Tuesday, July 31, 2007

Swiber – EGM July 31, 2007

I attended the Swiber EGM today, and surprisingly there were hardly any shareholders at all. Perhaps it was because it was mid-week and there was only one resolution, but I had expected more people to turn up to talk to the Management about the future prospects of the company. Still, this turned out to be a blessing in disguise as I had the chairman’s attention all to myself !

Aside from the usual perfunctory rituals of proposing, seconding and approving the transaction, I would like to highlight several points brought up by Mr. Raymond Goh (who so graciously ignored analysts just so that he could talk to shareholders).

a) The US$300 million medium term notes are preparation for their fleet expansion, and will not be drawn down in one large tranche; rather, it will be progressively utilized as and when the company needs the funds to grow their operations. The interest rate is not fixed yet as the notes have yet to be issued.

b) Another shareholder was asking Mr. Goh about the company’s operations. He stressed that Swiber was one of only a few EPCIC companies operating in this part of the world. He did mention a competitor based in India but this was a new company and thus had yet to build up a sizeable fleet to threaten Swiber’s position. Barriers to entry are high for this industry and Swiber intends to grow quickly with the funds raised from the equity placement and sale-and-leaseback in order to capture a larger slice of the market.

c) Swiber’s order book is about US$200 million currently, but the worldwide market for oil and gas investment totals about US$20 billion; thus Swiber has only got about 1% of this. According to Mr. Goh, there is much room for more contracts to flow in as long as the vessel fleet can be expanded so that more vessels can be deployed for contracts at any one time.

d) With regards to building the company, Mr. Goh mentions that Swiber stresses not only on building assets (i.e. vessels), but also on human resources. He is building process improvements using Shell as a role model in order to retain good talent and skills within the company. Swiber currently employs a Management team comprising 18 different nationalities.

e) The previous announcements for the LOI and contracts were from Indonesia and Malaysia. I asked if it was easy to break new ground into India and the Middle East and his reply was that prospects were good as the company has already laid the foundation for expansion into these countries by establishing an office and appointing VP of operations (for India).

f) The revenues from contracts are all taxed at a reduced tax rate as compared to normal revenue sourced from Singapore. This is because the Singapore Government is pro-active in promoting businesses and Swiber’s effective tax rate is thus only about 7% ! Even IE Singapore has approached Swiber with a view to helping it expand to other territories which it presently has no access to.

Prospects are good for the company to expand their operations and capture more contracts. With more of their own vessels coming on board and a new wave of vessels being ordered for FY 2008, Swiber is on track to improve on their profit margins and also capture larger contracts with prominent customers.

Pacific Andes – Annual General Meeting July 31, 2007

Many questions were raised at this AGM, both on a formal basis (i.e. addressed to the Board of Directors) as well as on an informal basis (talking with the Chairman after the meeting proper). I shall attempt to capture the essence of what was discussed as I did not write everything down (neither did I bring a tape recorder !):-

i) One shareholder asked about the earnings of the Group per quarter, which seemed to fluctuate somewhat. Mr. Ng (chairman) said that seasonality is a factor in the business and some months, you catch more fish and some months, you catch less.

ii) The elongation of the super-trawlers will enable fish hold capacity to triple. This will help to bring in more catch for each vessel as they need about 2-3 weeks to travel back and forth to the fishing grounds. Thus, a larger fish hold will ensure more fish can be brought back for processing each time in order to maximize efficiency.

iii) The problem of over-fishing is currently under control and many measures and regulations have been drawn up by Green Peace in order to discourage fishing companies from over-fishing. Mr. Ng mentioned that this was a good thing because setting quotas and limiting fishing would only drive prices up, which in the long run meant that margins would also improve for the entire business.

iv) A possible substitute for fishmeal was soya bean meal, which is a plant-based extract. However, Mr. Ng said that soya bean meal tends to pollute the water when placed in water, thus killing fish. Thus, it is not a good substitute for fishmeal and till now, this problem has not been solved. Fishmeal will continue to enjoy good margins for quite some time. When PAH bought over the fishmeal businesses and vessels in Peru, the price of fishmeal was only US$500 to US$600 per ton. This has risen in recent months to as high as US$800 to US$900 per ton (after a 15% correction off an all time high of over US$1,000 per ton), thus ensuring a very good margin for the Group in future.

v) One shareholder asked about the potential political risks involved in dealing in Peru, which is a South American nation. Mr. Ng mentioned two factors which mitigated this risk; one was that the Singapore Government has an agreement with the Peruvian government to protect Singapore businesses operating in Peru. Second was that in the contract signed with the Peruvian government under the current laws, it provides 10-year protection against the changing of laws which may restrict of impede CFG’s vessels from fishing in Peruvian waters.

vi) When asked about whether canning would form a major part of PAH’s revenue, Mr. Ng said that this was in a trial stage and canning would only form a minor portion of revenue for now. However, with the demand for fish rising in China and demand for canned anchovies (sardines) rising, canning operations may scale up in future.

vii) CFG and PAH currently operate under the Olympic fishing system, whereby a total allowable catch (TAC) is allocated to ALL fishing vessels within Peru. Thus, every month, all the vessels (including CFG’s) would essentially “rush out” to catch as much fish as possible. CFG’s strategy of increasing their number of supertrawlers and purse seine vessels means that they can catch a bigger piece of the TAC, which is why the senior notes were issued in order to buy over 5% of the total fleet in Peru. Mr. Ng mentioned that hopefully, in time to come, this would be changed to the quote system, whereby each company would be given a specific quote to catch (based on past years’ catch) in order to maximize yield and efficiency.

viii) Mr. Ng said that they have yet to prepay for the 4th VOA, and that the effects of the 2nd and 3rd VOA have yet to kick into the financial results. Also, the 63.9% ownership of CFG will only take effect from July 2007, thus 1Q 2007 financials would still reflect the 28.8% ownership.

ix) CFG will continue to actively seek out acquisitions of more vessels and to capture more VOA as this is a strong competitive advantage for the Group.

Based on the above observations, I would say there are still some risks and uncertainties relating to PAH’s business. Gearing is still uncomfortably high and Management has avoided directly replying to shareholders on how gearing can be reduced over time. As one shareholder put it, no use achieving higher growth and EPS as a result of the issuance of more debt as debt-boosted high ROE is useless. It remains to be seen if PAH can reduce their gearing to a more comfortable level, and I will have to monitor this as the months go by. One mitigating factor is that Mr. Ng mentioned that PAH has enjoyed 5 to 6 years of consistent growth in top and bottom line (except for a slight hiccup during the SARS period).

Thus, I remain cautiously optimistic on the Group’s prospects even as I await the 1Q 2008 financials to be released in 2 weeks time.

Note: My end-July 2007 portfolio review will be done possibly on 1 or 2 August as I will be away on a business trip to China. I shall return late Friday and only resume posting on Saturday August 4th.

Monday, July 30, 2007

Boustead – Annual General Meeting July 30, 2007

I attended the Annual General Meeting today. Below are some notes of what I gathered at the meeting and the issues and points raised by shareholders:-

Financial Statements

a) Page 82 Note 31 – Allowance for Provision for Doubtful receivables had increased from S$203K to S$6.3 million. Management explained that this related to the provision for receivables of Salcon Invest which was being voluntarily liquidated.

b) Page 63 Note 12 – Allowance for foreseeable losses on contracts of S$3.4 million. This relates to the sand export ban from Indonesia where suppliers refused to honour their agreements to sell sand to the Group at S$72 per cubic metre. The Group is now suing these contractors and making provisions for the increase in costs, as the market price for sand is now about S$150 per cubic metre. However, for FY 2008, the projects are expected to be priced higher in order to offset the effects of this cost increase, thus the impact would not be so severe.

c) Page 61 Note 8 (a) (ii) – This loan to a director is a different director from the one stated in Note 8 (a) (i), and the loan has since been fully repaid. When quizzed about the period of time required to complete the voluntary liquidation of Salcon Invent, the Chairman said that the settlement agreement has already been drawn up with the main contractor and this should be completed within the next few months. The process has dragged on for many years and the final settlement, he assured, should be within FY 2008.

d) Page 70 Note 19 – Loan receivable amount of S$18.3 million belongs to CGI Realty. The other shareholders of GBI have also provided the same proportion of the loan receivable.

e) Page 86 Note 36 (b) – Capital commitment of S$12.06 million relates to the Group’s commitment to a fund which has yet to take off. However, the agreement is non-binding and the Group is allowed to withdraw from it if it chooses to. This fund was originally set up to procure a land bank in Tianjin, China in order to replicate Boustead’s success in Singapore but no approval has been given so far. The amount stated in the notes represents 10% of the total funds to be committed assuming the approval is granted.

f) Page 78 Note 23 (c) (v) – A minor question was raised regarding the interest rate of 16% for a loan amount. The chairman said this was in relation to a loan taken up in Indonesia and the interest rates there are naturally high due to higher default risk.

Future Plans and Prospects for Boustead in FY 2008

1) A question was raised on whether minority interests (MI) will be further reduced in order to enhance earnings attributable to shareholders. The reply was that this was unlikely except for perhaps a small additional purchase in Boustead International Heaters. This amount is insignificant though.

2) Mr. Wong mentioned that Boustead’s order book was “looking good” and that the Group was hoping to clinch some Middle Eastern projects in FY 2007. However, this hit a snag because of bureaucratic requirements and resulted in delays in getting approvals for firm contracts. Thus, Salcon and the Water Solutions Alliance would have to wait some time before showing results but he is hopeful that something good will materialize soon.

3) On the Energy side, he mentioned that the Group has secured some projects (some of which are significant) which will be announced in due course. He anticipates some related announcements to be made in August 2007.

4) Incidentally, after the AGM and market close, a new contract was announced for Boustead Projects worth S$74 million, the single largest contract to date for the Group. This affirms what the Chairman had said and will help to grow their order book even further for FY 2008 (note that they now own 91.7% of Boustead Projects, up from 55% in FY 2006; thus more of the profits will accrue to shareholders for FY 2008).

5) With regards to Salcon, Mr. Wong mentioned challenging conditions in China and that margins can be pretty thin for most companies doing BOT water projects. When asked how Boustead compared to companies such as Epure and Sino-Environment (also listed onSGX-ST), he shrugged and said that it’s a very competitive landscape out there and that only the company with the lowest costs and most cutting-edge technology can manage to compete and stay alive. This is because China companies can always lower costs more effectively than Singapore companies and they also have an edge because of their Chinese connections. He admitted that one mistake he made was not entering the market earlier, thus missing out on good opportunities.

6) He maintained that Boustead will not accept BOT projects just for the sake of doing so, as some of the returns were so poor that he was forced to reject the proposal; otherwise shareholders’ returns would be affected as the ROE was not acceptable. All in all, he was offered nearly a 100+ projects regarding wastewater but he had to reject all of them due to unsuitability.

7) In a side note, Mr. Wong said that Boustead used to build factories; but now they realize that they can do the business of building high-end tech parks which command rental premiums of up to 3 times the amount for factories. The Group has thus decided to take this strategic direction in order to enhance returns for shareholders (refer to the S$74 million announcement dated July 30, 2007).

8) With Boustead’s current cash hoard, the Management is also eyeing potentialo acquisitions and Mr. Wong did not rule this out. Oil prices will remain high for the foreseeable future (he predicts it will not dip below US$40 per barrel) and thus the demand for waste to energy systems should remain high.

9) For the Jiangsu, Wuxi properties available for sale, they are not doing too badly but prospects are not exactly exciting either. Boustead chooses to manage these properties rather than build them, thus the returns will not be spectacular.

10) One shareholder asked about the possibility of rights or bonus issues in the future. While Mr. Wong did not rule out bonus issues, he said a rights issue was highly unlikely as the Group has more than enough cash already.

11) Another question was raised over succession planning and whether Mr. Wong had considered it. Mr. Wong jokingly said that the word “retirement” was not in his dictionary and that Minister Mentor Lee was already 84 (21 years older than him) yet he continued to work as well ! On a more serious note, succession planning was already underway with one person being shortlisted by Mr. Wong as a possible successor. However, more consideration and discussions with other Board members was necessary in order to determine if this person was “the right one” as the decision is not unanimous at this point in time.

12) Quarterly reporting would be done from FY 2009 onwards (the first quarter beginning June 2008). The auditor from Deloitte and Touche however, said that quarterly reporting for Boustead was not really indicative of business conditions as most project revenues were “lumpy” by nature and such reporting would necessarily use up more resources without affording shareholders the additional clarity. In fact, quarterly reporting may even encourage short-termism and this has already happened for some companies which have reporting quarterly results.

I approached Mr. Wong during the tea break to enquire on the progress of the Dinh Binh power station in-principle approval given in May 2007. According to him, regulatory requirements were still pending and the project was put on hold for the time being, thus shareholders should not expect a firm contract to be signed so quickly.

The atmosphere at the AGM was cordial and jovial and the Chairman was candid in his assessment of the Group’s future and also in giving details of various aspects of the company’s operations. I would say that a lot was learnt from this AGM alone as the questions asked were high-quality ones coming from long-term shareholders who understood the company’s business model very well. As a result of this AGM, it has affirmed my belief that choosing to remain vested in the company is the right choice to make.

Note: I will be doing a posting on Suntec REIT’s results and announcement of the acquisition of one-third of One Raffles Quay after digesting the information stated in the announcement cum press releases. Stay tuned for that !

Sunday, July 29, 2007

Boustead – Annual Report FY 2007 Review Part 2

Dear readers, this is a continuation of my review on Boustead’s Annual Report. Please see the sections below and feel free to comment:-

Income Statement

As can be seen, revenues had increased by 18.9% but COGS has increased by 25.8%, mainly due to the aforementioned increase in costs due to the sand ban for Boustead Projects. As a result, Gross Profit only increased by 7.5% and the Gross Profit Margin dipped from 37.7% in FY 2006 to 34% in FY 2007. It is hoped that the increase in COGS is only a one-time non-recurring issue and that margins will improve for FY 2008.

A quick glance also reveals that administrative expenses had increased by 47.2%, which is rather excessive when compared against the increase in revenues. This resulted in almost flat profit before tax (no growth) and would have been a very disappointing set of results if not for the lower proportion of minority interests factored in, which made profit attributable to shareholders jump 41.6%. Overall, it was only a mediocre set of results and Boustead are in danger of stagnating in terms of growth if they do not pick up the pace for FY 2008.

Balance Sheet

Current ratio is 1.82 in FY 2007 against 1.92 for FY 2006. Quick ratio is 1.69 for FY 2007, also lower than FY 2006’s 1.75. This was mainly due to a decrease in liquid assets as a proportion of current liabilities. The debt equity ratio decreased from 15.6% in FY 2006 to 13.3% in FY 2007, as the Group had taken up slightly more short and long-term loans to fund their operations and buy up stakes from minority interests.

Cash Flow Statement

Cash flows from operations was lower by S$15 million mainly due to increases in receivables as well as inventories. This was partially offset by an increase in payables, which implied that the Group took longer to pay off creditors as compared to FY 2006. For Investing Activities, a lot of cash (to the tune of S$25.4 million) was used in acquiring stakes in companies currently held by minority interests, which is a good way of enhancing shareholder value. As a result, there was a net cash outflow of S$23.3 million for FY 2007 as compared to a net cash inflow of S$3.5 million for FY 2006. Financing cash flows were negative as well but improved somewhat as FY 2006 saw them using cash from operations to pay off short-term bank loans of S$17.8 million. Fixed deposits pledged had also decreased, which freed up more cash; thus the outflow lessened from S$17.4 million to S$2.9 million. Boustead is still in a strong net cash position in spite of the outflows, as their operations had managed to generate enough cash to fuel the operations. They are preparing to pay for a S$9.41 million final dividend, which is only 7.9% of their FY 2007 cash and bank balance.

Notes to the Accounts

Note 2 Page 52 – For construction contracts, note that the % of completion method is being used, thus matching the revenues earned from a project to its construction costs.

Note 2 Page 54 – Borrowing costs are capitalized till the asset is ready for use. Any investment income from such borrowings will be used to offset the borrowing costs and reduced the amount of capitalization. Thus, this has no immediate effect on the Income Statement and has a deferred impact as long as the asset has not completed construction.

Note 6 Page 59 – For cash and bank balances, S$93.6 million was placed in fixed deposits of less than 3 months maturity. However, interest rates for FY 2007 only ranged from 2.1% to 6.2% as compared to 1.75% to 8.5% for FY 2006. Thus, the lower rates sort of offset the higher deposit amounts. It is hoped that Management can find a good use for this cash hoard, otherwise it might be better to return it to shareholders in the form of a dividend.

Note 7 Page 60 – Trade receivables had increased by 51.8% as compared to revenues increasing only 18.9%. Does this imply a collectibility problem ? An allowance of S$802K was made based on past experience but is this sufficient ? On the surface, it looks like the Group’s cash conversion cycle has lengthened considerably.

Note 11 Page 62 – Properties Held for Sale. The book value of these properties is S$3.26 million and there are 4 properties which are located in China, Wuxi Jiangsu province. The total gross floor area of these properties is 19,977 square metres. It is hoped that Management will be able to realize a good gain over book value for these properties.

Note 20 Pages 71-75 – Investment in Subsidiaries. One can notice that the Group has increased their stake in Boustead Projects Pte Ltd from 55% to 91.7%, as well as increasing their stake in Salcon Pte Ltd from 80.9% to 100% (wholly-owned). This is a good move as these two companies represent the divisions of Industrial Real Estate Solutions and Water and Wastewater Management respectively and are the two fastest growing segments. Increasing their stake means more of their profits will flow to shareholders of the company, instead of to minority interests.

Note 24 Page 79 – Trade and Other Payables has increased from S$78 million to S$103 million. One item, accruals, stands out as it has increased more than 100% from S$17.4 million to S$38.4 million. It will be good if Management can explain why there was such a large increase in accruals; what exactly were the accruals for ?

Note 28 Page 81 – Other Operating Income consists of S$7.2 million worth of gain on disposal of available-for-sale investments, which is a one-time non-recurring gain. If this gain is removed in the computation of net profit, then net profit after tax for the Group would have fallen instead of risen, but net profit attributable to shareholders would still be higher than FY 2006 at S$28 million (versus S$24.9 million).

Note 39 Page 89 – Events After Balance Sheet Date. Note that on May 8, 2007 (i.e. FY 2008), the company’s subsidiary Opelika Holdings Ltd sold a leasehold property for a consideration of 3.3 million pounds. As a result, the Group will record a gain on sale of investment property of S$6.3 million.

I await more news from the Group on its upcoming projects. The AGM will be held tomorrow and hopefully the chairman can shed more light on what the Group is planning to do and what strategic moves it is undertaking. There is also the nagging question of when approval can be given for the Dinh Binh power station project in Vietnam which is worth a cool US$500 million. Updates should also hopefully be given for Salcon’s role in the Water Solutions Alliance, and whether Boustead Projects have any upcoming projects bidded for.

Saturday, July 28, 2007

Boustead – Annual Report FY 2007 Review Part 1

I am doing this review of Boustead’s Annual Report mainly as a form of practice, as I am still rather “green” to the detailed review process of Annual Reports. Any comments or suggestions on how to improve my analysis are welcome, and I also invite readers to do their own analysis for any points/notes I may have missed out. Of course, since Boustead is a tightly-owned company (the CEO Mr. Wong Fong Fui had just increased his stake to 31% yesterday with a transfer of shares from nominee accounts), I would expect less readers to have the Annual Report or even be vested.

Still, the Annual Report can be downloaded from the company’s website at http://www.boustead.sg and I can be fairly certain that they are a company which delivers on their promises as they have had a 5-year track record of growth in revenues and profitability. This was largely due to the foresight of the chairman who sold off unprofitable business units and concentrated the company’s core competencies into energy conversion, water and wasterwater as well as industrial real estate solutions. Now leaner (and arguably meaner !), the Group continues to bid for higher value projects and seeks larger contracts in the Middle East and around the globe. This is the reason why the Annual Report’s name is “Being Focused”. I shall comment on this later in the post.

Chairman’s Message - An Analysis

The first and most distinct thing I noticed from the chairman’s first 4 paragraphs is that he gives a very honest and candid appraisal of the Group’s performance, without resorting to evasive or flowery language. The words “disappointment” and “performed below our expectations” for the water and wastewater division are used which signify that he is genuinely disappointed at the performance of this division and is not attempting to gloss over it. Even during the 1H 2007 results announcement, there was no attempt to hide the fact that some business units were performing below expectations. This candid approach earns points from me as I value honesty and admittance of mistakes by Management who is sincere in seeking shareholders’ understanding of the poorer performance. Of course, if Management still fails to deliver after several quarters, then one has to suspect that Management may not be able to turnaround the business; but so far Boustead has managed to deliver steady growth for 5 consecutive years.

The report title “Being Focused” is also given an explanation: the Group had spent a couple of years divesting their non-core assets and business units (such as their marketing, distribution, food, insurance and power generation businesses), choosing instead to focus on their core business units which represent the greatest growth potential for the Group. It is this focused mindset which is also synonymous with Warren Buffett’s focused investing principles; which advocate that a person/company concentrate on what he does best or what he knows best in order to achieve the highest returns. I have personally seen many companies trying to do anything and everything, losing their focus in the process and eroding their margins and earnings as costs mount. Sometimes, trying to do too much within too little a time frame can be detrimental and disastrous for a company.

The Chairman is cautiously optimistic that FY 2008 will be a better year, though he states that global oil prices remaining high would be a continued catalyst for growth for the Group. He also expects the water and wastewater division to start contribution more substantially to the Group’s bottom line, as the Middle East Water Solutions Alliance led by Salcon has yet to produce tangible results in the form of contracts. The upturn in the construction sector and continued increase in the property sector asset valuations would do good for Boustead’s Industrial Real Estate solutions division, as they are focusing on high-end industrial solutions for global clients.

Operations Review

Energy-Related Engineering Division

Boustead’s energy related engineering division consists of Boustead International Heaters “BIH” (which is a global specialist in engineering direct-fired heat process systems and waste heat recovery systems) and PT Boustead Maxitherm “BMI” which is a highly regarded combustion engineering specialist. This division experienced the strongest growth with the highest revenue contribution being recorded to date of S$130.6 million. It also clinched the largest engineering contract to date of S$36 million. They have continued to clinch major contracts from international oil giants (prominent customers) and are continually expanding their global presence into markets such as Middle East, North America and West Africa. This expansion is positive for the Group’s prospects as this means their global expertise is being more recognized, plus they have the endorsement of major oil companies which can fuel (no pun intended) their expansion.

BIH will focus efforts to capture more of the South American market for FY 2008 as it has identified good potential business in that region. For BMI, higher oil prices have also prompted interest in sourcing for alternative sources of energy. A few that are currently “hot” are alternative fuels like bio-fuels and bio-diesel or solar panels to harness the sun’s energy. Solid energy waste recovery systems are also gaining more demand and recognition as a good source of alternative energy as it makes use of material such as sugar bagasse (a waste product) in Indonesia to generate energy. Prospects look good for BMI as oil prices probably will not move downwards anytime soon, thus fuelling more demand for BMI’s expertise in designing such systems to cut down fuel usage for companies.

Water and Wastewater Engineering Division

For this division, Salcon Pte Ltd (“Salcon”) is the leading international water and wastewater specialist who is the only Asian vendor outside of Japan to be pre-qualified by international EPC contractors (a strong and sustainable competitive advantage). It experienced declining division revenue as the revenue contribution from 1H 2007 was weak, but it managed to salvage itself somewhat with a S$25 million contract for the building of Phase II Extension for the Bedok Newater Factory in 2H 2007, thus the total decline only came to about 13.1%.

If one looks closely at the numbers, the division revenue had declined by 13.1% but division contracts secured increased to S$57 million in FY 2007. This would imply that most of the contracts revenues and profits are to be recognized in FY 2008. The selection of Salcon as the anchor company for the water solutions alliance has yet to bear fruit, but the Alliance targets to capture a total project value of S$500 million by the end of 2009 (which will flow into FY 2010 for Boustead as their year-end is March 2009). Since there are about 8 companies in the Alliance, the revenue share of the S$500 million is expected to be about S$62.5 million spread out over 3 financial years. This brings it to only about S$20+ million per year, hardly enough to sustain the growth of Salcon. I would see it as imperative for Salcon to leverage on its expertise to grow their business elsewhere and not to rely too much on impending good news from the Alliance as it may not be as rosy as once thought.

Even the operations review states that business conditions will remain “challenging” for Salcon is FY 2008, and I see this as a warning that revenues and profits may not be sustainable for this division in the long run unless the Group manages to build up their competence, expertise and network in this area more effectively.

Industrial Real Estate Solutions Division

The Group’s real estate solutions division is managed by Boustead Projects Pte Ltd and they are a leading industrial estate solution provider in Singapore. FY 2007 was the division’s best performing year to date, with revenues of S$124.8 million. Contracts secured for FY 2007 hit a new high at S$211 million, with new clients such as Berg Propulsion and UMS signing on deals with Boustead Projects to build industrial leasehold properties. With such a good track record, I would think this division is poised to grow more strongly in the coming years as the Singapore property market also shows an upturn. The division’s profitability was affected by sand shortages for FY 2007, but this should be a one-off problem and for FY 2008, higher profitability and better margins are expected.

Their overseas ventures may also bear fruit as projects are expected in countries such as Vietnam, Malaysia and China. Recall too that in early May 2007, Intellasia news (a leading news agency website for Vietnam news) reported that the Ministry of Industry has given in-principle approval for Boustead Projects to construct a thermo-power plant with a contract value of US$500 million in Dinh Binh province. The final decision rests with the central government and Boustead is unlikely to recognize the full bulk of the US$500 million as they probably need to partner with another company for a project of this scale and size. However, this news represents part of the possible pipeline of projects which Boustead Projects may undertake in FY 2008, and provides a glimpse into what may possibly be new revenue streams coming from new territories. In short, there is much to look forward to in FY 2008 with regards to this division.

Geo-Spatial Technology Division

For this division, I frankly do not anticipate much growth as such technology is only useful to probably government agencies and statisticians or map readers. Assuming the government does make more use of this technology, I still do not see much revenue growth beyond FY 2008. It can probably remain as a good cash cow division contributing cash, but has limited potential for growth in my opinion. Other competing technologies may also erode the margins and revenue growth for ESRI in the near future. My suggestion will be to sell off this division if it continues to show signs of slow or flat growth, and to focus on the other 3 core businesses.

My review of the Balance Sheet, Income Statement, Cash Flow Statement and Notes will follow tomorrow in Part 2.

Friday, July 27, 2007

Pacific Andes – Annual Report FY 2007 Review

As promised, this is my review and analysis of the Annual Report by PAH. Suffice to say that it has not been easy “reviewing” the Annual Report and I should be forgiven for missing out certain parts which may be of concern as there is really a truckload of information to go through. The problem is that most companies only give you something like 2 weeks plus to go through the Annual Report before holding their AGM. To me, this is just too little time !

This post will review the annual report and highlight areas which will cause concern for the shareholder. Suffice to say I took about 4-5 days to go through the entire report and I would like to point out the following items which may require further attention as we move into FY 2008. Note that I am commenting on some of these items in my capacity as an “finance guy”, and it may sound jargon-ish and technical to those who are not familiar with accounting concepts and principles (my apologies for that !):-

1) Debt-equity ratio has risen to an unhealthy 117% as of FY 2007, and this was caused by the issuance of the 5-year senior notes to raise money for CFG to acquire the purse seine vessels as well as to fund more acquisitions of companies operating in Peru. While the acquisitions are expected to be yield-accretive, we should note that PAH’s interest expenses will shoot up much higher in the coming years (it was HK$40 million for FY 2007 just for interest on senior notes as compared to zero for FY 2006, see Note 9 Finance Costs).

2) On Page 44 Note 2 regarding deferred charter hire, it is stated that this is capitalized as a prepayment and subsequently amortized off in the Income Statement over the period in which the benefits are expected to accrue. Since the charters are going to be for 5-10 years, the amortized cost will be over this period of time. The current portion in the balance sheet Page 33 is HK$173 million, while the non-current portion stands at nearly HK$1.8 billion. Shareholders should note that charter hire expenses form part of cost of goods sold and this could increase over time, thus having a dampening effect on gross margins even as the Group attempts to elongate its super-trawlers in order to maximize economies of scale.

3) Refer to Page 45 Note 2 on deferred expenditure, it is interesting to note that expenses on each voyage (to catch fish) are actually deferred until matching can be done between revenues and expenses (an accounting concept). This technically means that if the fish from the catch are never sold, then the expenses could be deferred indefinitely ! Also, there is a catch which says that if expenses actually exceeds the revenues from a particular voyage, it will be immediately recognized in the Income Statement due to the prudence principle. This rule means that expenses from many voyages could potentially be “deferred” by the Management if they wish to prevent recognition before a certain cut-off date, as all they need to do is to sell a different batch of fish. This is one possible avenue for manipulation.

4) Also on Page 45 Note 2 on deferred expenditure, charter hire fees are separated into fixed and variable. For the fixed charter rates, these are expensed off regardless of whether the vessels under the VOA are being deployed, which means that in theory, expenses could very well still be incurred during the vessels’ downtime ! This could potentially lead to higher expenses should any damage befall the vessels and it s significant risk factor in my opinion.

5) Under Page 49 Note 3 on critical accounting judgements, it is stated that the carrying amount of deferred charter hire is stated as such on the balance sheet (without provision for impairment losses) mainly because the charter hires are expected to be profitable in the foreseeable future. The risk here is a sudden decrease in the carrying amount of the charter hires (for whatever reasons relating to the fishing industry), thus causing the auditors to pass an entry to write-off a s significant amount of impairment losses over to the Income Statement.

6) On Page 55 Note 8, there is an exceptional gain on dilution of interest in CFG as a result of CFG doing a placement of shares. This exceptional gain must be deducted from the net profit after tax in order to arrive at the true EPS for the Group.

7) On Page 55 Note 9 on Finance Costs, pay particular attention to a more than 120% increase in finance costs from HK$103 million to HK$228 million in just one financial year. This is a cause for concern as the Group is gearing itself up more and more over the years (refer back to Point 1).

8) For Page 65 Note 21 on Other Intangible Assets, it is good to note that fishing permits are essentially perpetual in nature and do not have a finite useful term. Thus, there will be no amortization expenses associated with the acquisition of these fishing permits ! Unless there is a drop in the carrying amount of these permits, it is unlikely that there will be any impairment loss recognition in the books in the near future as permits are no longer issued by the Peruvian Government.

9) For Page 67 Note 25, note that prepayments for fish has increased substantially from HK$135 million in FY 2006 to HK$500 million in FY 2007, almost a 270% increase. It will be good if Management could explain what this prepayment was for and whether the amounts are collectible; including why there was such a substantial increase (could it be due to fishmeal ?).

CEO Statement Review

The chairman Mr. Ng Joo Siang gives an operations review, financial review and an outlook and forecast for the financial year ahead. This is pretty standard fare when it comes to giving statements, and encompasses most aspects of the financial year under review.

For operations, he mentions that China has grown and expanded as one of their key markets and they expect to maintain growth in the current financial year. He also touches on the three new VOA acquired under CFG, as well as the integration of their newly acquired Peruvian operations into PAH’s vertically integrated business model. All this is pretty standard fare for a shareholder who has been actively keeping up with the company’s announcements (including CFG’s), but will act as a useful summary for a new shareholder or a person seeking to invest in PAH.

In the financial review, he basically touches on increases in revenues, net profit for the year and net profit attributable to shareholders. He also gives a year-on-year comparison for performance of net profit after excluding exceptional items, which is the correct approach considering that PAH have an exceptional gain due to dilution of interest in CFG. The dividend is also stated (0.54 cents per share post-rights) and he goes on to elaborate on how PAH and CFG tapped on the capital markets to issue debt such as convertible bonds and senior notes to accelerate their expansion. For readers of the Annual Report, this should sound alarm bells for them to check on the Balance Sheet’s liabilities section and the section on loans and finance costs under Notes To The Accounts.

The outlook ahead section is perhaps the most important as it gives shareholders guidance on the future for PAH. I have summarized the section into several points which are noteworthy:-

1) PRC market volumes for fish has increased 14.1% from 2001 to 2006, thus more growth momentum is projected for fish demand in the PRC. The PRC government is active in promoting aquaculture, and want aquaculture production to hit 46 million tonnes by 2010, which is an annual growth rate of 6%. Analysis: If the above measures are true, then there is room for growth within PAH’s largest market which is China (it constituted 76.1% of their total revenues for FY 2007, according to Note 6 Page 54).

2) Strengthening the harvesting capacity and efficiency of existing vessels, and also building up the fishmeal division to ensure it contributes more strongly to revenues and bottom line. He expects the fishing division to contribute strongly to growth in FY 2008, as the harvest volume has not increased to 270,000 tons after acquiring more vessels. Analysis: PAH is focusing on organic as well as acquisitive growth as it seeks to increase the holding capacity of its vessels by acquiring more, as well as by elongating their supertrawlers. It remains to be seen if these will translate into better margins as a result of economies of scale, but at least shareholders are being informed of the said improvements which we can look forward to.

3) The fishing division is set to lookout for other attractive opportunities to acquire more Peruvian assets which will be earnings accretive to the Group. Analysis: Whatever acquisitions CFG makes has to be value-added, meaning there must be economies of scale and must substantially increase CFG and PAH’s operating capacity above current levels, as well as (possibly) reducing costs. The acquisition should be priced at a reasonable level to ensure that it is a good deal (the Group should avoid paying more than it should even though it may sound like a good deal).

Overall, the tone of the Annual Report is one of optimism. Apart from the following points mentioned above, the rest of the numbers look good and I look forward to engaging the Management in a frank discussion of the Group’s prospects and strategies for FY 2008.

Thursday, July 26, 2007

Swiber – Clinching of US$12 Million LOI in Malaysia

On July 25, 2007 (today), Swiber announced yet another LOI clinched for an offshore installation project in Malaysia. This brings their total order book to date to more than US$200 million, but note that not all this amount will be recognized in FY 2007. I will not be going through the computations of intrinsic value with every successive LOI or contract win as I think I need more clarity on their margins before I begin to make assumptions.

From historical records, their first quarter results were released on May 15, 2007, which is about 1.5 months after the end of the previous quarter (i.e. March 31, 2007). By using this as a rough guide, we can expect Swiber to release its 2Q 2007 results on and around August 15, 2007. With this results release, I can then obtain a more accurate picture of the earnings growth for Swiber on a quarter-on-quarter basis. Also, margins will now be clearer if we take into account the fact that some of their own vessels have been delivered to them in the first half of FY 2007. Using the 2Q 2007 margin might be more indicative of the 3rd and 4th quarter margins as more and more of their vessels come on board.

I have noticed too that their contract duration is getting shorter, even though the amounts are still small (i.e. less than US$50 million per contract) as compared to their mega-contract value of US$146.6 million with Brunei Shell. This shortening of contract duration for smaller contracts is actually a positive thing as it allows quick earnings to be recognized within the same financial year as the date of contract; in addition, it will help to boost cash flows as well and does not “tie down” the support and construction vessels for extended periods. However, I do hope that their efforts to venture into India and Middle East will bear fruit eventually; and that they will be able to clinch a future contract or LOI which is as large as (if not larger) than their Brunei Shell deal.

Since this posting on Swiber is not about the calculation of intrinsic value (i.e. not too numbers-based), I would like to comment more on the strategy and direction of the business. Value investors constantly analyze businesses (not stock prices !) and try to extrapolate whether the business will do well in the long run based on current conditions. Swiber has announced 4 contracts so far this year, which boils down to an averageof 1 contract every 1.5 months. They are building up their momentum and profile to take on more projects in India and Middle East by setting up representative offices there and appointing capable Management to helm the growth there. Swiber is also aggressively securing more funds by way of a sale-and-leaseback of 5 vessels (yet to be approved at the EGM), private placement of shares to institutional parties and now the establishment of a US$300 million medium term note facility. This funding will boost their fleet size and allow Management to embark on an ambitious growth strategy which will see their fleet expanding rapidly and the company trying to clinch larger contracts with prominent customers.

To be fair, whether this will all pan out is still a big question mark. All I can conclude at this point is that Swiber seems to be in high gear, and we should expect more news to come during the remainder of FY 2007 which should attest to Management’s ability to deliver on their promises.

Borrowing to Buy Shares

Just a quick comment here, I recently read in the New Paper (I think it was Monday’s edition) in the Dr. Money section which states that banks such as DBS and UOB are now aggressively targeting people who play the stock market to borrow in order to “feed their habit”. On the surface, the loans appear to be interest-free but if you read the fine print, they are actually imputing in an interest factor upon loan confirmation. Some banks even charge obscene rates such as 17.6% per annum on these loans, which almost amounts to daylight robbery !

The thing which bugs me is not that they are granting such loans, which probably would have been in existence for some time already. It is the way the whole thing is marketed which is so irksome and, I feel, socially irresponsible. Banks are saying things like:”Would you like to invest in your favourite counter during this bull run ? Don’t miss out, XXX bank can give you an interest-free loan to help you seize the chance !”

These banks are basically feeding off people’s greed to make more money and capitalizing on ignorant people who do not read fine prints in order to generate more interest income for itself. I feel this is unethical and totally irresponsible, as many people may not know the risks involved in borrowing to play shares and may not be able to cough up the money should their shares fall. Add in the interest component and you can immediately see why this scheme is so insidious !

So please, dear readers, think for a moment before you plunge yourself into further debt. Only invest using spare cash which you can afford to lose or lock up for a long time. Do NOT over-leverage and use tomorrow’s money to pay for today’s gamble.

Wednesday, July 25, 2007

Investment Mistakes Part 5 – Listening to Rumours & Following Gurus

While considering whether a company is worth buying into, one has to take into account many factors. As discussed under the research series parts 2, 3 and 4 thus far, investors have to scrutinize a company’s financials and assess its ability to sustain a competitive advantage over time based on the 5-forces model. Even then, as Warren Buffett mentions, it is better to buy a great company at a fair price rather than a fair company at a great price. When he uses the word “fair” in this context, he is referring to the price at which the shares of the company are being offered in the stock market; and to compare this to the intrinsic value of the company, in order to see if there is a sufficient margin of safety.

My “mistakes du jour” journal continues with my fifth mistake, that of purchasing a stake in Asiapharm on March 29, 2006. My mistake was in seeing the price surge from about 80 cents plus to over 90 cents (at the time), and also hearing how one friend made good money from this counter by buying at 69 cents and selling at 94 cents. I made the ultimate error of “chasing the stock’s price” by doing momentum purchasing, and also to listening to a friend’s tip without doing prior research on the company. Thus, I was a victim the classic case of rumours, tips and hearsay (see my previous posting on this).

The problem was that I rationalized my purchase decision based on the fact that Mark Moebius of Templeton Investments had just taken a strategic stake in the company (which caused the share price surge). The announcement and press release stressed that Mr. Moebius’ fund had bought a substantial stake in the company, and that he was a very shrewd investor who could see good value in companies. Thus, forums were abuzz with people who praised his decision and collectively, they agreed that the 90-cent plus level must be good value. Mr. Moebius was, in effect, almost worshipped to “guru” status because of the performance of his famous Templeton fund.

This was a classic example of investing based on guru’s moves. Most of the time, prominent fund managers may invest in a company for a variety of reasons; plus they are not always right about value either (hey everyone is fallible). Thus, I learnt the hard way that objective, independent research and thinking is always far superior to “hero worshipping” somebody else. I am not trying to imply that the guru may be inferior or trying to mislead people in any way; it’s just that when fund managers invest, they may have their own reasons and always remember that their entry price is much, much lower than the market price (usually), thus they are in a totally different boat from the retail investor.

Ultimately, I sold out on June 9, 2006 at 64.5 cents, incurring a whopping 31.4% loss after the price kept drifting down due to tighter industry regulation from the Chinese authorities. To be fair, Mr. Moebius could not have known this was coming either and thus was unprepared for the devaluation of Asiapharm as a result. Even though Asiapharm subsequently announced the acquisition of several drug companies, the share price never recovered back to the 90-cent level due to continued strict industry regulations. As at the time of this post, Asiapharm’s closing price is 70 cents, way below my original purchase price of 94 cents. If I had stubbornly held on and refused to admit my mistake, I would have lost out on the opportunity cost of investing in a much better, cheaper company.

Tuesday, July 24, 2007

Ezra – Appointment of Independent Director Mr. Ngo Get Ping

Ezra had, on July 18, 2007, announced the appointment of Mr. Ngo Get Ping as their independent director. Dr Ngo, who is 48, has over 20 years of experience in the finance and stock-broking industry. He sits on the Board of SGX-listed Medi-Flex Limited as well as 2 Malaysian-listed companies Tiong Nam Logistics Holdings Bhd and OSK Holdings Bhd.

Mr. Lionel Lee, MD of Ezra, stated that the company places emphasis on good corporate governance as well as corporate transparency practices. With this I believe he means practicing good disclosure and for a company to have a press release for the appointment of a Group Finance Director (announced on July 12, 2007) as well as an independent director is a rare thing indeed. Not only that, but the company has also focused on the expertise and skill sets that the 2 new appointees will bring to the Group, in order to sharpen its competitive edge and allow it to learn and grow.

As Mr. Lee said, corporate transparency will become increasingly tough as the Group diversifies its business and incorporates more business segments/units into its principle activities. As the scale of operations grows, so does the need to keep shareholders like us informed of the myriad changes to the company; and what the Management is doing to grow the company. Management has shown that they are committed to keeping shareholders informed of the latest changes to the Group, which is commendable as I have always placed a premium on good governance and disclosure practices.

Swiber – Establishment of S$300 Million Multi-Currency Medium Term Note Programme

On July 20, 2007, Swiber announced the establishment (with the assistance of Citicorp Investment Bank (Singapore) Limited) of a S$300 Million Multi-Currency Medium Term Note Programme. Basically, this programme will allow the company to issue various types of notes, which constitutes a form of debt financing. The following are allowed to be issued by the company under this programme:-

Fixed, floating or variable interest rate notes in series or tranches – fixed interest rate notes have a built-in locked up interest rate which does not fluctuate according to the interest rate environment and SIBOR or LIBOR. Floating or variable rate notes may contain provisions which allow for the interest rate to fluctuate; this may be good or bad depending on the trend for interest rates (whether ascending or descending).

Hybrid Note or Zero-Coupon notes are also allowed to be issued. Zero-coupon notes have no interest fixed to them and thus are considered more “risky”, as investors need to have affirmation that the company is going to be solvent and able to pay off the notes. Swiber has to reduce the risk of default for note-holders in order to issue this class of notes.

Mr. Raymond Goh’s opinion is that Swiber is in “growth mode” now and thus he is aggressively pursuing all forms of financing in order to grow and expand Swiber’s fleet. So far, the company has made arrangements for a sale-and-leaseback (to be approved at the EGM to be held on July 31, 2007) and successfully concluded a private placement exercise of 55.35 million new shares to strategic institutional investors at S$2.1748 per share. This third form of financing (i.e. debt financing) effectively covers most of the methods which companies use to generate more cash inflows. The company’s aggressive plans has got me quite concerned as a shareholder though, as private placements means immediate dilution for existing shareholders, while the issuance of notes will mean higher finance (interest) costs in the Income Statement. All these measures are being under-taken with the assurance that “growing the fleet” will benefit the company in future years. As I mentioned before, this has yet to be proven as net margins for the company are still at a low 18.9% for 1Q 2007.

The effects of the three modes of financing are set out below:-

Sale and Leaseback – A financing scheme which results in an upfront large one-time cash inflow from the sale of vessels, “lightens” balance sheet as assets are not capitalized; large one-time exceptional gain recognized in the income statement, subsequent expenses impact on the Income Statement from monthly operating leases for the vessels

Private Placement – Also called Equity Financing. Involves the receipt of a large upfront cash inflow, net of placement agent and legal/professional fees. Effects are dilutive for shareholders and earnings per share, as the equity base of the company increases.

Issuance of Notes and/or bonds – Also called Debt Financing. Involves receipts of monies in exchange for the company taking on more liabilities (both current and long-term) in their balance sheet. Depending on the conditions stated in the bond agreements, may result in higher interest expenses for the company which directly impact the Income Statement.

The only mode of financing Swiber has not attempted (but which is popular with Chinese companies) is the issuance of convertible bonds (CB). CBs have both a potential dilutive effect as well as an immediate interest component; thus they are sort of an in-between for equity and debt financing.

It remains to be seen if Swiber’s moves can result in greater revenues, margins and earnings for the company; or whether it will help them to increase their visibility in order to clinch more contracts. I will remember to engage the CEO on this during the EGM.

Business Trip - Vietnam July 24, 2007 to July 27, 2007

To all readers, I shall be in Ho Chi Minh City during the above dates. Thus, I will probably blog only about once in 2 days, unless there is something really noteworthy for me to say. The usual reasons apply (much busier when overseas and poor internet connections) and I seek readers’ understanding on this. I shall be back to blog more about my investment mistakes, and will start to include mistakes of omission as well as commission.

Sunday, July 22, 2007

Research Series Part 4 – The Annual Report

Part 4 of the research series focuses on the review and analysis of the Annual Report. This is a report sent by the company to all shareholders once a year to update shareholders on the business operations, provide financial figures and to offer guidance for the business in the coming financial year. As far as I know, most people treat the Annual Report as either a paperweight, or something to stack up with their old newspapers in order to sell to the karang guni. In other words, no one pays much attention to or attributes much significance to the Annual Report.

This behaviour is prevalent but it is a gross mistake on the part of the shareholder. Annual Reports can yield a ton of valuable insights about how a company operates, what it owns, what is has acquired/disposed of, revenue recognition principles and a host of other financial and operational information. This is a very good way of understanding more about how a company works and to also learn more about the profiles of the people running the company (i.e. the Board of Directors and Management Team).

In this post, I shall highlight the important aspects of the Annual Report to look out for (this applies to almost all Annual Reports) in order to gain a better awareness of the company and its underlying business:-

  • Business Activities and Group Structure – This portion tells you about the company’s principal activities and how many countries they operate in, as well as giving information on the different business units and segments the company has.
  • Chairman or CEO’s Statement – This part of the Annual Report is very important; as it sets the tone of the whole report and gives readers an insight to the attitudes, plans and vision of the head honcho of the company. It usually consists of a review of the previous financial year, key events, how those key events have affected the company, as well as future plans and strategies for the next financial year. Some CEOs may even give their own detailed analysis and views on the industry prospects and whether conditions will be “challenging” or not. What’s important is to pick out the tone and candour within the statement and see if the CEO is being candid or evasive about his company’s performance. While there is no hard and fast rule for this, reading many annual reports will enable the shrewd investor to eventually pick up nuances within the statement which may hint on potentially good or bad news to come.
  • Operations Review – This essentially sums up the year under review and gives the shareholder a bird’s eye view of what has been going on, as well as what plans are being undertaken to expand the business. Some companies go to great lengths to write about their achievements and customer wins, while others only provide a snippet. Look out for practical reporting without over-the-top self-praise; management must be rooted in the reality and not stay in the clouds all the time. Using too much history to justify future performance is also not a good sign.
  • Significant Accounting Policies and Estimates – This section details the various accounting treatments for various items within the Income Statement and Balance Sheet, and is a good way of seeing how revenues are recognized, how certain assets are amortized or depreciated; as well as items which may be unique to the Balance Sheet like deferred expenditure for example.
  • Profit Before Income Tax – This note in the Notes To The Accounts will disclose important figures like the breakdown for depreciation or amortization, exceptional gains and losses as well as items like exchange gains/losses. It helps you to see how much of the profit is derived from recurring business and how much is a one-off effect.
  • Revenue – A surprisingly useful note, it actually gives the breakdown of the revenues generated by business unit, or by segment (the segmental report gives this too). Thus, one can see whether there is revenue growth within specific business units, as well as new revenue generated from any new ancillary segments that the company has.
  • Contingent Liabilities – This is an important note which informs the reader of any pending liabilities which have yet to be crystallized (recognized) in the books. These usually consist of lawsuits or warranty claims which are pending resolution.
  • Capital Commitments – Any company will have commitments for capital expenditure, and this note basically tells the reader how much the company needs to commit (some are contractual, some are not) in future financial periods. From this, one can project the amount of cash outflows to occur in the next few financial periods.
  • Events After Balance Sheet Date – Essentially, this is the latest “updates” provided by the company on what has happened since the end of the previous financial year, and the date of printing of the Annual Report. This is noteworthy as it provides a rundown of the company’s initiatives and strategies under-taken, possibly to grow the business further.
  • 20 Largest Shareholders – A summary is given (as at balance sheet date) of the twenty largest shareholders of the company. The reader can note if the company’s shares are tightly held by a few individuals; and what the free float is like in the market.

I will be illustrating with an example of an actual Annual Report soon (Pacific Andes and Boustead, I will choose one), to highlight the various points which shareholders should take note of. In the meantime, please take some time to browse through the entire annual report (from cover to cover) even though it may seem like a bedtime story !

My personal experience is that I have discovered much information and insights by reading through the Annual Report; and most of the time I formulate some questions and take some notes in order to clarify with the Management during the AGM. The next part of the research series will focus on the 3 key aspects of the financial statements (one part for each statement); namely the Income Statement, Balance Sheet and Cash Flow Statement.

Saturday, July 21, 2007

Investment Journey – A Summary

Most reader would be curious to know how I arrived at my value investing philosophy which I firmly believe in now and which I also currently advocate to all readers, be they of my blog or on local share forums. Admittedly, it was a road which was bumpy and full of potholes but the learning I received was invaluable. I have been documenting my investing mistakes up till now and will continue to do so for the foreseeable future. Readers, however, should see how I have built up my investment philosophy based on my experiences, and decide if value investing is right for you. Remember that it is more than just about careful research, extensive reading and thoughtful analysis. Temperament and the ability to control emotions is also a key aspect of successful value investing.

Here is a summary and rundown of my investing journey (note the mistakes along the way and how my state of mind evolves to incorporate what I have learnt). Note that mistakes subsequent to MIIF (mistake no. 4) will be reviewed in detail in future posts (this is just the summary).

a) December 1, 2004 – Purchased my first stock called Suntec REIT at IPO, added more at S$1.11 later. This was to become my first and only yield play, bringing in 2 cents/share dividend every quarter. State of mind: Buy Companies

b) February 22, 2005 – Purchased MCL Land because of attractive dividend and committed mistake no. 1. Sold at a loss on May 12, 2005. State of mind: Buy companies with good prospects

c) May 4, 2005 – Purchased Yellow Pages and then sold on May 27, 2005 because of historical trend analysis (the stock had reached a historical high and retraced downwards), and committed investment mistake no. 2 by failing to consider the business aspects of the company. State of mind: Buy companies with good prospects and good earnings growth

d) July 22, 2005 – Purchased Keppel T&T and sold on July 26, 2005 on a whim and tried to contra for a quick gain but instead, lost out about 5.2% of my investment amount. State of mind: Buy companies with good prospects, good earnings growth and do NOT contra.

e) May 27, 2005 – Purchased MIIF and sold at a loss on Dec 15, 2005 after attending the company’s EGM (explained in investment mistakes part 4). State of mind: Buy companies with good prospects, good earnings and good Management. Do not contra.

f) March 29, 2005 – Purchased Asiapharm and sold at a loss on June 9, 2005 by blindly following gurus and buying at too high a PER. State of mind: Buy companies with good prospects, earnings and management at a reasonable price. Do not blindly follow gurus and do not contra.

g) January 9, 2006 – Purchased Trek 2000 and sold on Nov 13, 2006 because of inability to maintain a sustainable competitive advantage and also because of technological obsolescence. State of mind: Buy companies with good prospects, earnings, fundamentals, management and sustainable competitive advantage at a reasonable price. Do not follow gurus and avoid contra.

h) February 26, 2007 – Purchased C&O Pharmaceutical and sold at a loss on November 9, 2006 due to industry changes and Chinese government intervention. State of mind: Buy companies with good prospects, earnings, fundamentals, management and which have a durable competitive advantage in a growing industry at a reasonable price below intrinsic value. Do not follow gurus, avoid contra and margin.

i) June 9, 2007 – Purchased UTAC and sold at a profit on February 23, 2007 due to unfamiliarity with the industry. State of mind: add “circle of competence” to the previous statement.

As one could have guessed, I had already caught on to value investing concepts close to the early part of 2006, and proceeded to read up more on it by buying books, surfing value investing websites and visiting Berkshire Hathaway’s (Warren Buffett’s holding company) website. My last “speculative” stock purchase was actually made on Feb 26, 2006 for C&O Pharmaceutical; subsequent purchases were UTAC in June, Boustead in Sep and Nov 2006 (averaged down) and Swiber in Feb 2007. You can see that for the past 1 year from July 2006 till June 2007, I had only purchased two companies and made a total of 3 transactions ! As my value investing philosophy began to solidify in my head, I realized that it was beginning to get more and more difficult to find companies to buy.

So dear readers, this is what I had to go through in order to learn my lessons on value investing. For those who think it has been a breeze, I would say definitely not ! I had my share of bad losses and cut all my speculative counters to the point where I currently have no speculative, under-performing companies.

Perhaps those punters out there have to learn the hard way too before they embark on their own value investing journey of discovery !

Monday, July 16, 2007

Former Remisier King: Equities Still Have Legs

There was an interesting interview in the Business Times (BT) yesterday by Ms. Teh Hooi Ling on the former remisier king, Mr. Peter Lim. He was the influential businessman who made his millions during the 1990s being involved in businesses and deal-making. He retired in the late 1990s to settle his divorce proceedings, and is currently working as a business advisor for various business deals, garnering up to S$300,000 per deal.

What I wish to highlight are some of the lessons to be learnt from the 4-hour (yes 4-hour !) interview with Mr. Lim. Below is a summary of what I have learnt from Mr. Lim's years of experience and wisdom:-

1) Dangers in small-cap sector - Mr. Lim warned that many small-cap (penny) stocks had run up a lot over the past few weeks. This is due to investor optimism and speculation running rampant and much of the potential has been priced in, meaning that risks proportionately increase as prices go higher. He says that all it takes is one piece of negative or bad news to send the entire stock price crashing, as free float can be very small for such companies. Lesson Learnt: Buy stocks with solid fundamentals, and maintain a margin of safety.

2) Higher Rentals for Businesses - Higher property prices equates higher costs of rental as well, especially for companies with offices in "prime" areas such as Orchard Road or Raffles Place. This will be a severe drain on profits if property prices continue to soar, and investors should take note of the % which rental expenses take up in the Profit and Loss Statement. Lesson Learnt: Watch the company's profit and loss statement for increased costs as a result of higher property prices.

3) "Don't Gear, Don't Gamble" - Another prudent piece of advice from Mr. Lim is not to gear (meaning take on more debt) and not to gamble (punting/speculating on equities and property). During bull markets, most new investors sign up for margin accounts in order to make use of leverage in order to magnify their gains. This is highly risky as a sudden drop in prices would mean mounting debts which may be in excess of their net worth. Lesson Learnt: Do not let rising prices mislead you, it is a sign of higher risks in the market and one should be even more wary. Do not leverage and always maintain sufficient cash balance for emergencies.

4) Build Wealth, not Debts - Mr. Lim mentions that people always get it wrong: they build more debts during good times because of abundant liquidity and higher cash inflows; but forget that these commitments are still present when a downturn or recession comes along. I happen to notice more and more sports cars on the road (is it my imagination ??) and there are increasing signs that people are "wealthier", meaning they tend to spend more on big ticket items. Couples may also be cheered on to buy high-priced properties in expensive areas which may fall prey to falling valuations in a bear market or recession. Lesson Learnt: Build wealth and cash reserves during a bull market without needlessly adding on to your debt and capital commitments. Live simply and below your means. Do NOT use tomorrow's cash to pay for today's enjoyments.

5) Adequate Portfolio Asset Diversification - Mr. Lim has 50% of his net wealth in equities, 10% in properties and 40% in cash. This is another sign of prudence as he does not sink the majority of his wealth into equities as equities are over-valued at this point. Ideally, I would have expected him to park some money into bonds, but he did not indicate this. Lesson Learnt: Have adequate diversification across asset classes. For me, I park about 40% in cash, 60% in shares but am aiming to reduce this to 50%:50%.

6) The Importance of Management - The importance of Management was brought up as well when Mr. Lim said: "The most important factor to consider when investing in a company is the person running it; you look at whether the person is honest, and whether he or she is master of their trade." This goes back to my previous investment mistake No. 4 when I stated that Management is an important measure of the quality of the company. Lesson Learnt: Engage Management in a candid discussion on the company's prospects and industry trends to see if the company can continue to grow earnings into the forseeable future.

Let's all continue to learn from the "gurus" of society and how they build their wealth. Of course, not all gurus preach such conservative methods for building wealth, but from what I know, most wealth is built through running businesses or prudent investing and NOT gambling/punting !

Business Trip to Myanmar July 18, 2007 to July 21, 2007

Dear readers, I will be on a business trip to Myanmar on the above dates, and will only return on Sat July 21, 2007 in the afternoon. Since Internet access is almost non-existent there, I cannot be expected to blog at all during this period. I thank readers for their understanding. I will be back on either Sat or Sunday with a new posting once I have settled down.

Sunday, July 15, 2007

Mid-July 2007 Portfolio Review

The first two weeks of July proved to be pretty fruitful, with some news from the companies I own. In the meantime, the Singapore Stock Market hit new highs once again, with the STI closing this Friday (July 13, 2007) at a record high (yet again, yawn !) of 3,654.61. The strange thing of course, is that the record close was “powered” by none other than a strong DJIA finish. There was no particular impetus for the index to close so high, as the second quarter results release period has only just officially begun (with SPH being the first and only index stock to release results).

Below is a summary and rundown of my investments and related news:-

1) Ezra - Buy Price $1.30 (bonus adjusted), Market Price $6.50, gain 400%. The most significant announcement was that of Ezra’s intention to divest part of EOC in order to realize the cash from their investment in EOC. This would be done by doing a vendor share sale on the Oslo Bourse when EOC got officially listed on the Main Board. The proceeds would be used to finance Ezra’s expansion and Management has also hinted at a dividend payout. Other news included the announcement of US$127 million worth of charter contracts for 10 of their vessels; 8 of which are from their current fleet (5 AHTS and 3 AHT) and 2 of which will be delivered soon. Ezra have also appointed their first finance director, Mr. Tay Chin Kwang, to helm the operations. He has experience in dealing with IPOs, M&A as well as corporate finance issues.

2) Boustead - Buy Price $1.295 (average), Market Price $2.34, gain 80.7%. Boustead has announced that their AGM will be held on July 30, 2007 at Boustead House. This is to approve the final dividend of 4.5 cents per share (gross) and also to pass ordinary resolutions to re-elect the directors. The Annual Report has yet to arrive and I will post my thoughts on the Annual Report as soon as I obtain it.

3) Swiber - Buy Price $1.01, Market Price $3.34, gain 230.7%. Swiber has announced the successful completion of the placement of 55.35 million shares to institutional investors to raise money for fleet expansion and for working capital. In addition, they have also announced that they have set up a new office in India and appointed Mr. BK (see previous 2 posts on Swiber) to be vice-president of the Indian and Middle Eastern Operations. Their EGM will be held on July 31, 2007 at 2:30 p.m. at Raffles City Convention Centre (I will be attending unless held up by unforeseen circumstances) to approve the sale and leaseback transactions for 5 vessels. I have just received the circular today and am digesting it. I will do a posting on it once I get through the numbers. The EGM will also be a good time to engage the Management again on Swiber’s strategies and future plans.

4) Global Voice - Buy Price $0.1775 (average), Market Price $0.205, gain 15.5%. GV has announced just one new contract in the half month from June 30, 2007 till now. The contract is a 5-year one signed with AIXIT to provide private fibre network connections. August can be said to be the month of “reckoning” as GV will report its half-year results. If what I am beginning to suspect is correct, GV may not have that strong a competitive advantage after all; a lot depends on the numbers so I won’t want to speculate too much at this point time. Mediaring’s profit warning was a sober reminder of how fast the IT industry changes, and I am now more wary of being too optimistic about GV’s future.

5) Suntec REIT - Buy Price $1.11, Market Price $2.01, gain 81.1%. No news on Suntec REIT. They should be releasing results close to the end of July, as is traditionally the case for the last few quarters. I am expecting a dividend of no less than 2 cents/share.

6) Pacific Andes - Buy Price $0.665 (rights-adjusted), Market Price $0.91, gain 36.8%. The rights issue entitlement has been paid for and my number of shares will double once the results of the rights issue are out (and CDP has sent confirmation of the new shares being credited to my account). Other than this, there has been no significant news for either PAH or CFG, though a very bullish and detailed report has been written by CIMB on CFG, giving many details of the structure of the VOA and CFG’s competitive strengths.

Overall Portfolio

My overall portfolio has increased by about 127% from a new cost of about S$44K as at July 15, 2007. The market value of my portfolio is around S$102K. The main increases in the portfolio’s value can be attributed to Ezra and Swiber. The month of July will see the release of results from Swiber (1H 2007 results) and Suntec REIT (released around late July 2007 for 3Q FY 2008), as well as the AGMs for Boustead and Pacific Andes and the EGM for Swiber. All in all, it’s going to be a very busy month !

My next portfolio review will be on Tuesday, July 31st, 2007 after market close and after I have attended the Swiber EGM.

Saturday, July 14, 2007

The Importance of Sustainable Competitive Advantage

When a value investor screens companies, he is not only looking for companies with good earnings and revenue growth including high ROE, but another intangible factor is whether the company has a sustainable competitive advantage. Under Porter's 5-Forces, we discussed the importance of "Threat of New Entrants", which referred to the barriers to entry for a new company trying to enter a particular industry. If a company has a strong competitive edge, this will make it difficult, if not impossible, for the competitor to get a solid foothold and steal market share away.

Thus, the strict definition of sustainable competitive advantage is a company which has a strong product, service or brand which no one else can replicate or perform as well; such that the company can offer a better value proposition to its customers/clients. This competitive strength has to be sustainable, meaning it has to be strong enough to last many years; insulating the company from external threats and allowing it to have pricing power and significant market share.

For the companies in my portfolio, each has its own competitive advantage, which is why they were chosen in the first place. They are as follows:-

a) Ezra Holdings - Ezra has a fleet spanning many a broad range of offshore support vessels spanning transportation, production and construction which can provide services to tne entire oil field cycle. These consist of medium AHTS, AHT, Pipe-Laying vessels and soon, an FPSO. This is in contrast to most other companies who only supplies support vessels for one aspect of the oil field cycle. By promising a one-stop solution, Ezra is able to deploy its own vessels at any phase in the cycle in order to minimize disruptions and to lower costs (avoidance of using third-party vessels); something which its competitors find hard pressed to do.

b) Pacific Andes (PAH) - PAH is a fishing specialist company which owns 63.9% of China Fishery Group (CFG). CFG, in turn, owns exclusive fishing licences to fish in the waters of Peru in order to harvest Peruvian anchovies to process into fishmeal. Since there is a limited supply of fishing licences due to over-fishing, there are thus strong barriers to entry for CFG's competitors. In addition, PAH and CFG are vertically integrated which means they cover the entire value chain (using SCM principles), thus reducing reliance on third-party fish sources which tend to ramp up costs. This positions them to be in a unique competitive position even as worldwide fish consumption continues to grow.

c) Global Voice (GV) - GV owns an extensive European metopolitan fiibre network which was built during the dot.com era. They bought over this network at a fraction of the original construction cost due to the lack of demand for such services back in the late 1990's. In addition, GV has also purchased a long-haul network and undersea cable system from Viatel to augment its fibre network capabilities. Thus, the company is in a unique position to offer solutions to customers spanning many countries and linked through many cities; something which other companies lack because they do not have the physical infrastructure.

d) Swiber - Swiber owns a fleet of small to medium AHTS vessels as well as a crane barge and pipe-lay vessel which are similar to Ezra; but the difference is that the company provides services to the EPCIC industry. This is a niche industry and they are one of Asia's more prominent operators. Most of the competition is located in America and for those companies to set up a representative office here would mean higher costs. Thus, Swiber offers a strong value proposition and is able to charge lower prices (cost advantage) due to their Asian roots. The business is also gaining traction as they expand their vessel fleet and diversify their customer base into key markets such as India, The Middle East and Brunei. Their competitive strength is their niche focus, which avoids putting them in direct competition with the larger rig buildings and support vessel owners.

e) Boustead - Boustead has three business units (see their Annual Report or website at http://www.boustead.sg/) and has expertise in managing Industrial Real Estate Solutions, and their expertise is renowned over the world just by looking at the recent projects which Boustead Projects had secured. Also, their 100% owned unit Salcon is a world leader in water and waste-water solutions, and is part of the Singapore Water Solutions Alliance organized by IE Singapore to explore opportunities in the Middle East. Their Maxitherm and Controls & Electrics division (engineering division) has also successfully completed projects in countries as diverse as Philippines and South America. Thus, Boustead has an almost complete suite of competitive advantages; and they are led by a capable Management team which has grown the business successfully for the last five financial years.

Taking the above into account, it is important for the reader to understand that many companies do seem to have a strong advantage and tout themselves as "market leader" or "trend movers". But by looking closer and thinking harder about their business model (as well as applying the 5-Forces), one can see that their so-called competitive position can be eroded very quickly should the business environment change. Industries like alternative fuels are subject to constant change and no company has the upper hand right now (e.g. Wilmar). Solar panels are also all the rage but since everyone is jumping on the bandwagon, no one knows who the dominant player will be.

Sometimes, it pays to be patient and observe the companies involved in an industry in order to determine which is the market leader. By analyzing the competitive strengths of the market leader, we can start to see why the company is able to command such a premium position. However, it is still up to ourselves to ask whether this is sustainable as we need to have a long-term perspective. It is not easy to do, admittedly; but it's not rocket science either ! Most laymen and retail investors should be able to get a grasp of things from reading the papers and business publications. All one needs to do (and please find time to do it !) is to sit down and think through the issues, and you will gain more understanding and clarity eventually.

For tomorrow, I will be doing my mid-July 2007 review of my portfolio, so stay tuned !

Friday, July 13, 2007

Swiber - Incorporation of Subsidiary Company in India and Appointment of VP

Swiber announced today that they have incorporated a 100%-owned subsidiary in India called Swiber Offshore (India) Private Limited. This company comprises 10,000 shares of Rp 10/- each and its principle activity will be to carry out business in India and the Middle East relating to EPCIC activities. The investment in this wholly-owned subsidiary was funded through internal resources and is thus not expected to have a material impact on NTA per share or EPS for the current financial year.

I perceive this move as a sort of springboard move by the company to tap the opportunities present in India and the Middle East. In FY 2006, Swiber had already inked some deals with BG Exploration in India; thus the incorporation of this company can only mean that Swiber is intending to further extend their presence in this key market in order to capitalize on possible opportunities.

At the same time, Swiber has also announced the appointment of Mr. Nijan Kumar Mahapatra (BK) as vice-president of the Group's Middle Eastern and Indian operations. Mr. BK brings with him 24 years of experience in the oil and gas, petrochemical, marine and civil engineering industries (he has a bachelor's degree in civil engineering from Kashmir). Prior to joining Swiber, he was the regional manager of another EPCIC player (the press release did not name his previous employer, though) and has a good track record to speak of in terms of delivering results. This factor, coupled with the new branch office in Mumbai, will help to sprearhead the Group's expansion into India and the Middle East with their unique offering of EPCIC services.

A quick comment on this: I had spoken to Mr. Raymond Goh at the AGM some time back and he did mention that he believes in hiring a strong Management team with good capabilities in order to help him achieve his vision for the company. In particular, he spoke of hiring a team which comprised various specialties from various countries, in order to get a combined pool of experience such that everyone can share ideas and build upon their knowledge base to help grow the company. Mr. BK is the recent addition and his track record shows that Mr. Goh is still committed to adding strong, capable people to his Management team. Often, as I have mentioned in my previous post, a strong management team is what is required to propel the company to greater heights. Time will tell if Swiber can indeed secure larger contracts in India and Middle East, but at least they are already laying the foundation in anticipation for such growth.

EGM held on July 31, 2007 2:30 p.m. at Raffles City Convention Centre

Swiber is holding an EGM at the above date, time and location to approve resolutions relating to the sale and leaseback of 5 vessels as announced on March 28, 2007 and May 10, 2007. A circular should be despatched soon to shareholders regarding the transactions and their financial effects. Ezra has sent me a similar circular before on this sale and leaseback arrangement and typically it tells the shareholder what the consideration is (cash portion), the profit to be recognized (exceptional gain) and the operating lease associated with the leasing of the vessels back to Swiber. What I am curious about though, are the bargain purchase options (BPO) specified in the Agreement(s) and how much Swiber will need to incur to re-purchase the vessels back. Swissco's strategy is markedly different in that they choose to own all their vessels instead of lightening their Balance Sheet using this arrangement. As to the merits and demerits of such an arrangement, more details will be discussed once I receive the circular from Swiber.

Ezra - Appointment of Mr. Tay Ching Kwang as the Group's 1st Finance Director

A separate announcement from Ezra today also mentioned the appointment of the Group's first Finance Director, Mr. Tay Ching Kwang (what a coincidence with Swiber eh ?). Incidentally, Mr. Tay used to be the chief financial officer of Horizon.com (now called Global Voice after an RTO !) from Feb 1999 to May 2001; and has also held a position as financial accountant in a listed company called Flextech Holdings Limited back in 1994-1996. Accordingly, he brings with him about 17 years of experience in handling M&As, Pre-IPOs and corporate finance matters.

I suspect the Group is gearing up for a possible M&A deal by hiring Mr. Tay, as the CEO has mentioned expanding into markets in which Ezra does not have a presence currently. After buying into 22% of Nylect (a separate post will be done in future on Nylect) and listing EOC Limited in Oslo, Norway, I believe Management should now be seeking opportunities to broaden their customer base. Ezra had already catapulted themselves into the global league of FPSO players in Oct 2006 by clinching their first milestone FPSO contract, and are now pitting themselves against giants such as Solstad, Prosafe and Tidewater. The Group is probably contemplating possible strategies to enhance their competitive edge and to establish a stronger presence in key markets where there is buoyant demand for oil and gas exploration activities.

The next 18-24 months should be an exciting time as I observe how the company intends to execute its growth strategy. There might be hiccups and obstacles along the way but hopefully, the Management is able to learn from them and emerge stronger. I remain optimistic about the Group's prospects as we enter the last 2 months of FY 2007 for Ezra.

Wednesday, July 11, 2007

Investment Mistakes Part 4 – Company’s Management

To continue the series on investment mistakes, my next mistake was to buy a company in which I had no faith in the Management. The “company” in question was actually Macquarie International Infrastructure Fund (MIIF for short). This was actually an infrastructure fund which invested in assets such as airports, toll roads and oil storage tanks. I purchased 3,000 shares at S$1.15 on May 27, 2005 and sold out at 95 cents on Dec 15, 2005, incurring a loss of 17.1%. The selling occurred after an EGM held by the company to approve the issue of new units in MIIF to fund the purchase of additional assets which were yield-accretive.

The strange thing was that these new units would rank pari-passu with existing units in that they were entitled to the dividend of 3 cents per share promised to shareholders as at Dec 31, 2005. The circular did not attempt to explain this and I was left wondering what Management’s explanation would be. I therefore made it a point to attend the EGM to ask questions of the Management. It would be my first experience with the Management of the companies I own and would open my eyes to the importance of talking to the people in charge of the company (or in this case, the fund).

Many shareholders bombarded the Management with the same question, apparently because they were disgruntled that the “new” shareholders would be entitled to the same dividend as existing shareholders when they were only vested from mid-Nov 2005 till Dec 31, 2005. By right, the dividend should have been pro-rated to the amount of time the new shares were in issue till year-end. In fact, Suntec REIT had done exactly the same thing when they issued new units to fund the purchase of the remaining space by minority tenants. The new shares which Suntec REIT issued were only entitled to the pro-rated dividend, and the Management took pains to separate the dividend into two components, one for existing shareholders and one for existing and new shareholders.

In MIIF’s case, the CFO and CEO could not give a convincing explanation as to why this was NOT done, and many of the shareholders (myself included) felt shortchanged and bullied. This incident showed that Management was not sympathetic to existing shareholders who have stood by the fund since its IPO. After the EGM, I thought over the incident for a few days and then promptly sold off my shareholdings for a loss.

Lesson Learnt: Always try to engage Management on issues relating to the company if you can, be it through emails, EGM or AGM (most common method). It need not be about the issue I described above; discussions may range from the company’s prospects, strategies undertaken, markets targeted, customer base, product range, revenue streams and margins just to name a few. I have had the fortune of meeting the Management (including the chairman and CEO) from Ezra as well as Swiber and engaged them on several aspects of the business. Most of the time, things to look out for would be their manner in answering queries, their attitude, how willing they are to open up, whether they are evasive and how passionate they are about the business. Do also note that Management may get over-zealous about their business prospects but it is up to the discerning and intelligent investor (to quote Benjamin Graham) to sift out the yarns from the facts. Always keep an open mind and think over what Management has said, in order to draw conclusions and insights.

Tuesday, July 10, 2007

Ezra - Announcement of Charter Contracts worth US$127 Million

This evening, Ezra announced charter contracts for 10 of its vessels, worth potentially US$127 million (about S$194 million). The latest charters come at "improved rates" and shows the "continued strength in the oil and gas sector", said Mr. Lionel Lee (CEO of Ezra Holdings). One good point to note is that Lewek Stork will be the 2nd AHTS to be chartered by the same client (client name not mentioned) and it will be used in India, which is one of the markets Ezra is targeting to enter.

Ezra is chartering 8 vessels from its existing fleet consisting of 5 AHTS and 3 AHT to various oil majors in South-East Asia. It is not immediately clear if these 8 vessels were previously already on charters which have expired, or if these are new vessels which have come on board recently and are awaiting charter confirmations. The value of the charters for these 8 vessels is about US$69 million (S$106 million) and are for a period of 5 years, with extension options. This would indicate that this revenue stream will continue for at least 5 years till FY 2012. However, what is not clear is what proportion of this revenue would be recognized in FY 2007, and whether the US$69 million relates to revenues per year, or over the 5-year charter period. Perhaps it would be good to clarify this with Management should I have the chance (perhaps at the EGM).

As for the remaining 2 vessels, Ezra is negotiating charter contracts worth US$58 million on a 3-year charter contract basis. These 2 vessels are new vessels which will come on board in the early part of FY 2008 (which may mean as early as Nov-Dec 2007). I would hazard a guess that the vessels should be ready by late calender year 2007 as most charter contracts for new vessels are signed 2-3 months before the vessel is delivered (as per Management's assertion).

For now, it is not possible to quantify the impact of these new charter contracts as the duration and revenue recognition breakdown was not stated. In addition, the recent award of the contract with ConocoPhillips also did not state the contract amount and duration due to confidentiality reasons. This makes valuing the company all the harder, what with the impending vendor share sale of 42% of EOC Limited as well. What's important is that the company is growing its vessel fleet and can sustain or even improve its revenue stream due to buoyant market conditions. Gross and net margins have to be assessed in their FY 2007 results release to ensure they remain competitive.

Global Voice - Deploys PrivaNex for AIXIT

Global Voice today announced another contract (a 5-year one this time) to deploy a dully redundant private fibre network for Aixit. Readers can download the full announcement from http://www.globalvoice.com to read the details, including the technical details of the deployment.

I must admit I am becoming increasingly uncomfortable about GV's business model and ability to generate good cash flows and increased earnings. This comes after Mediaring (the first profitable VoIP company) announced a half-year operating loss due to intense competition and eroding gross profit margins. Although GV is in a different business altogether and they are operating different types of assets, nevertheless, they are in the same industry (IT-related) and it worries me that Mediaring, being a market leader, has also succumbed to competitive forces. Recall from my previous post on Porter's 5-Forces that in the IT industry, threat of substitutes is very high as users are now switching to Skype (which is free) instead of using paid VoIP.

GV needs to demonstrate that it can retain and capitalize on its "Private Fibre Networks" as a unique competitive advantage and value proposition which is difficult to replicate, substitute or replace. The risks are definitely there, as mentioned by several well-informed forum members, that another new technology may replace GV's offering in time to come. If this happens, the worst case scenario will be a total erosion of business for GV as their customers (or potential customers) switch over to the new technology. I remain hopeful that GV can maintain its competitive edge, but will watch the industry for danger signs.