. This is an emotional response which is typical of human psychology, thus Mr. X cannot be faulted for feeling panicky when his shares fell 20%. The trick is in determining, in the first place, why you bought the company and to fix your investment horizon. If these are in place, no amount of fluctuation will cause you to sell low. Volatility gives opportunities for value investors to buy at cheap prices, as there are always people out there who will panic and sell low to YOU.

Another counter-example is a guy called Mr. Y who decides to do momentum trading, or as they call it, going with the flow of the crowd (see my post on "the madness of crowds"). He buys in excitedly at 65 cents (Lottvision again, since this is such a wonderful example of a volatile stock), hoping to flip it quickly at a profit when it hits 70 cents. Let's say, hypothetically, that the share price starts to tank and it never reaches his buy price for the next few weeks. He will then decide to turn into a "long-term" investor, and wait it out. I have seen this happen to older relatives, who have told me horror stories of holding Informatics at 80 cents, BBR at 70 cents and even Van Der Horst at $8 (it's now called Interra Resources and trading at a fraction of $8).

So what's the moral of the story ? I am not saying buy and hold is wrong, but we must make decisions based on objective facts, and not be driven by emotions. Evaluate the company to see if there is any potential, or if its business is just going downhill. This is a key factor in determining whether buy and hold is suitable, or to sell immediately and take a minor loss. After all, money invested in a losing counter is also an opportunity cost.

Most traders will tell you to have a cut-loss strategy of let's say, 10% below your buy price. But how many of us has the mental discipline to stick to it ? From the people I've met, I dare say nealy 99% will just hold through the drop. Thus, in the end, people buy high and sell low.

For investment returns, I see people on forums having extremely unrealistic expectatons ! People always expect to buy something for like, 3 cents, and hope to see it go up to $1, for a 33 bagger ! Let's be realistic, how many companies can grow their earnings by 33x over a period of a few months ? Others will expect sentiment-driven rallies to last forever and keep averaging up, only to end up with negative returns in the end.

A good way to be realistic about returns is to benchmark this against returns from other forms of investments. As far as I know, cash gives the lowest return (less than 1% p.a.), bonds give about 5% on average while equities have been known to average about 11-12% return p.a. over 30 years. Thus, a good figure to expect will be in the range of 10-15% for a long-term horizon. I will not discuss short-term expectations as everyone knows that investment profits/losses can be wildly fluctuating. What I am dicussing is a consistent approach to obtaining returns on your investment.

To conclude, investing with a good margin of safety will give the investor an overall return of 10-15% on average, per year. This is inclusive of dividends as well as capital gains. Investing wisely and not based on sentiment will ensure that your money can only grow in time instead of shrinking. Remember leh, this is YOUR hard-earned money, so use it wisely.

Wednesday, May 16, 2007

The madness of crowds

Today, let's explore the above phrase very simply and aptly titled "the madness of crowds". This phrase actually came from Sir Isaac Newton (yes, the sciency guy who gave us the three laws of motion, but was a tad slow in getting to the part about relativity !) when he lost a ton of money in the South Sea bubble (see this link Newton lost a lot of money in the bubble and speculative mania, which led him to remark that he could predict the motion of heavenly bodies, but not the madness of people.

This concept basically ties back to the greater fool theory which I blogged about some time back. Crowd or herd mentality comes about when many people jump into a "hot" counter or hyped-up stock, thus creating the "bubble". More and more speculators, seeing the amazing and meteoric rise in the share price (sometimes within seconds), feel a compelling urge to jump in as well. And so the madness builds up, as more and more ignorant people pile into the counter, pushing it higher and higher, resulting in the greater fool theory being in play. When the party's over, those still left in the dark hall will probably not be able to find their way home, and even the coaches have turned to pumpkins (akin to Cinderella). Warren Buffett warns of this behaviour when he mentions that such madness is akin to dancing in a room without clocks. Everyone knows that the party ends at midnight, but everyone wants one last dance. But in this room without clocks, no one wants to leave and no one knows exactly when to leave. Thus, a great number end up getting "trapped" and burnt.

As I was observing the market today, I had quite a good first-hand experience with crowd madness. Lottvision was massively played up today and it jumped up 11 cents from $0.505 to $0.615, on a volume of 141 million shares ! The SI forum was alive with people patting each other on the back for the "quick" and "instant" profits made from this sentiment driven rally. Others even proudly admitted moving "in and out", thus making profits a few times over. Yet others proudly proclaim that they bought in just before closing, to wait for the next burst of energy to push the counter past $1.00.

This is just one simple example of madness, and irrational exuberance. Everyone knows the company is loss-making and has no fundamentals to speak of. Even the new core business of lottery machines has yet to formally take of, but people are already talking excitedly about super profits and massive gains. It doesn't take a genius to figure out that inflated expectations are akin to a big bubble blown out of chewing gum. The chewing gum bubble will burst in the end, leaving a sticky mess, and the child will grow tired of sucking on the now-tasteless gum and throw it away.

This is exactly how the crowd reacts, moving from one stock to another, akin to a butterfly visiting flower after flower to gather nectar. Needless to say, this practice can be lucrative in a bull market and sudden rally, but what happens in a crash ? People who think they are so smart get caught off guard; imagine buying 200 lots to contra and the price crashes 10 cents, that's a $20,000 contra loss. All it takes is one BAD contra trade to wipe all many small good ones.

Thus, is it worth the effort ? Buffett mentions that most people cannot resist the temptation to trade in and out of the market, because they liken activity to intelligence and profit-making. Actually, the best profits I've known have been the ones where I bought into a good company, and SAT ON MY BUTT doing nothing at all. This may sound strange to a reader unfamiliar with value investing, but that's precisely what happens.

Value investing can guarantee steady returns, year after year, through all kinds of markets. In bull markets, historically, traders and speculators have outperformed value investors (this is a natural thing, as value investors are conservative and do not take unnecessary risks). But in a bear market or a market trading flat, value investors are the ones who reap the most benefits. This is because of the margin of safety principle and the fact that they concentrate on the business, not the share price.

For more information on value investing, I do recommend a book called "Value Investing for Dummies", which I have found in most good bookstores.

Tuesday, May 15, 2007

Mid-May 2007 Portfolio Review

It's time for a quick half-monthly review of my portfolio and my companies' businesses.

1) Ezra - Buy Price $1.30 (bonus adjusted), Market Price $5.50, gain 323%. The company had just ordered 2 ultra-large AHTS, and are working towards capturing their 2nd FPSO contract. EGM is to be held soon for approval of the bonus share issue.

2) Boustead - Buy Price $1.295 (average), Market Price $1.96, gain 51.3%. Boustead had won a S$11 million contract for Boustead Projects just yesterday. They should be releasing results in the final week of May 2007, and their proposed building of a power station in Dinh Binh Vietnam is still awaiting approval.

3) Swiber - Buy Price $1.01, Market Price $1.94, gain 92.1%. Swiber just released a corporate presentation and analyst briefing for 1Q 2007 results. It helps to explain a few of my concerns regarding margins and cash flows, and I am hoping the company can perform better in 2Q 2007 and beyond.

4) Global Voice - Buy Price $0.1775 (average), Market Price $0.205, gain 15.5%. GV is experiencing slow but steady growth after rebranding as EUNetworks. Just today, they announced a new 3-year agreement with UBL. For more of GV's contracts, please see my writeup in the next section.

5) Suntec REIT - Buy Price $1.11, Market Price $2.02, gain 82.0%. As this is a REIT, nothing much to comment. Yield is still fair at about 5% for my buy price, and I am expecting them to acquire some property in the near future which is yield-accretive, as the price has run up somewhat.

6) Pacific Andes - Buy Price $0.81, Market Price $1.13, gain 39.5%. China Fishery just reported results today and bottom line increased by 54%, so the flow through effect should hit PAH. PAH has yet to release more details of its proposed acquisition of 63.9% of CFG, and an EGM also needs to be convened to approve this major transaction. Results are expected in the 2nd last week of May 2007.

Overall, my portfolio has increased 88.3% from cost as at today. I should be aiming for at least 100% capital gains on my overall portfolio assuming Boustead, Swiber and Pac Andes show strong results moving forward. My next review will be at end-May (i.e. May 30, as May 31 is a public holiday).

Global Voice - An Update

Global Voice has so far captured many contracts this year and is rapidly building up its customer base. Below is a summary of all contracts captured so far for FY 2007:-

a) Jan 3, 2007 - Provision of private network for Hodgeson University
b) Jan 22, 2007 - Multi-Year contract with Largest Internet Exchange, AMS-IX
c) Feb 6, 2007 - Agreement with Denit for redundant data-centre
d) Mar 5, 2007 - Agreement with Techem for converged mission critical connectivity
e) Mar 12, 2007 - Contract with Endemol for content delivery solution
f) Mar 21, 2007 - 365 Hosting expands agreement with GV
g) Mar 27, 2007 - CreditWeb selects GV for global transaction platform
h) Apr 18, 2007 - Cyso selects GV for delivery of solution
i) Apr 23, 2007 - Blue Face chooses GV for highly redundant communications
j) May 8, 2007 - GV and UNet seal agreement for broadband services across the Netherlands
k) May 15, 2007 - GV concludes agreement with UBL to deploy high availability solution

In total, there have been 11 contracts won so far this year. Not counting Hosting365 which was an expansion of an existing contract, there have been on average 2 contracts captured per month (total = 10). Thus, this year has been a bumper year for GV, as the whole of FY 2006 only saw the capturing of about 5-6 contracts (and all of which were for the later part of FY 2006). In addition to these contracts, GV has also launched their Stuttgart network which will further enhance their competitiveness. The CEO Noel Meaney will also be one of the speakers at Capacity 2007, to be held in New York on 25 and 26 June 2007, and will be speaking on how to enhance revenue streams for companies through the use of EUNetwork's solutions.

To summarize, it looks very positive for GV for FY 2007; but this can only be validated once the 1H 2007 financial statements are out. They are due for release close to the end of August 2007, so there is still time for the company to continue to capture contracts to build up its recurring revenue base. At the current price of $0.205, it is difficult to conclude if this is a fair value for GV as PER cannot be used to value the company (it was loss-making in FY 2006). Still, GV may turn out to be as successful as Mediaring (the first profitable VoIP company) and Aztech (which does VoIP products) if it manages to build a strong customer base and leverage on its brand equity.

Monday, May 14, 2007

Swiber - 1Q 2007 Results Analysis

Swiber Holdings Limited released its 1Q 2007 financial statements and press release today. You can check SGX Announcements page (see links on right side of my blog) to look for it. Basically, to sum it up, I expected more from the financials and was a little disappointed by what I read. Below is an analysis of various aspects of the financials:-

First of all, gross margins for 1Q 2007 have declined to only 27.5% as compared to 1Q 2006 which saw gross margins as high as 37.4%. That's a nearly 10 percentage point drop in gross margins, and this could have boosted earnings significantly. One quick glance already makes it obvious - revenues may have increased by 205.8% but cost of goods sold increased even more by 254.1% ! Management should provide some clarity on why margins continue to be squeezed, but no specific mention was made in the press release or performance review.

Net margins have also decreased from 28.4% in 1Q 2006 to only 18.9% for 1Q 2007. I was already being conservative when I estimated their earnings based on 30% net margin, but to be fair, that took into account the fact that most of their vessels have been delivered. In this case, I would assume that the remaining 10 vessels have yet to be delivered, thus putting a strain on margins as the company has to use third-party vessels. The next step Management should take is to update shareholders on the status of the delivery of the vessels, and assure shareholders that margins will improve in future. Just as a hypothetical illustration, if margins had remained at 1Q 2006 levels, we would be seeing net earnings of US$5,487k instead of the current profit of US$3,642k. That's a 50.7% increase in earnings assuming margins had at least been maintained at 1Q 2006 levels !!

Finance costs have also ballooned 210.7% from US$75k to US$233K, reflecting an increase in bank borrowings for the company. While they maintain that debt/equity ratio remains at 0.35, nevertheless, increased borrowings would mean increased interest costs. In a rising interest rate environment, this could cause a larger cash flow drain for the company. A quick look at the Balance Sheet shows that short-term loans more than doubled from US$4.4m to US$9.8m. Long-term loans have also risen and total liabilities are US$57.5m as compared to only US$42.0 a year ago. Trade and other receivables have also increased significantly, ostensibly due to the 200+% increase in top-line, but the company should comment on the number of days of receivables outstanding to see if their cash conversion cycle has improved. A major worry for me for any company is their ability to manage cash; if this is absent, then the company could face a cash crunch even as they are making profits.

The cash flow statement is another area of concern. The company actually generated NEGATIVE cash flows from operating activities of US$3.7 million ! This was because their increase in receivables had more than offset their increase in trade payables, which is the worrying aspect I talked about. Assuming the company pays its creditors faster than it collects from its debtors, we could see more trouble ahead in terms of cash flow management. Let's hope this problem is only temporary with the spending on capex and would resolve by 2Q, otherwise it is a glaring area to highlight to the Management.

As can be observed, about US$9.7m was spent on capex as compared to US$3.8 million a year ago. When put in context, this is justifiable as the company is aggressively expanding its fleet. The sale and leaseback arrangement also means that cash flows will be eased under "investing activities" as the sale would generate immediate cash back for them. Thus, it is hoped that the company can continue to invoke such MOU in order to ease their raising of cash through bank loans, which necessarily incurs interest costs.

Their order book as at March 31, 2007 is US$176 million as stated. The LOI for the Indonesian installation of pipelines and platforms is worth US$21.3 million, thus their current order book as at May 14, 2007 stands at US$197.3 million. Only US$70.4 million from the Shell deal will be recognized for FY 2007, thus the total order book forFY 2007 is about US$99.8m + US$21.3m = US$121.1 million. Taking a net margin of 18.9% (as derived from 1Q 2007 and is thus a good indicator), we would arrive at earnings of US$22.9 million. Add this to the current earnings of US$3.7 million and we get US$26.6 million. Using a conversion rate of 1US$ to S$1.51, we get a net profit of S$40.15 million. Thus, the EPS based on 369 million shares is 10.9 singapore cents. Applying a conservative PER of 13x gives a fair value of S$1.414 for Swiber.

But intrinsic value is more than just about numbers. Swiber is currently aggressively expanding its fleet and negotiating for more deals in the region. Being an EPCIC player operating in a niche market, their focus has given them a better competitive advantage. Management is also pro-active, forward-looking and competent and so far they have delivered (except for the margins !). Thus, it might be prudent to apply a slightly higher PER of 15x for their strong entrenched position within the oil and gas industry and their niche focus. This would translate into an intrinsic value of S$1.635 per share for Swiber, based on forecast EPS of 10.9 cents. Thus, at the current closing price of S$2, I feel Swiber is over-valued. A more reasonable price to buy at would be around the S$1.60 to S$1.70 level.

Further catalysts would include:-

1) Securing of more LOI and contracts for EPCIC projects
2) More sale and leaseback deals to securitize more vessels to aid in fleet expansion
3) Setting up of more repreentative offices in countries where they wish to establish a foothold, namely Middle East, Bangladesh, Vietnam and Thailand
4) Ordering of more confirmed vessels for FY 2008 in order to build their capabilities. Currently, many aspects of their 2nd wave of expansion are merely "planned" and are not concrete yet.

For shareholders who find this review useful, or who have a comment to make about my numbers and assumptions used, please feel free to drop a comment. I will try to reply as soon as I can.

Have a great week ahead, everyone !

Sunday, May 13, 2007

Valuing Companies - A Simple Business Model Approach

Valuing a company isn't really as difficult as most people think, but neither is it easy ! It's one of those things where you have to exert some effort initially but once you get the momentum, it feels much easier as you go along. It's a little like rock-climbing, once you get over the initial difficulty, scaling the rest of the wall seems easier (though this analogy does not ring true for me, cos I have a fear of heights !).

Let's look at a company using a very simple business model approach. What this means is that we look at what a company is essentially doing (i.e. its industry), its core strategy, its target markets, potential customers, suppliers and stakeholders. From these aspects, it is already possible to eliminate the "potential" companies from the downright avoidable ones. What I can surmise from my limited investment experience is this: some industries just do not have the margins and are too competitive, lending credence to the fact that getting decent earnings growth is tough ! Even the best company is a sunset industry may not be making much profit, thus it may not qualify as a good investment using value investing screening criteria.

A few of the hot industries right now include oil and gas, palm oil (alternative fuels) and also properties ! The not-too-good sectors right now include China pharmaceuticals industry, plastics industry and semi-conductor industry. When I say "hot", it means popular but not necessarily a good investment because what is popular may not be profitable (take the boom as a good example). I shall attempt to elaborate below.

Oil and gas companies are enjoying the boom in the exploration of oil right now, and most companies in the sector are seeing high margins and high ROE. Palm Oil companies like Wilmar are also enjoying tremendous attention and are touted as the next big thing, which we will have to wait 2-3 years to see. Properties are in a boom cycle right now, and prices for private properties have been hitting stratospheric levels. When one looks at such industries, one inevitably feels like dumping their money in cos it seems so enticing !But wait, assessing each company within the industry is important too, because when it comes to value investing, the company must have a durable competitive advantage and sustainable growth based on recurring earnings. Next, assess the strategy for each company and see if this can ensure good growth in 3-5 years time. Sometimes, a little business sense is helpful here as companies may like to hype up their products/services to the public, and it is up to us laymen to decide if the CEOs and analysts can be trusted.

Just remember that some business models may work much better than others, from a simple common sense point of view. Just to take a rather glaring example, recently Rowsley went through a RTO with a China company Perfect Field which will guarantee a profit of S$300 million each year for FY 2008 through FY 2010. The company is currently only making about S$4 million a year, thus this would represent a 7500% increase in profits, in just ONE year. Call me a skeptic but which product in the world can give a company a 7500% increase in profits ? Even if the company could actually achieve this, is it sustainable ?

Another example I see of a strange business model is selling gemstones on TV, for the company on SGX called GEMS TV. Let's see, when was the last time my mum went shopping for jewelry through the TV.......*thinking* so far none ! My wife, sister and mother love going to the physical shop to choose jewelry, and they have a whale of a time trying on this and that. If GEMS TV chooses to penetrate Asian markets, then they must see this as a big obstacle. Also, they are competing with traditional jewellers as well as TV Channels for advertising space, and this all adds up to higher COSTS. Over time, they would have to scale up their revenues significantly in order to recoup their investments. It would seem that the company is expanding into foreign markets too aggressively without building up their core earnings, and such over-extension can hurt profits in the long-run. The worst-case scenario would be for the company to overuse its cash, and not have enough sales to replenish it (slow cash conversion cycle). This could potentially be detrimental to the survival of the company.

I have highlighted 2 business models which I feel cannot work under current circumstances. Perhaps if the model was revamped or revised, it may stand some chance of being successful. Sometimes, when we are presented with a business proposition, we need to coolly evaluate it in the light of the competition, industry, expenses, revenues, customer base and cash flows. It may not be simple but it's not rocket science either !

OK, back to the not so hot industries. China pharma is undergoing a turbulent phase as the government insists on regulation. Asiapharm, C&O and Reyoung have thus not done as well as they should have (but Sihuan did put up a commendable set of results). Plastics and PCB industries are essentially too commoditized and companies like Jadason, Eucon, Fu Yu and Meiban will find it very tough to maintain margins and keep costs under control, as there are so many unlisted competitors giving them a run for their money. Chip and semicon industry is also too dependent on the IT industry, which is too volatile. Companies like Global Testing, UTAC and Chartered are not having it easy, and the capital intensive nature of the industry ensures that cash will always have to be used up for expansion/upgrading of facilities while margins remain razor-thin.

In summary, look at a company and its business model before deciding to invest. If it sounds too hyped up or downright weird, it may be good to go wash your face and come back with a clearer mind to analyze the situation. When things seem too good to be true, they are usually not (true).

Friday, May 11, 2007

Ezra Holdings Limited - A Brief Review

Just a short, succinct review on Ezra Holdings. There has been not much significant newsflow this FY so far, apart from the listing of EOC Pte Ltd, 1H 2007 results release and their order of the 2 30,000 bhp Rolls-Royce AHTS. The company has been quietly and steadily building up their fleet of AHTS vessels, and the heavy accommodation barge and pipelay vessel are slated for delivery this FY as well. There was some concern from yours truly about Ezra's intention to order more vessels to beef up their fleet in preparation for FY 2009, as the company usually forecasts demand about 2 years in advance and places orders for vessels to cater to that demand.

There have been reports written of the buoyant oil and gas slowing down in FY 2009, as the supply of oil rigs and oil drilling vessels outstrips demand. This would surely adversely impact Keppel Corp and SemCorp Marine first, the effect will then cascade down to ship builders and oil and gas support vessels such as Labroy Marine, ASL Marine, Pan-United Marine, Ezra and probably even second liners like Jaya Holdings and CH Offshore. There is also some concern about AHTS over-supply by FY 2009 as I see many of Ezra's competitors such as Haliburton and Prosafe ordering AHTS vessels for future use. This is cause for concern as it means that charter rates will gradually decline after peaking in FY 2008. Also, a more pressing worry is that demand may taper off so much that part of Ezra's fleet lays idle as its AHTS will not be in use any more. Of course, this is the worst case scenario as we all know that oil exploration activities are still very much in demand in the world, and are slowly moving towards Asia and Australia as the oil fields in the Middle East start to dry up. Furthermore, as the supply of FSOs and FPSOs builds up, there will still be demand for support vessels to ferry equipment and personnel to/from the vessels and rigs.

But I digress. Back to the company proper, they had recently bought 21% of SGX-listed Nylect Technologies Limited (soon to be renamed Ezion Holdings Limited). Accordingly, EOC also has signed an agreement for services to be rendered to Nylect and this sets up the stage for a long-term partnership between the two companies. The fact that Ezra had bought into Nylect at 33.1 cents/share is also good assuming Nylect can scale up its business to become a player in the oil and gas industry. Equity accounting will ensure that any profits earned by Nylect be recognized as "share of profits from associated companies" on Ezra's consolidated Profit and Loss Account. It was a wise move to divest Uni-Bulk (they used to hold 30% of it) as it was loss-making, and to free up the cash to purchase a more worthwhile investment. Still, a lot hinges on the future performance of Nylect, and I dare not be too optimistic at this point till I see some good NUMBERS from Nylect.

Ok, well, so much for a SHORT summary. Today also saw Lloyd Investment becoming a substantial shareholder of Ezra with a 5.01% stake in the company. Normally, I don't really watch for funds buying into my companies, but I do take note of them in passing. The company should be announcing its EGM pretty soon for the approval of the bonus issue, which should see its issued share capital doubling from 289 million shares (after the share buy-back) to 578 million shares.

The listing of EOC also helps Ezra to raise US$43.3 million to fund its fleet expansion and for working capital. A closer reading of the announcement shows that the listing will only be complete close to the end of the year, as EOC is only listed on the OTC section of the Oslo Bourse. It will be moved to the Main Board by the end of the year, and Ezra plans to dividend out shares in EOC to shareholders such that its stake falls below 50%. Frankly, I think this is the first SGX listed company to dividend out shares in a company listed on a Norwegian bourse ! Key questions will be: how are they going to go about this, and how will shareholders obtain the shares ? Will they be held in trust by the brokerage, or by CDP ? Also, how will the shares be bought/sold ? Interesting questions to ponder about and we can either wait for further news from Management, or ask them during the EGM maybe ?

One final thought before I end off this post - are the 30,000 bhp AHTS in demand ? Ezra only orders vessels if it has firm charter contracts on hand for them, as assured by Mr. Chan Eng Yew whom I spoke to during the AGM. Thus, I assume that the 2 Rolls-Royce size AHTS have charter contracts waiting to be signed, because the company did not disclose any contract value. As the vessels are suited for deep sea oil exploration, I would say Ezra is forward looking as exploration is gradually shifting towards deep waters (I mentioned in an earlier post that Mr. Raymond Goh of Swiber Holdings Limited told me this). There is also some speculation that they may order one more 12,000 bhp vessel but this cannot be confirmed; and that Lionel Lee said in an interview that the company looks to capture another FPSO contract within the next 18 months (i.e. by the end of FY 2008). I am sincerely hoping that the company does not "over-stretch" themselves as they have now been thrust into the global league, and will thus compete with the major players. Somehow, competition can either make one stronger or weaker, and the tenacity of the Management to weather the challenges will show in its earnings, revenues and margins.

Good luck to all shareholders of Ezra, and have a great weekend !
Swiber - Sale and Leaseback

Swiber has announced the details of its sale and leaseback with R.S. Platou Finans Shipping A.S., a company which is domiciled in Norway and which specialises in offshore and marine related financing schemes. This is a follow up to the original announcement on March 28, 2007 which mentioned the sale and leaseback but did not provide the numbers.

The company's subsidiary Swiber Engineering Limited has signed 5 Memoranda of Understanding to sell 5 vessels (one pipelay barge and 4 AHTS) to various companies under R.S. Platou for a consideration of US$87.5 million. Since the book value of the 5 vessels is only US$58.4 million, Swiber will thus recognize an extraordinary gain of US$29.1 million in its books. As to when this gain will be recognized, I believe it is when the transaction has been substantially concluded (i.e. when the vessels have been built and delivered to the buyer, thus triggering the condition for the remainder of the payment). This gain will therefore be progressively recognized as the announcement states that the vessels will be delivered over a period of time, with the pipelay starting from July 2007.

A quick comparison with another listed company which had this arrangement is Ezra Holdings Limited, of which I am also vested. A quick check on the history shows that they had 2 such sale and leaseback deals. One was announced on July 19, 2006 and the deal was worth US$181.3 million, all conditions were essentially similar. The other announcement was made some time back in March 2005 and consisted of the sale and leaseback of 4 vessels. In both cases, an exceptional gain was recognized and the company was able to lighten its balance sheet, improve leverage and obtain cash for future vessel acquisitions.

Back to Swiber; this is the first in what will probably be a series of transactions aimed to securitize its vessels and to lighten its balance sheet in order to keep it asset-light. The immediate effects of this arrangement, from my point of view, is that Swiber gets the 10-20% downpayment in CASH for their working capital purposes. This is essentially the part of the deal which I like, the fact that cash is coming in first so that it can be deployed for other uses. The profit is exceptional in nature and thus will not affect valuations as it is non-recurring by nature. However, gearing can be reduced immediately with the inflow of cash and this means that the company can improve their Balance Sheet position. Also, as more deals and contracts come its way, the company will be able to use its improved cash flow position to pay off the bareboat charter expenses relating to the operating leases on its vessels which have been securitized. The S&L lasts about 7-8 years and there is typically a bargain purchase option to buy back the vessel at a nominal fee, after the usage of the vessels during this period. It is a win-win situation for both the lessor and the lessee. The lessor will get to enjoy recurring lease income for 7-8 years, while the lessee will free its balance sheet and obtain cash for deployment to expand its fleet.

The transaction also has financial effects such as increasing the NTA and EPS of the company. NTA will rise to US 21.18 cents as the company will recognize a cash inflow, but this is because it did not take into account operating lease expenses relating to the charter of the vessels, which would have a reducing effect on NTA (it states this as US cents 18.01). As for the increase in EPS, this is purely due to the exceptional profit and should not get shareholders too excited. One good thing I noted is that the company has no share options and no convertible debt in place, thus there will be no possible dilutive impact on EPS in future periods. As its share capital base is only 369 million shares, the exceptional gain adds about 11.91 Singapore cents to EPS (assuming exchange rate of US$1 to S$1.51).

An EGM has to be held and shareholder's approval sought for this as it constitutes a major transaction. It will be interesting to query Management more on the probable charter income from the vessels, and to ask how they will be deployed. Also, it is prudent at this stage to seek more clarification on the additional 10 vessels which are coming in FY 2007, and to ask if they will be financed in a similar fashion. At the same time, Management should make known its plans for the 2nd wave of vessel expansion, assuming buoyant conditions remain in the oil and gas sector.

All these announcements are coming fast and furious before the release of the 1Q 2007 results on Monday 14th May, 2007. Expect some price support in the near-term as the recently announced US$21.3 million contract has boosted Swiber's order book, as it is their first contract since the major Brunei Shell deal. Shareholders (such as myself) would keep our fingers crossed that they can clinch a major deal in Qatar or some other part of the Middle East.

Thursday, May 10, 2007

Portfolio Review and Objective Analysis

For those who do not know me, I will now attempt to give a preview of how I review my portfolio and analyze my investment decisions. As I did mention before, when I first started out it was just a tangle of messy thoughts, unfocused and impulsive. I did manage to make a lot of mistakes (fortunately, they were small ones !) before I started going down the path of value investing. Most of 2005 was a mumbo-jumbo of unworthy investment and trading decisions, and only in 2006 did I begin to seriously read up on investing, psychology, temperament and analysis.

Every half-monthly, I will do a review of the companies I own. Currently, my portfolio stands at 6 companies, and I usually like to keep at most 6-7 companies as I prefer a focused portfolio instead of one where I have 10-15 companies and I don't have the skill, time and energy to understand their businesses fully. Risk is lowered when you know your companies very well and the industries in which they operate. Diversification is for those who do not value companies, and is an effective protection against ignorance (according to Mr. Warren Buffett !).

A brief summary of my 6 investments are as follows:

Ezra - Bought in late 2005, oil and gas support industry

Boustead - Bought in late 2006, multi-industry though concentrates on wasterwater solutions, engineering solutions and industrial buildings

Swiber - Bought in early 2007, EPCIC services for oil and gas industry

Global Voice - Bought in early 2006, private fiber network solutions provider based in Europe

Suntec REIT - Bought since IPO days in Dec 2004, for steady dividend income (and I like to shop at Suntec haha)

Pacific Andes - Bought in early 2006, integrated processor of fish and fishmeal related products (and because I love fish too !)

These 6 companies form my core holdings since Feb 2007 after I divested myself of UTAC at a small profit, as I was not comfortable holding on to tech stocks as it did not fit my value investing criteria (incidentally, UTAC was bought based on a TA challenge from a friend, rather than using sound value investing techniques).

Periodically, the reader will get an update and review on the companies and how they are doing. Objective analysis is important to me, so comments are welcome if you think there is a flaw in my logical argument. Obviously, since I am vested it is virtually impossible to be 100% objective, but the attempt must still be made.

The next half-monthly review will be on May 15, 2007 Tuesday after market close. Swiber will be releasing their 1Q 2007 results on May 14, 2007 after market close. My next posting will probably elaborate more into how I evaluate past mistakes and learn from them in order not to repeat them again. This will be useful to the reader who may also have made several investment mistakes in his investing lifetime to date.