Friday, November 30, 2007
The half month from mid-Novembe 2007 to end-November 2007 was equally turbulent, with the resurgence of the sub-prime credit crisis sparking panic and fear in global markets. Many mortgage companies in the USA such as Wells Fargo have had to make large write-downs to reflect the losses for sub-prime debt. It did not help that Sears, a popular retailer in USA, also reported a 99% drop in 3Q 2007 net profit, which led economists to conclude that perhaps spending was dropping and USA is in greater danger of falling into a recession. On the Singapore front, inflation hit a 10-year high of 3.6%, while unemployment also fell. There was no particularly earth-shattering news about the companies I own, but the economic news was certainly interesting to follow !
I did take the opportunity to purchase shares in China Fishery Group Limited (CFG) as a result of Mr. Market’s manic-depressive mood swings. This was done on November 16 and subsequently again on November 20 to average down. With a historical annualized PER of less than 10, dividend yield of more than 5% and good growth prospects moving forward, this has made it an attractive purchase. CFG has a strong competitive advantage in that they are one of the few big seafood players in the world, and the Management has a good track record of growing the company for the last 8 years. I have thus included CFG in my current portfolio review.
Below is the summary of my investments and related news as at November 30, 2007 (STI at 3,521.27 points):-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $3.34, Gain 418%. Ezra has concluded their share buy-back scheme for now, it would seem. In total to date, they have repurchased 5.436 million shares from the open market to hold as treasury shares, at an average price of S$3.4603, costing them a total of S$18.8 million. On November 23, Ezra also announced the placement of 28.879 million shares in Ezion holding, in which they have 50 million shares, at a price of S$1.21 per share, thus netting a gross cash inflow of S$34.9 million. At this point, it is unsure if Ezion will issue Ezra with an equivalent number of shares to cover back this sale and at what price, as the announcement did not make it clear. I will be clarifying this as well at the AGM. Subsequently, on November 28, Ezra announced that EOC had snared its first major regional contract worth US$148 million, of which I had done a posting on just 2 days ago.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.38, Gain 83.8%. There was not much news from Boustead, except to announce on November 28 that they had incorporated a new subsidiary company known as Boustead Infrastructures (Labuan) Pte Ltd and that its principal activity would be building construction. This could possibly be a prelude to the Group snaring some construction contracts in Labuan, perhaps ? It remains to be seen if this will come to pass. On November 29, 2007, Boustead went ex-dividend for its interim dividend of 3 cents per share, representing a dividend yield of 2.3% based on my buy price. If annualized (using last year’s final dividend of 4.5 cents per share), the total dividend would be 7.5 cents per share for a yield of 5.8%.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.48, Gain 244.6%. There was no news from Swiber other than the announcement, on November 19, 2007, that it had incorporated a subsidiary company called Kreuz Offshore Marine Pte Ltd principally engaged in offshore marine support business. Recall that Kreuz International Pte Ltd is the renamed company after Swiber acquired North Shipyard Pte Ltd on August 6, 2007.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.55, Gain 39.6%. There was no news for Suntec REIT during the half-month ended November 30, 2007. The dividend of 2.8268 cents per share was received on November 29, 2007.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.635, Loss 3.1%. There was no news from the company during the half-month ended November 30, 2007.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.58, Gain 5.3%. There was no news from the company during the half-month ended November 30, 2007. However, Pacific Andes did buy shares in CFG over a number of days. This totaled about 1.254 million shares through Golden Target Pacific Limited.
My overall portfolio has increased by 95.2% from a new cost of S$58.3K as at November 30, 2007, as a result of the purchase of shares in China Fishery Group Limited. The market value of my portfolio is S$113.8K. Realized gains have increased slightly to S$4.3K as a result of the ex-dividend for Boustead.
Comparison against STI
The STI was 3,037.74 on January 3, 2007. It is currently at 3,521.27 today, representing a gain of 15.9%.
Adjustment of cost to ensure consistency of comparison – My cost and market value were S$33.9K and S$46.0K respectively as at Jan 3, 2007 while my adjusted current cost is about S$58.3K. Therefore, my adjusted market value will be about S$79.1K. The market value of my holdings as at today is S$113.8K. This represents an increase of about 43.9%.
Thus, as at November 30, 2007, my portfolio has risen by a gain of 28 percentage points higher than the STI.
My next portfolio review will be on Friday, December 14, 2007 after market close.
Thursday, November 29, 2007
This is part 2 of my analysis of Pacific Andes’ 1H FY 2008 results. I will be analyzing and commenting on the Cash Flow Statement as well as the prospects and plans for the Group moving forward.
Cash Flow Statement Analysis
Pacific Andes generated a lot of cash inflows from operating activities for 2Q 2008, amounting to HK$856 million, as compared to a much lesser HK$255 million for 1Q 2008. This caused the net cash inflow for 1H 2008 to total HK$1.11 billion. However, this was still about 11.2% lower than the total 1H 2007 operating cash inflow of HK$1.25 billion. This was due mainly to the larger decrease in inventories for 1H 2007, lower trade receivables as well as an increase in bills receivable for 1H 2008 as compared to 1H 2007 which had a decrease (and hence recorded a cash inflow). As PAH scales up their operations in Peru, it is understandable that they have higher inventories and also higher trade receivables, thus causing a slightly lower net cash inflow. The interest paid was HK$173 million for 1H 2008 compared to HK$61.7 million for 1H 2007, a 180% increase; which was due largely to the increased amount of debt which PAH took on. Income taxes were also much higher at HK$33 million due to taxation on their Peruvian operations, all of which ate into cash flows. These 2 items alone accounted for nearly HK$144 million increase in cash outflows, which is more than the difference of HK$141 million between 1H 2008 and 1H 2007.
For investing activities, PAH had acquired property plant and equipment worth HK$364 million in 2Q 2008. However, the main cash outflow was the acquisition of additional interests in China Fishery Group Limited (CFG), effectively raising PAH’s stake from 28.8% to 63.9% currently. A total cash outlay of HK$2.22 billion was paid to acquire the additional interest in CFG. The goodwill recognized for this transaction was HK$2.11 billion, which will be reflected in the Balance Sheet. For 1H 2007, PAH had spent money acquiring PPE, investment properties and paying for charter hire of vessels. The total cash outflow for 1H 2008 was HK$3.32 billion, as compared to only HK$339 million for 1H 2007. I see this move as PAH crystallizing more value from CFG at a good price, thus the positive effects should only be felt some time in the future.
There was quite a lot of “action” within the cash flows from financing activities. For 1H 2008, PAH had a 1:1 rights issue at 52 cents per rights share, thus raising an amount of HK$1.78 billion. This resulted in the issued share capital doubling and caused dilution in earnings per share. However, the rationale for this exercise was to raise PAH’s effective stake in CFG so as to recognize more value from the fast-growing CFG. Thus, I do not expect the earnings dilution to be overcome so quickly. In fact, it will probably take at least half to one year before the increased earnings from their present 63.9% stake kick in to overcome the dilutive impact. Another positive note is that they have repaid more bank loans for 2Q 2008 amounting to HK$97 million. For 1H 2008, they had repaid a total of HK$255 million worth of bank loans, and I hope that their operating cash flows can continue to stay strong for them to gradually reduce their gearing, so as to also reduce their interest costs. A dividend was not declared for 1H 2008 as I believe the Group wishes to conserve cash; instead, a scrip dividend scheme was proposed to allow shareholders to choose between a share dividend or a cash dividend. More details on this scheme should be out in due course.
Prospects and Plans
PAH has plans to grow their fishing division through CFG, as this is the division which shows the fastest growth and most promise. In the fishing industry, getting access to more supply of fish is critical, as the industry is more or less dominated by a few major players and there are also quotas set on the amount of fishing allowed. By purchasing more purse seine vessels and securing more VOA, CFG and hence PAH can increase its fishing fleet and get access to more supplies of fish in order to expand the business. From what I read, PAH and PAIH have a leading position within the global seafood industry, and PAIH’s supply chain management provides fish for about 20% of China’s market, thus this makes PAIH one of the dominant players in the industry. With greater access to fishing vessels and by obtaining their third and fourth VOA, PAH and CFG can then grow their business further. Management should be on the lookout for more earnings-accretive acquisitions of vessels or fishmeal plants, as well as attractive VOA opportunities. These will be the catalyst to further grow the business.
Another aspect which PAH intends to improve on are its margins. CFG is currently upgrading its super-trawlers to increase hold capacity, and this can help to bring back more fish to process at fishmeal plants using the same vessel, thus PAH will benefit as well as it provides the supply chain management services for the fishing division. The upgraded vessels will also be used to hunt for Chilean Jack Mackerel, which is a new species PAH has not utilized yet. Other improvements on operational efficiency will also help to improve margins, and Management is actively working on this.
For 1H 2008, the Group acquired 16 vessels and 3 fishmeal plants in Peru. Another was recently acquired in Chimbote and was announced on October 10, 2007. This gives the vessels greater access to fishmeal plants to unload their catch so that they can be re-deployed to catch more fish.
For their frozen fish SCM business, PAH is working towards reducing chartering expenses by growing their own fleet of reefer vessels. PAIH is also working towards harvesting under-utilized species of fish in order to grow the Group’s product lines, and to avoid over-fishing for the more “popular” species. As such, the Group has also engaged a qualified international audit firm to audit its practices with regards to over-fishing, and so far the report has been positive on all aspects.
Note that PAIH has constructed a new processing complex in Qingdao, China which will be operational by December 2007. This is a 333,000 square metre sprawling complex with state of the art facilities and equipment, built at a cost of US$85 million (about HK$663 million). Once operational, it can greatly enhance the Group’s seafood processing capabilities and help the Group to attain new levels of efficiency and quality.
The future looks positive for PAH and CFG, assuming they can scale up the business and also maintain or improve their margins. The key risk is if they cannot secure more VOA or acquire more vessels in future, thus limiting their ability to grow their supply side. I will be awaiting PAH’s 3Q 2008 as well as CFG’s FY 2007 results, after which I will do another review.
Wednesday, November 28, 2007
This evening, on November 28, 2007, Ezra announced that its 48.9%-owned associated company, EOC Limited, had clinched a milestone first major regional contract worth US$148 million to jointly provide transportation and installation services for the Malaysian-Thailand Joint Development Area (MTJDA). The contract was awarded by Carigali-PTTEPI Operating Co. Sdn Bhd (CPOC), which is a joint operating company between PTTEP International Limited and Petronas Carigali (JDA) Sdn Bhd. Thus, the contract value will be jointly shared between EOC and CPOC, which means EOC will recognize US$74 million from it.
This contract will involve the provision of various offshore support vessels including Lewek Champion (heavy lift accommodation pipe-lay barge) in order to transport and install platforms. Actually, it is EOC's 100% owned subsidiary, EMAS Offshore and Construction, which had won the contract from CPOC and CPOC is acting as the main contractor; thus EMAS is the sub-contractor for this project. The project is slated to being in 3Q 2008 (from July to Sep 2008) and end a year later (i.e. around July to Sep 2009), thus impacting the financials for FY 2009.
A quick computation shows that the profits accruing back to Ezra Group are not that significant after all, due to the fact that they now own only 48.9% of EOC Limited (and thus can only recognize that portion of profits attributable to associated company). EOC will recognize US$74 million from the contract over a period of about 12 months, but since Ezra holds 48.9% of EOC, this means that only US$36.2 million of the contract will be recognized in the Group's books. Assuming a net profit margin of 15% (to be conservative), this works out to be about US$5.43 milliion or S$7.87 million; which will appear as part of "Share of Profits of Associated Company" in Ezra's consolidated accounts. Profit attributable to shareholders ex-gains for FY 2007 was S$34.5 million (from my earlier analysis), thus this contract does represent about 22.8% of the recurring earnings for Ezra. It remains to be seen if the Group can scale up their core net profits for FY 2008 significantly, with the delivery of the FPSO Kitty Knutsen. We shall find out on January 9, 2008 when the 1Q FY 2008 results are released.
Regarding the prospects of the Group now that this contract has been clinched, I would say that Ezra also wishes to cover their home base of Asia instead of merely looking for contracts in other parts of the world, which is a good thing. But if the vessels are utilized for such contracts in Asia, will this mean that they will not be available for charter to other parties during the whole FY 2009 ? Will this negatively impact financials and "tie up" their capacity ? For FY 2009, there should be more new vessels coming in to ease this lack of supply, and Ezra should see more contracts coming in as they had ordered the vessels based on customer demand in the first place. It will be good to enquire this of the Management during the upcoming AGM, which should be held in the later part of December 2007.
Sunday, November 25, 2007
With Mr. Market currently being so manic-depressive and seeing only bad days ahead, it is important to remember that he is there to serve you, not to instruct you. The pervasiveness of his mood swings has the ability to affect all but those who inherently understand the true value of a business. Market watchers and pundits who are paid to say something about the market everyday will come up with a myriad of reasons why Mr. Market is pessimistic, and a dearth of bad news will continually stream in to reinforce this perception. Thus, the resultant effect is a massive sell off by hedge funds and mutual funds because they too are affected by the fear and panic which is spread by Mr. Market. Oh, what mischief this man can do ! Sometimes, when I glance at the market, I can almost see Mr. Market’s evil face grinning at me as he waves his hands over the market, causing millions to panic and dump their holdings at the lowest possible price (no, I am not schizophrenic, I am just using a metaphor !). This hardens my resolve not to listen to him but to focus on the true worth of the companies I hold.
A falling market is the ultimate test for a value investor. It is mentioned in value investing books that you never know if the companies you pick have the ability to survive Mr. Market’s manic mood swings, and there is no way to know if your portfolio is sound until it is tested by fire. Thus, when I view the current market situation, I see myself facing the “exam” which I have been “studying” for these past 18 months. All the research, reading, analysis and thinking has gone into identifying good companies selling at a fraction of their true worth; but now the time has come to see if the buy-and-hold strategy will ultimately win over the “fast profit” strategy of churning your portfolio.
With this in mind, I would like to reiterate to readers that the goal of sound and intelligent investing is not for quick gains or huge profits. If you want those, please go to the nearest 4-D or Toto booth, put down a few dollars; then hope and pray for yourself to strike the lottery ! In fact, the most important tenet for value investing should be capital preservation. With this, I mean that one should invest with such a wide margin of safety that losses are largely minimized, while gains are almost certainly assured. Too many people throw their money into the market with only the upside in mind; they never think of the potential LOSS they may face, and always end up shocked and stunned when the market turns against them.
It is also prudent to note that one can actually make a lot of money by avoiding losses. What do I mean by this ? It simply means you don’t go out there and take unnecessary risks, like buying into a company you don’t understand, subscribing for IPOs (which subsequently tank) or chasing a company’s share price just because it has just rallied. Please note that avoiding such mistakes can actually make you much richer even if you do NOT know a thing about value investing; as compared to people who keep chasing the next hot tip, or buy at the peak of a bull market, or simply buy indiscriminately. This may sound quite incredible, but one can actually compound their money better in a bank (earning a paltry 0.25% interest per annum for POSB) than letting the market eat up their money through poor judgement and bad decisions.
To conclude, I would say that for one to really practice value investing or go down the path of value investing, one has to change one’s mindset radically. Most investment professionals or fund managers will preach about how their fund has generated the highest returns or how a particular sector is “hot” or “growing at an exponential rate”. Just try asking them about capital preservation and they will become evasive and uncomfortable, and tell you that “in investing, there are always risks, so we must assess if you are high, medium or low risk; so that we can tailor the portfolio to suit your needs”. What I say is: investing is only risky if you do not have capital preservation in mind, and fund managers who invest only thinking of gains are not doing their clients a favour. In order for an investor to do well in the long-run (yes, not short-term !), one has to make capital preservation the central concept in one’s investment philosophy.
Saturday, November 24, 2007
This is part 2 of Boustead’s 1H FY 2008 results review, and I will be concentrating on the Cash Flow Statement and also discussing the prospects and strategies for the Group.
Cash Flow Statement Review
Boustead’s cash flow from operations has traditionally been very strong, as they have an established set of core businesses which generate good cash inflows consistently. Their geo-spatial technology arm, for example, is a cash cow for the Group even though it has limited growth, as it is used by government agencies and researchers. Engineering services and real estate solutions also rakes in the cash by completing projects in a timely manner and ensuring they contract only with reputable clients who have lower risk of default. Part of the net operating cash inflows of S$18.5 million was also due to the stronger deal flow for 1H 2008, as compared to 1H 2007, as the Industrial Real-Estate Solutions Division headed by Boustead Projects had snared a record number of contracts. This is evident from the increase in receivables resulting in cash outflows of S$32.8 million and consequent increase in payables resulting in a cash inflow of S$40.2 million (again, this uses the indirect method of cash flow statement preparation). The result was a significant increase (more than 400%) in cash inflows from operating activities from S$4.1 million in 1H 2007 to S$18.5 million in 1H 2008.
For investing activities, the company had purchased a higher amount of fixed assets (at S$9.5 million, presumably for use in their engineering contracts) as compared to the same period last year (at S$4.9 million). However, the major cash outflows in 1H 2007 was from the consideration paid to minority shareholders in order to acquire more of Boustead Projects (55% to 95%) and Controls and Electrics (from 60% to 75%). For 1H 2008, the acquisition of shares from minority shareholders will include the remaining 10% stake in Boustead International Heaters Limited (payable in 4 installments on June 23, 2007 onwards). There was a net cash inflow of S$10.4 million from Boustead disposing of assets held for sale, and recognizing the S$6.5 million as gain on disposal in the Income Statement as well. All these transactions helped to lower the net cash outflows from investing activities to only S$1.4 million, as compared to S$28.7 million in the previous period.
Looking at financing activities, the Group had mainly spent cash on giving out dividends (4.5 cents per share less 18% tax in the previous announcement). Some cash was also used to pay off bank loans and dividends to minority shareholders, resulting in a net cash outflow of S$9.4 million. The lack of activity within this section shows that Boustead need not rely on financing activities to generate cash, implying that most of the cash is generated from operating activities and this is enough to keep the Group going. Of course, the argument is that too much cash is not a good thing unless the cash is properly utilized, which is why I am curious to see how the Group is planning to use its cash hoard of S$127.5 million in the months to come.
Prospects for the Group
Since Boustead has three main core divisions, I will comment on the prospects and plans for each and give my views accordingly.For the Energy-related Engineering division, prospects continue to look very positive as the world grapples with record oil prices (as at the time of writing, oil prices have hit an intra-day peak of US$99.29 per barrel, just a whisker away from US$100 per barrel) and a higher demand for energy due to the growth of China and India. Alternative energy systems developed by Boustead to convert waste-to-energy should continue to be highly sought after. With oil prices predicted to surpass the US$100 mark and continue their climb, Boustead’s expertise will continue to provide the Group with contracts and opportunities. Mr. FF Wong had mentioned that the Group was in the midst of negotiating several mid to large contracts in the coming months, so shareholders can sit back and wait for some good new to flow in.
For their water and waste-water division, Management is candid enough to admit that the division can hardly manage to expect to turn around this financial year (FY 2008) as competition has been stiff and margins have been low. During the AGM, Mr. Wong had already indicated that he was approached for many BOT water projects in China, but had rejected all of them due to low margins which made the projects unattractive. This is one aspect I highly admire about Management, which is their ability to say “no” if a project does not add value to shareholders and also their honesty in admitting that things are not going well. I hold integrity and honesty in high regard and Boustead has not disappointed me on these aspects thus far. Salcon’s eventual turnaround will definitely take some time and shareholders should be prepared for this, as Management turns their attention to the Middle East to try to secure contracts with better margins. It was also reported in their press release that they would continue to work on cutting-edge technologies to keep themselves one step ahead of the competition, and hopefully, these measures will churn up some worthwhile contracts for Salcon in the coming months.
Boustead Projects has been on a roll, and this division should continue to do well for the foreseeable future, as the construction industry in Singapore takes an upswing from the IR and the BFC. Property rates are rising and this will bode well for Boustead Projects in future as they plan to build and develop a few properties per financial year for sale. They still have several plots of land remaining for development and this presents untapped potential in this division. Their focus has shifted to building high-end tech buildings for multi-national clients and this has paid off for them, as Boustead Project’s order book swells to a new record high. Moving forward, the division looks very promising indeed as they continue to seek out opportunities to expand their order book.
For geo-spatial technology, the growth rate may not be impressive (only 5% per annum) but it can remain as Boustead’s “cash cow”, generating good cash for possible use in investing in other ventures or even to be used for a potential acquisition.
All in all, the prospects look bright for Boustead as their continue their sixth year of increased revenues and profits; possibly culminating into a very good dividend for FY 2008 as next year will be Boustead’s 180th anniversary celebrations.
Wednesday, November 21, 2007
Part 2 of my analysis is continued here, and it will focus on the cash flow statement as well as discuss the strategies, prospects and plans for the Group moving forward
Cash Flow Statement Review
Due to the scaling up of operations and the completion of several contracts, Swiber has generate a healthy operating cash inflow of US$14.5 million for the 3Q 2007. This is up almost 300% from last year’s 3Q 2006 amount of US$5.3 million. It can be seen that the increase in trade receivables of US$20.7 million (due to expanded operations) was more than offset by the cash generated from an increase in payables of US$25.1 million, using the indirect method of cash flow statement. Other payables had also increased by US$10.4 million which helped to provide support as well. For Swiber, having a healthy operating cash inflow is integral as it operates in a capital intensive environment and is also increasing its gearing through the issuance of notes and taking up of bank loans. Thus, in time to come, interest expenses will be higher and will eat into their cash flows. As more projects are anticipated to flow in, operating cash flows should remain healthy for the foreseeable future.
Most of the cash outflows belonged to investing activities, as the Company scaled up its vessel fleet aggressively during 3Q 2007. Proceeds from the sale of vessels came up to US$47.1 million, but this was offset by purchases of more assets and additions to non-current assets amounting to US$73 million. A further US$5.2 million was spent in acquiring the interest in a subsidiary (I would suspect this is their 100%-stake in North Shipyard, now renamed as Kreuz Engineering and Shipbuilding Pte Ltd). All these transactions led to a net cash outflow of US$30.4 million.
The Group had sought to raise cash through financing activities during 3Q 2007, and it shows in this portion of the cash flow statement. US$71.1 million was raised through a bond offering as part of their S$300 million multi-currency medium-term note facility with CitiCorp Investment Bank (S) Ltd. Another US$78.6 million was raised as proceeds from the issue of 55.35 million new shares at S$2.1748 per share, as part of a placement to institutional investors back in June/July 2007. A further US$6.7 million was raised through additional bank loans obtained, while US$13.9 million was used to repay other bank loans. Moving forward, Swiber has indicated that they will resort to more debt funding for the purchase of their new drilling vessels and support vessels (derrick crane, subsea support vessels and Equatorial Driller).
Prospects and Future Plans
For Swiber, prospects look positive as they have recently recruited veterans such as Mr. Glen Olivera to helm their deepwater drilling unit, and also conducted a very successful notes issue. The Group’s move into subsea and deepwater signifies their commitment to grow the business beyond what it is today, and shows the Management’s drive to stay abreast of changing trends and to adapt and react accordingly. Swiber’s core strength is in EPCIC activities for the offshore oil and gas industry, and they are leveraging on this to extend their capabilities to the deepwater segment as well.
Swiber’s strategy for the future remains a three-prong approach: build up their vessel fleet capabilities, extend their presence into new, untapped markets; and hire experienced and capable Management to lead the business and take it to new heights. Thus far, they have been very aggressive on the vessel acquisition front, with many announcements and press releases detailing the extent of their plans for purchasing; and committing a lot of funds in the process. The key risks here are the demand and supply cycle of the EPCIC and deepwater drilling market. It is one thing to make forecasts and predictions about how things will pan out in the future, but another matter when it comes to the actual scenario and whether good value can be capitalized upon to grow revenues and profits. There would be uncertainty at this point over the level of competition present in the industry and also the margins to be enjoyed in new segments such as deepwater drilling. You can summarize by saying that Management are taking a calculated risk by expanding their fleet, and much of their future success still depends on uncertain future events.
As for entering new markets, thus far Swiber has demonstrated that they are able to forge strategic alliances to extend their footprint within South-East Asia, with JVs in India and Brunei as well as a co-operative agreement inked in Vietnam. As mentioned in my previous posts, whether these alliances will translate into actual dollars and cents will depend on whether Swiber can leverage on their network of contacts to secure more contracts and LOI. Much of their anticipated success comes from building their “brand name” and the CEP Mr. Raymond Goh personally flying over to engage in negotiations. The progress thus far is encouraging and it is hoped that the Company can continue to forge ties with other countries where Swiber has yet to establish a presence, in order to build up the Group’s reputation in South-East Asia.
The hiring of experienced Management has been a key factor in Swiber’s growth; good Management has the expertise and experience to ensure projects are executed on time and with no cost overruns, and it is critical to put someone experienced in charge so as to create goodwill as the Group is expanding. Delays and hiccups are not only financially costly, but also reflect badly on the capabilities of the service provider and may hamper future business. Swiber understands this aspect very well and knows that timely project execution is not merely about financial numbers, but also about reputation and recognized skill. I see this year (FY 2007) as Swiber’s year of building their reputation and credibility, in order to bid for more projects of higher value. Thus far, they have placed bids for US$800 million worth of projects to be carried out in FY 2008 and FY 2009.
In summary, things look bright for the Group but there are also significant risks moving forward as mentioned above. I will be closely monitoring developments within the industry as well as on the Company level, and will report such news here from time to time.
Sunday, November 18, 2007
On November 14, 2007, Pacific Andes released their 2Q and 1H FY 2008 results (the company has a March 31 year-end). Suffice to say that growth was not as impressive as I had expected, and my fears about the high interest expenses on the covertible bonds and senior notes came true as finance costs had soared as compared to the same period last year. This could possibly be a major source of headache for the company moving forward as it drains a lot of cashflow. On the positive side though, the recent acquisitions and move into the fishmeal industry has helped to smooth revenues somewhat, as can be seen that 2Q, which is traditioally a weak fishing season, showed better revenues as compared to a year ago. What Pacific Andes (PAH) needs to do is to better control costs and improve efficiency of operations, otherwise the company will not be able to add value to shareholders in the long-run.
My review will be in the usual two parts, the first concentrating mainly on the Income Statement and Balance Sheet, while the latter part will be on the Cash Flow Statement and future prospects:-
Income Statement Review (note: all figures quoted within are for 2Q 2008, not 1H 2008)
Revenues increased 111.1% from HKD 751.9 million to HKD 1.59 billion, which was mainly due to their increase in fishmeal and fishing activities through CFG (China Fishery Group) as well as their recent stake increase from 28.8% to 63.9%. However, cost of goods sold remained high, rising 116.1% to HKD 1.25 billion, thus leaving a gross profit of HKD 337 million (margin about 21.2%). Comparatively, for 2Q FY 2007, gross margins were slightly higher at 23.0%. Sadly, the momentum generated in the revenue increases could not be brought to bear on the net profits, as most of the increase was absorbed by higher selling and distribution expenses and finance costs. Selling and distribution expenses increased 4-fold (up 427%) to HKD 32.5 million, while finance costs ballooned 218% to HKD 101.5 million. These two expenses make up 8.44% of revenues already and play a big part in “shrinking” net margins for 2Q 2008, as compared to 2Q 2007. Net margin for 2Q 2008 was low at 10% compared to 15.9% a year back, largely due to these two costs. Selling and distribution costs have increased in line with the increase in operations for the Group, which I can understand, but 400+% seems a little surprising nonetheless. Finance costs are a major drain on cash and though the debt is used to fund expansion, it has not really translated into much earnings accretion (yet !). Fortunately, PAH has mitigated the risk of interest rate increases by “locking in” the interest rate on the senior notes and convertible bonds. Hopefully, in the next few quarters, there will be more margin improvement as a result of better streamlining of operations and better efficiencies resulting from economies of scale.
Profit attributable to shareholders increased 46.2% for 2Q 2008 and for 1H 2008, the increase was 41.5% to HKD 182 million. According to Note 6, EPS is now HKD 18.83 cents based on a weighted average share capital of 966 million shares; but the fully diluted EPS (taking into account full conversion of all convertible bonds) drops to HKD 17.63 cents. This is not even counting in the full effects of the 1:1 rights issue which has doubled the share capital base, thus I forsee more earnings dilution as a result of this. I will give an estimate of about 80% of fully-diluted EPS to be conservative, which is about HKD 14.1 cents. This translates to about 2.82 Singapore cents per share, or 5.64 cents per share annualized. At Friday’s closing market price of 71 cents, this values the company at about 12.6 times PER. At my current buy price of 65.5 cents, the PER I purchased at is about 11.6 times. If profit worsens or drops unexpectedly and causes my margin of safety to narrow, I will not hesitate to dispose of this investment. My concerns relate to the high gearing for PAH and I need to see Management do more to improve margins and lower costs in future periods. That said, 2Q did see a major cash outflow due to the acquisition of the additional stake in CFG, which may have distorted the results a little (the acquisition was only completed on July 23, 2007). I shall wait for the 3Q 2008 report to see if things have improved.
Balance Sheet Review
PAH’s balance sheet has traditionally held a lot of debt, which I am not particularly comfortable with. I acknowledge that it might be a necessary evil if the company has to resort to debt to expand its operations quickly and gain a stronger foothold in the fishmeal industry in Peru. Compare PAH’s method with Ezra and Swiber, where both companies also rely heavily on debt financing to boost their fleet of vessels. In PAH’s case, they need to increase their reefer vessels to cope with better SCM, purse seine vessels to catch more fish and put their super-trawlers for elongation and enhancement in order to fish in new waters. All this costs money and the non-current liabilities has seen an increase of about HKD 548 million for convertible bonds. Current ratio is 1.58 for Sep 30 compared to 1.91 for March 31. Quick ratio is 1.32 against March 31’s 1.51, as a result of an increase in current liabilities and a drop in current assets (lower inventories). Their interest-bearing bank borrowings together with senior notes forms HKD 3.1 billion, which is almost equivalent to their total current assets. I see this as a potential risk area for the Group moving forward, and hope that Management can find ways to bring down this high debt. Otherwise, PAH as an investment would not seem very attractive in the long-run.
Part 2 will be continued on a later date, do stay tuned and feel free to comment and give your opinions on the Company and Group.
Saturday, November 17, 2007
It is with considerable horror and trepidation that I picked up today’s edition of “Weekend Today” newspaper and saw the headline on the front page stating that Trade and Industry Minister Mr. Lim Hng Kiang had commented (in Parliament) that inflation is expected to hit a historical 25-year high of 5% next year ! As the paper mentioned, it was only on October 30, 2007 that MAS mentioned that inflation would hit 4%; his comment on 5% would mean a 25% increase over the 4% forecast, which is shocking to say the least. This would mean that an item costing S$10 would cost S$10.50 by next year (5% increase) if this scenario came to pass.
As readers may know, the concept of inflation has been around for the last couple of hundred years, but it only came to greater prominence with the development of economic theory by the great Nobel Prize Winners John Maynard Keynes and some other important people (of which I will not bother dredging the names of !). Simply put, inflation is what happens when the prices of goods and services increase; meaning that the same dollar can buy less goods over time. This has a lot to do with aggregate demand and aggregate supply, but since this is not an economics 101 class I will spare readers the details and dive straight into the implications.
Inflation is part and parcel of the growth of an economy and cannot be distinctly separate from it. As long as there is economic growth and GDP growth, there is bound to be some measure of inflation. In fact, economists believe that steady inflation is actually healthy for an economy, as it shows that the entire economy is becoming more healthy and that people have a greater propensity to spend. Chronically high inflation or the opposite of inflation (i.e. deflation) is not healthy as the former situation signals the fact that price is increasing too quickly for the common man to cope with, resulting in decreased consumption and hence slower growth; while the latter scenario has occurred in Japan over the last decade, and caused businesses to suffer a result of decreased prices. So the general argument would be that inflation is necessary and healthy, so why is there such a hue and cry over the recent 5% announcement? Perhaps it is because 5% is seen as a threshold which is bordering on “high” instead of “healthy”. Traditionally, for Singapore, inflation has held steady at between 2.5% to 3% per annum, and most of the time real wages have also increased by between 3-5% (including in the civil service) to keep pace with this inflation. If inflation really hits 5%, then real wages may not increase enough to compensate this increase in inflation, even though nominal wages are increasing (real wages are what economists refer to as “inflation-adjusted wages”, while nominal wages are the simple dollar value of wages without accounting for inflation). This would inevitably cause hardship to the lower income families and retirees who may find the cost of basic necessities like rice, bread and water rising.
In fact, some recent personal examples I can quote of evidently rising prices include a trip to Old Chang Kee (who, incidentally, are considering a listing on SESDAQ). A normal curry puff there used to cost S$1, but now it’s S$1.10. When quizzed about this apparent 10% increase in price, the staff just gave me a blank look as if I were an idiot asking obvious questions. Another lunch visit to a nearby café close to my office made me discover that my favourite curry chicken rice had “inflated” from S$4.50 to S$5.00. A quick query on the sudden price increase of 11.1% was met with “my boss told me to adjust the price, go ask him !”. I have not been to the supermarket recently but I am sure the same might be happening in NTUC Fairprice, Cold Storage, Carrefour and Giant. I would appreciate if readers can give their feedback on whether this is happening (i.e. rising prices of basic goods).
So what can the common man on the street do to counteract the effects of this inflation ? Putting your money in a bank is obviously the worst way of growing it, as most banks give interest rates ranging from 0.25% per annum (POSBank) to 1.68% per annum (Maybank iSavvy account). Even fixed deposit rates do not get more attractive than 2.25 to 2.5% per annum unless it is a foreign currency time deposit (which will then be subjected to currency risk as well). The most logical solution would be to purchase a high yielding equity such as a REIT, some of which promise yields as high as 7% (e.g. Saizen REIT) or to purchase equities in companies at a decent margin of safety. Thus far, I have a REIT which yields about 7.5% dividend yield at my 2004 purchase price, as well as some companies which are paying a 5% dividend yield at my purchase price. Other suggestions from readers on how to combat inflation will be most welcome !
Note: Just yesterday, on November 16, 2007, I saw value emerging in China Fishery Group (CFG) and purchased a couple of lots at a price of S$1.54, which I feel offered a decent margin of safety. I will detail the reasons and rationale for purchase as well as computations of expected growth and risks of my investment in a subsequent posting.
Friday, November 16, 2007
On November 14, 2007, Boustead released a strong set of results for 1H FY 2008, with revenues for the half-year ended September 30, 2007 rising 47.6% to S$206.2 million from S$139.7 million a year ago. Net profit attributable to shareholders rose an impressive 227% from S$7.9 million to S$26 million, partly due to the fact that the comparison is done from a low base (lower 1H FY 2007 profits due to delayed recognition of certain contracts then). Earnings per share has risen 229% from 3.1 Singapore cents/share a year ago to 10.2 Singapore cents/share. A dividend of 3 cents per share (tax-exempt) was declared, which was 50% higher than the gross dividend in the previous corresponding period, and this will be paid out on December 18, 2007.
I will proceed here with my analysis and comments on Boustead using my usual two-part format as per Swiber. Comments are most welcome in order to share knowledge and enhance the understanding on the company and its prospects.
Income Statement Review
Gross profit had increased by 38.2% from S$43.8 million to S$60.6 million on the back of a 47.6% increase in revenues, which means that gross margins were slightly impacted. The reasons for this are not known but I could speculate that perhaps some of their more recent contracts yielded lower gross margins than anticipated; or that the sand issue may still be driving up costs for their industrial real-estate solutions division in the short-term. Gross margins stood at 29.3% for Sep 30, 2007 as compared to 31.4% for Sep 30, 2006. Of note is that net profits actually were boosted by a one-time gain of S$6.5 million on the sale of a leasehold property, thus adjusted net profit attributable to shareholders will be about S$19.5 million, as compared to S$7.9 million a year back. This still represents an impressive 146.8% increase in core earnings, and the reasons for this (from my observation) are that selling and distribution expenses have hardly increased (only 1.8%) while administrative expenses have increased by only 14.1%, much lower than the increase in gross profits and revenues. In fact, other operating expenses and finance costs actually posted a decrease year-on-year, and I attribute this to effective cost-control procedures put in place by the Group during the financial year. As a result, core earnings net margin stands at about 9.47% for Sep 30, 2007, as compared to last year’s 5.68%. This increase in earnings attributable to shareholders also came about as a result of Boustead increasing their stakes in Boustead Projects during the previous financial year.
Segmental Revenue Breakdown – Review and Analysis
As can be seen from the table above for breakdown of segmental revenue, the strongest growth came from Engineering Services which posted a 60.9% increase in revenue. Please refer to the table below for a further breakdown and analysis of the revenue contributions for Engineering Services. Geo-Spatial Technology saw modest growth of 4.5% year-on-year but Management has said that this division will post a slightly stronger 2H FY 2008 revenue performance. Moving forward, I believe the main growth drivers for Boustead will be for real estate and their expertise in the Energy-related engineering division.
It can be seen from the Table above that the strongest growth came from their industrial real-estate solutions division headed by Boustead Projects, posting a 76% increase in revenue from S$51.3 million to S$90.3 million . During the half-year ended Sep 30, 2007, Boustead Projects had announced no less than 5 medium to large contracts, one of which is the S$25 million contract to build the Newater facility at Bedok. Boustead Projects also serves international clients such as Panalpina and Berg Propulsion in the design and building of industrial real estate. This is not even taking into account the S$300 million Libyan Township project for which Boustead has a 65% stake in, and revenues and profits will only begin to flow in from 2H FY 2008. Management has guided that with the upturn in the construction industry, more projects should flow the way of Boustead Projects in the years ahead.
Following the recent surge in oil prices to a high of US$98.62 per barrel and the buoyant oil and gas market, this has also caused Boustead’s energy-related engineering division to post strong revenue growth of 36.6% to hit S$65.7 million for 1H FY 2008. Management has reiterated that they are in the process of negotiating several medium to large contracts for 2H FY 2008, and are very upbeat about the prospects for this division. As a shareholder, I hope to hear more good news from the Group in the months to come.
However, the water and wastewater division under Salcon is experiencing strong competition in a low barriers to entry industry, thus Management does not expect a turnaround by end FY 2008 as several deals which are in negotiation have been delayed. The reason for the 113.3% increase in revenue was mainly due to order backlogs from FY 2007 and because of the comparison using a low base for 1H FY 2007. Mr. FF Wong had mentioned during the AGM that wastewater projects in China had very low margins and were highly competitive, with the best bid going to the company (usually local) wit the best technology. Thus, the Group will continue to work on current R&D initiatives and implement new technologies to enable Salcon to gain a better competitive edge when bidding for projects.
Balance Sheet Review
Boustead’s balance sheet has traditionally been very strong, and this time it is no exception. Their cash hoard has increased further from S$119.4 million to S$127.5 million for 1H FY 2008, despite paying a record final gross dividend of 4.5 cents per share (less 18% tax). Trade receivables and trade payables had increased in line with the increase in business activities, and costs on uncompleted contracts also rose from S$4.2 million to S$15 million in line with the increase in business activities for the Group. Current ratio stands at a healthy 1.7 for Sep 30, 2007 as compared to 1.82 for March 31, 2007, which is still very healthy. The Group has only S$7.6 million in inventories, thus their quick ratio will not be affected much either. Total borrowings also remained relatively constant and this is a good sign that the Group is relying on internally generated cash inflows to fund their operations expansion instead of resorting to debt.
I will continue with the review of the Cash Flow Statement and prospects and outlook for the Group in Part 2 to be posted in due course.
Thursday, November 15, 2007
The half month from end-October 2007 to mid-November 2007 has been a turbulent one for the stock market, with sub-prime fears coming into play again as large banks such as Merril Lynch and CitiGroup making astounding write-offs for the CDOs in their portfolio. The carnage has spilled over to Japanese banks as well, as it was reported today that Mizuho had to make a large write-down on their CDO-backed assets. Who knows what the extent of this crisis will be, and when will it finally peter out ? I am watching this saga closely to see how it affects the markets, in order to try to determine a good safety margin for long-term investment.
Below is the summary of my investments and related news as at November 15, 2007 (STI at 3,477.59 points):-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $3.64, Gain 464%. The bonus shares from the 1:1 bonus have been listed and quoted on the Stock Exchange of Singapore today. Ezra has also initiated a series of share buy-backs commencing November 7 to date (November 14, 2007 was the latest announcement). They purchased a total of 4.473 million shares at an average price of S$3.4528 for a total consideration of S$15.444 million, thus reducing the issued share capital from 585.4 million shares to 581.367 million shares. The shares will be held as treasury shares and this move enhances EPS for all shareholders and should be viewed as positive.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.38, Gain 83.8%. Boustead reported a sterling set of results, with revenues increasing by 47.6% to S$206.2 million for the half year ended September 30, 2007. Net profit attributable to shareholders was up 227% to S$26 million, and earnings per share has increased 229% to 10.2 Singapore cents per share. A dividend of 3 cents per share (tax exempt) was declared, representing a yield of 2.3% based on my buy price. I will be doing a review and analysis of Boustead’s results in due course.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.48, Gain 244.6%. Swiber released a decent set of results on November 14 which were mostly within expectations. I had done a part 1 review of Swiber yesterday and the positive surprise was the significant increase in gross margins which bodes well for the company in the long run as they capture more LOI and contracts. On November 6, Swiber announced the incorporation of Swiber Offshore Drilling Pte Ltd, and placed Mr. Glen Olivero as the head of this unit due to his vast experience and expertise. Just a week later on November 13, Swiber announced their first drilling contract worth US$25 million in the Gulf of Thailand, and subsequently on November 14 announced another LOI from Indonesia worth US$31 million (details are in my previous post). This evening, Swiber has also released a presentation for Equatorial Driller, which is a new deepwater vessel (with subsea capabilities) which Swiber undertakes to build as part of their commitment to serving the deepwater segment; and this vessel will be placed under their new wholly-owned subsidiary Black Gold Drilling Pte Ltd. I will be posting more details of this once I go through the slides presentation prepared by Swiber.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.69, Gain 52.3%. There was no news for Suntec REIT during the half-month ended November 15, 2007.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.73, Gain 11.5%. Pacific Andes released a decent set of results for 2Q FY 2008 but there was some margin contraction on the part of CFG, which means that the results could have been much better. Also, the elongation works for the super-trawlers operated by CFG are expected to be completed on schedule by the end of 2007, thus they will be deployed only in early 2008 and will contribute to 4Q FY 2008 results. In addition, the Group is going to target Chilean Jack Mackeral, which it sees as an under-utilized fish species in order to increase revenues. The prices of fishmeal had dropped and operating costs for their new vessel fleet had gone up significantly, thus impacting margins. There was no interim dividend declared, but the company said that the dividend would be “reserved” till a final dividend under a new scrip dividend scheme in which shareholders could elect to receive the dividend in cash or in the form of shares. I will also be doing a review of Pacific Andes’ results in due course.
My overall portfolio has increased by 136.8% from a cost of S$43.2K as at November 15, 2007, as compared with 143.0% as at October 31, 2007. The market value of my portfolio is S$102.4K. Realized gains have increased slightly to S$3.98K as a result of the ex-dividend for Suntec REIT, while Boustead is currently under “cum-dividend” and so the dividend amount will not be included under realized gains yet.
Comparison against STI
The STI was 3,037.74 on January 3, 2007. It is currently at 3,477.59 today, representing a gain of 14.5%.
Adjustment of cost to ensure consistency of comparison – My cost and market value were S$33.9K and S$46.0K respectively as at Jan 3, 2007 while my current cost is about S$43.2K. Therefore, my adjusted market value will be about S$58.6K. The market value of my holdings as at today is S$102.4K. This represents an increase of about 74.7%.
Thus, as at November 15, 2007, my portfolio has risen by a gain of 60.2 percentage points higher than the STI.
My next portfolio review will be on Friday, November 30, 2007 after market close.
Wednesday, November 14, 2007
Swiber released their 3Q FY 2007 financial statements today, and I will proceed with Part 1 of the review and analysis. Part 1 shall focus on the Income Statement and Balance Sheet items while Part 2 will talk about the Cash Flow Statement, strategies and prospects for the Group.
Income Statement Review
Swiber reported an increase in revenue of 55.3% for 3Q 2007, up from US$29.2 million for 3Q 2006 to US$45.4 million. Recall that the Group had secured several LOI which were announced from May to July 2007 which pertained to the third quarter, and revenues were also positively impacted by the recognition of the Brunei Shell deal which is ongoing till FY 2008. An important thing to note is that gross margins had improved from 23.2% for 3Q 2006 to 34% for 3Q 2007, which is a very significant 10.8 percentage point increase. This is in line with Swiber’s assertion that using their own vessel fleet can help to reduce operational costs and help to streamline project delivery and scheduling. The results of Swiber’s lower reliance on third-party chartered vessels has pulled up their GP margins and their 9M 2007 GP margin stands at 31.3%, which is still a significant improvement over 9M 2006’s GP margin of 24.6%. Moving forward, as more of the newbuilds come on-stream, we should see gross margins improving further (or at least being maintained at current levels).
Profit after taxation stood at US$19.6 million for 3Q 2007, which was 249% higher than 3Q 2006’s net profit of US$5.6 million. However, part of the profits are made up of gains on disposal of assets held for sale of US$7.772 million. After removing this, core business profits stand at US$11.87 million, which is still a 111% increase over 3Q 2006. The strong profit surge can be attributed to contracts of higher value as well as better margins (margin expansion) as a result of utilization of Swiber’s own vessel fleet. For 9M 2007, net profit was US$21.0 million (net of exceptional gains), which was 193% higher than the net core earnings of US$7.16 million for 9M 2006. If we annualize Swiber’s core earnings of US$21 million, we will get US$28 million (or about S$40 million). Using a share capital base of 424.35 million shares, annualized EPS will be about 9.42 Singapore cents. At the current market price of S$3.36, historical PER will be about 35.6 times. I will be doing a projection for forward PER in my future postings.
Balance Sheet Review
Swiber’s balance sheet has undergone several key changes as a result of a share placement exercise and a debt (notes) issue. Most notably, cash and bank balances has surged from only US$11.5 million for Dec 31, 2006 to US$133.6 million, and this will be further explained in the Cash Flow Statement review. Trade receivables has increased nearly 2.4 times which is in line with the increase in the top line for the Group. Assets held for sale has increased nearly 9-fold as the Group has invested heavily in building up its vessel fleet over the last 9 months of FY 2007. For non-current assets, note that Swiber now has joint venture partners in Brunei and India, thus the US$4.4 million represents their portion of the capital injected into these JV. The current ratio stands at 2.83 for Sep 30, 2007 versus 1.38 for Dec 31, 2006; and this is mainly attributable to the large increase in cash reserves (a current asset) without a corresponding increase in current liabilities (the bonds are classified as long-term liabilities).
Trade and other payables has increased too in line with the increase in business activities, and this has caused current liabilities to rise more than 200% to US$86.4 million. Swiber has done a commendable job of keeping most of its new liabilities as long-term ones, thus deferring the principal repayment of the loans as well as bonds till their EPCIC business has got a more secure foothold. For non-current liabilities, bonds comprise US$71.1 million and this will be the main bulk of debt which will incur interest expenses (i.e. higher finance costs) for the Group moving forward. Note that finance costs in the Income Statement had only increased 364% for 3Q, which I feel has not fully captured the effects of the increase in bank borrowings and the interest on bonds. The Group’s debt-to-equity has increased to 0.61 from 0.23 as at Dec 31, 2006. Moving forward, it is imperative that the Group build their business sufficiently to ensure a good interest expense coverage from operating cash inflows.
Swiber – Clinching of Maiden US$25 Million Drilling Contract
Just yesterday, Swiber announced that they had clinched their maiden contract for offshore drilling works for a series of wells in the Gulf of Thailand. This comes just days after the company had announced the incorporation of a new 90%-owned subsidiary Swiber Offshore Drilling Pte Ltd and a new wholly-owned subsidiary Black Gold Drilling Pte Ltd. The client in question is called NuCoastal (Thailand) Limited and this is a 12-month contract which is supposed to commence in March 2008. The good news is that NuCoastal has an option to extend the contract by a further 12 months, but there is no mention of the additional potential revenue if they decide to extend.
The drilling unit Swiber Jack-up 1 and an accommodation barge will be deployed for this maiden drilling project; and also includes supplying support vessels to ensure everything goes smoothly. This project will be helmed by Mr. Glen Olivera, who was recently appointed to head Swiber’s drilling team. This news is very positive in that Swiber has managed to clinch a drilling contract even though it does not have prior experience in this area (as their core business is still EPCIC). The risks are execution and delivery and it is up to Mr. Olivera’s expertise and vast experience to ensure that the project goes smoothly, on schedule and without unnecessary cost overruns.
Another uncertainty is the gross margins which can be expected for drilling contracts. For EPCIC, the gross margin has been established to be around 30-34% but it is not known how lucrative offshore drilling is. Thus, this remains a mystery till FY 2008 when Swiber reports its 2Q 2008 results.
Swiber – LOI for US$31 Million EPCIC project in Indonesia
Just this evening, Swiber announced yet another back-to-back contract win, this time for EPCIC works to be carried out for an international oil conglomerate based in Indonesia. The contract value is US$31 million and the project is targeted to commence in April 2008 and be completed by August 2008. The nature of work is platform installation which the Group is very familiar with, and I would expect them to command the same high gross margin of at least 30% since they will be deploying their own vessels. Thus, gross profit to be recognized over 5 months is about US$9.3 million.
DBS Vickers (DBSV) had projected for Swiber to clinch another US$64 million worth of projects in 4Q 2007, and the 2 announcements over the last 2 days already adds another US$56 million worth of projects to the Group’s order books. If December 2007 is a good month, I am sure the Group will be able to surpass DBSV’s forecast.
Tuesday, November 13, 2007
This topic on multi-level marketing (MLM or network marketing) has come up more frequently these days in the Straits Times when they reported on a company known as Sunshine Empire. Apparently, this company is becoming more and more high profile and the founders are conducting dubious activities to try to recruit more people to join the company to promote its products and agenda. MAS recently had issued a warning to the general public to be wary of such companies. But just what exactly is a network marketing company, and is the business model sustainable or profitable ? Let’s explore this concept and compare it with a classic pyramid scheme (a.k.a. Ponzi Scheme).
A network marketing company makes use of a network of sales people in order to sell a product or set of products. The recruiter will recruit say 4 people (called the down-line) to buy a set of products to start off the network, and these 4 people in turn each approach 4 other people to become their down-line, selling the products to them in turn and so on. It all sounds very feasible as long as there is a genuine product and there are enough down-lines to support the commission structure for the recruiters. The scheme can continue as long as there are end-users buying the products, thus enriching the sellers who were the original recruiters. Such a network marketing scheme is legal and legitimate as the money flows in from parties who purchase and use the products, and not solely from new recruits. Most MLM companies require an upfront “investment” in the company’s products, after which you will become a member and can then sell the products to another salesperson or an end-user. Commission is then paid to the salesperson based on the value of the products sold.
This all sounds well and good but the problem is that there are companies which operate in the same manner, minus the actual physical products. These are called pyramid schemes and are unsustainable in the long run. The modus operandi of such companies is that they will promise a very high (and unrealistic) return on investment to all who “invest” in the company. This might range from anything like 100% per annum to 1,000% per annum and these claims entice people to throw their money into the company. As more people join, the early birds can paid from the monies invested by those who join later, and the promised returns really do accrue to these early birds. However, it has been calculated that the entire scheme is unsustainable after 12 levels of recruitment as it would require the population of the entire Earth to sustain the ridiculously high promised payouts ! This scheme was first mooted by Charles Ponzi back in 1920 in the United States, and it was essentially the same method (read about him in wikipedia.com). It has been proven that about 88% of all people who join a Ponzi scheme will lose essentially all or a large part of their investment, with only the initial 12% becoming fabulously rich. In essence, this is the ultimate re-distribution of wealth (by the way, lotteries such as Toto and 4-D also do this, albeit in a more organized fashion) and most of the wealth gets distributed back to the original founders of the scheme.
In the case of Sunshine Empire, the chairman Mr. James Phang (who, incidentally, was also involved in a dubious company marketing a product called Number One Product) made claims that he was “better than Warren Buffett” and could promise returns as high as 10% per month, which was in essence 120% per annum. It should be noted that Mr. Buffett himself, being the greatest investor and wealth builder who has ever lived so far, has only managed about 23% per annum for 30 years. Thus, there is no doubt that the wild claims made by this company are fraudulent and stink of arrogance. Anyone who is remotely financially literate would have viewed this as the scam it was as there was no real product involved but merely a case of redistributing wealth from new joiners to those who had joined earlier. An “investment” of $10,000 could yield $1,000 within a month, but there is no possible way for this to be sustainable in the long-run as pyramid schemes all collapse from their own weight after a while, leaving almost everyone poorer.
So why do these schemes still exist, and why are they still so popular (Sunshine has “recruited” close to 20,000 people and counting) even though it has been tried so many times ? The simple reason is that people, being human, are ALWAYS greedy and wish for quick returns for hardly any effort at all. Suffice to say that this is what I despise most: people who want instant large rewards without putting in any requisite effort whatsoever. Another factor is the level of financial literacy; most laymen with no knowledge of investment returns would automatically think that 10% per month is a great deal without considering if it was sustainable or even possible. A third reason is that it is not easy to distinguish a legitimate MLM company from a Ponzi scheme, and it usually takes the relevant authorities some time to investigate a company’s activities before it can make a conclusion.
In the meantime, I would advise readers to be very wary of claims of inflated returns. Equities can give you an average return of 10-12% per annum over the long-term, while super-investors such as Warren Buffett or Peter Lynch can manage much higher rates of return at 16-20% per annum consistently. If you ever hear of a claim which says 40-50% per annum consistently, then there is a very high chance that it is a scam !
Sunday, November 11, 2007
The recent focus has once again shifted onto the sub-prime mortgage loan crisis in the USA, with the markets there suffering their worst one-week drop since August 2007. I had watched with alarm as a seemingly deadly mix of sub-prime woes, a falling US dollar and high oil prices combined to create one of the most potentially devastating mix of problems for the US economy moving forward. Let’s take a look in turn at each of these events and their probably impact on the economy in the months to come.
Sub-Prime Mortgage Loan Crisis – Unless one has been living under a rock for the last 6 months, the sub-prime mortgage problem should now be a familiar mention among investors and pundits. The result of over-leveraging for people in the USA with poor credit histories, and being overly lax on credit policies, this problem has ballooned into a major crisis of confidence in renowned banks all over the world. Packaged debt instruments called “collateralized debt obligations (CDO)” are losing their value almost on a daily basis and forcing financial institutions such as Citigroup, Morgan Stanley, Merril Lynch and UBS to make massive write-downs. The indirect effect this has had on the credit markets is that it is now not easy to get a home loan anymore, as credit policies have been tightened in the USD as a result of the sub-prime fallout. On a macro scale, the property market there is taking a hit as foreclosures hit a record high on falling home prices. On a more micro-level, consumers have been hit hard with “negative equity”, which is what happens when the value of what you own (in loans) is higher than the value of the underlying asset (i.e. the property they hold in this case). The crisis will have two effects which I can forsee in the coming months: There will be a major slump in the property market as foreclosures get under way, and more and more people will restrict spending (lowered consumption) as their mortgage loans eat up more and more of their savings. This is the perfect recipe for an economic slowdown, which has been predicted by the Federal Reserve’s Mr. Ben Bernanke.
Weakening US Dollar – The US dollar has weakened considerably in the past few months, dropping from 1:1.55 SGD to the current 1:1.439 SGD (as at the time of writing). This is most probably a result of the huge US budget deficit and is further exacerbated by the Federal Reserve’s interest rate cuts to 4.5% (25 basis-points on October 30, 2007). The US dollar is now at a ten-year low against the Singapore dollar and at an all-time low against the Euro, which has led some pundits to remark that perhaps the US dollar will soon cease to become an international currency for exchange ! The positive part is that this makes US exports cheaper to other countries but I feel that the weakening dollar may signal more economic problems within the USA which have yet to surface.
High Oil Prices – Oil prices have been on a rally of late, touching US$98.62 per barrel (an all-time high) for light sweet crude just a few days back but now settling around US$95 per barrel. The reasons for this are manifold: supply concerns, unrest in the Middle East (again !) as well as the falling US dollar are all contributing to the steady rise in oil price. This, in turn, will have an effect on the costs and subsequently profits for many companies which use petroleum or petroleum-based products as their raw material for manufacturing. The effects are probably not apparent now but investors should take note of oil price’s impact on the costs for the companies they own, as many companies’ gross margins (e.g. in the furniture industry) may be squeezed by this development. For the man on the street, higher oil prices also mean that pump prices at petrol stations have hit a high and this makes it more expensive to top up fuel for vehicles now.
The above is just a very brief discussion on the three factors which I think possess the deadly “cocktail” to propel the US economy into a recession, unless strong and immediate measures are undertaken by the relevant authorities to address the situation. How this will pan out for the outlook for Singapore companies is uncertain, but the effects of the sub-prime crisis have already taken a toll on the three local banks which have been forced to make provisions for their CDO-related assets. I will be closely watching the effects of these 3 events and will give readers an update again in the coming months, as well as my personal views and analysis.
Note: I added a link under "Research Links" on the right-hand sidebar for the Public Insight program, which I recently discovered to be airing reviews on Singapore-listed companies. They are into their third season episode 1 right now and all previous episodes (including one on Ezra Holdings Limited) can be viewed from the links within the website.
Friday, November 09, 2007
On November 6, 2007, Swiber announced that they were expanding their scope of business to include deepwater drilling activities as well. Thus far, Swiber has only focused on the niche market for oil and gas EPCIC activities to be carried out in shallower waters in South-East Asia. By teaming up with an offshore oil and gas veteran, Mr. Glen Olivera, they have incorporated a company called Swiber Offshore Drilling Pte Ltd in order to sharpen their focus on the deepwater drilling segment of the market.
Swiber Offshore Drilling will be 90% owned by Swiber and 10% owned by Mr. Olivera; and I see this as a good move on Swiber’s part to give a stake in the company to Mr. Olivera (at the same time putting him in charge of the division) as shareholder and management goals will thus be aligned. According to the press release, Mr. Olivera has 35 years of experience in the oil and gas drilling business and has supervised onsite drilling projects as well as managed drilling groups which have drilled in waters from 800 to 2,400 metres in depth. He also has experience in cutting costs substantially and therefore will make a valuable addition to the Swiber Management Team.
With this announcement, it begins to make sense as to why Swiber had, on October 11, 2007, ordered 4 new vessels which had subsea and deepwater capabilities. Apparently, the company was already gearing up for this strategic move into a new business segment which would signal a new revenue and earnings stream. Deep water oil production is set to increase to 20% of current worldwide oil exploration by 2011 and Swiber are gearing up 4 years in advance to tackle this growing demand. I recall a conversation with Mr. Raymond Goh during Swiber’s FY 2006 AGM at Raffles Hotel back on April 30, 2007. I was asking about Swiber’s EPCIC activities and Mr. Goh mentioned that they were mainly confined to shallow waters as most of the oil and gas exploration in South-East Asia consisted of shallow water. When I asked if Swiber would move into the deepwater segment soon, he replied at the time that Management “was looking into it” to see if this was a good growth area. Apparently, Management’s research has shown that this would indeed be a promising growth area in future, and hence has decided to sink US$108 million to buy the 4 new vessels and also pumped in capital of US$90,000 (90% equity) to form the new Offshore Drilling company.
While I would agree that the company is very aggressive in expanding their vessel fleet and is undertaking positive steps to build up its network and strategic alliances, the practical point remains that so far these efforts have so far been a “paper exercise” in that it has not translated into contract wins or LOI. Perhaps as a shareholder, I am impatient for Swiber to realize some tangible benefits from these corporate moves over the last 4 months; but I have always believed that such “uplifting” news without the requisite revenue or earnings visibility would imply that the company’s efforts have yet to bear fruit. I can appreciate the fact that Management is pro-active in securing alliances and joint-ventures and also in growing their vessel fleet; but my main worry now is whether there will be sufficient demand moving forward for these vessels not to remain idle. As mentioned before, unlike Ezra, I do not think that Swiber orders vessels based on a client’s potential future usage. Probably they are just purchasing these vessels in anticipation of higher demand in the foreseeable future, but I have to clarify this with Management or it would not be fair to just assume this.
Although some shareholders may cheer the latest news about Swiber’s foray into the deepwater drilling segment, there are pretty high risks moving forward which I have identified:-
a) The demand for deepwater drilling is still unknown at this point and the 20% figure provided in the press release is at best, an estimate. Should demand not move in tandem with supply, Swiber will be in trouble as their vessels sit idle incurring operating costs.
b) Margins from this business are also uncertain at this point, as there may be high costs involved in providing deepwater EPCIC services, as compared to their current shallow water offerings.
c) There is no guarantee that competition will not come in to make Swiber’s plans go awry and to take away a chunk of the market share which Swiber has enjoyed thus far in South-East Asia. The mitigating factor is that barriers to entry are very high in this industry as high capex is required.
With the above uncertainties and lack of earnings visibility moving into FY 2008, I would say the intrinsic value of Swiber should remain the region of S$2 to S$2.50 per share, which is an estimate based on their business growth and earnings so far. A good margin of safety would be to purchase below S$1.60 for a 20% margin of safety (for prudent investors) or around S$2 if you are slightly more optimistic.
Note: Views expressed on intrinsic value and margin of safety are personal and do NOT constitute a recommendation to buy or sell the shares in Swiber. For proper professional advice please consult your nearest lawyer, stockbroker, accountant or analyst.
Wednesday, November 07, 2007
Investment Sins Part 1 – Introduction and Overview
This is a new series which I am introducing as part of a discussion on behavioural finance, and it is also predicated upon the writings and intelligent insights gained from a book written by Maury Fertig called “The 7 Deadly Sins of Investing”. In subsequent posts, I will write more about the new area of behavioural finance, as this is a new field which has only recently become very popular with academics and there is now a body of research under-way to find out more about the emotional aspects of investing and personal financial decision-making.
This overview will introduce the 7 sins specifically talked about in the book, and each subsequent post will discuss and elaborate on one of the sins. I will not be delving into any of the examples featured in the book (as that would be a violation of copyright, so go read the book yourself hehe); my aim is to focus on the sin itself and discuss my own personal experience with that emotion, and how it has affected my investment decision-making. Consequently, I will give suggestions on how to combat and avoid the sin and ways to learn from our past behaviour so that the sin is not repeated again in future.
The sins are as follows (in no particular order of how nasty they are!):-
1) Envy – One of the more pervasive sins around, this causes a person to envy another’s success or portfolio and in turn creates a lot of negative emotions.
2) Vanity/Pride – The failure to admit a mistake can distort objective thoughts and cause one’s ultimate ruin as a company spirals into the red.
3) Lust – Lusting for more riches is an effect of greed and when one chases markets to higher highs, one is playing the Greater Fool game.
4) Avarice – Knowing that not everyone can do well all the time and that mistakes are inevitable.
5) Anger/Wrath – A pretty common investing sin in forums when I see people railing about the losses they made and blaming the market instead of themselves. The desire to “take revenge” always clouds judgement and causes further mistakes to be made.
6) Gluttony – Do not let the market consume you, as it will cause burnout very quickly !
7) Sloth – The ultimate sin of being lazy and just letting your portfolio rot towards the core.
I will expand on each of these sins in future posts and how they have affected me, and in turn welcome comments on how we can all avoid such sins in our investing life.
Sunday, November 04, 2007
In today's Sunday Times, there is a very good article in the Invest section which talks about the concept of good debt, and bad debt. This concept has been discussed in forums such as Wallstraits.com (see link on my sidebar) and Mr. Dennis Ng of Leverage Holdings Pte Ltd has also promoted this concept as being central to growing one's wealth. The article basically talks about how the number of undischarged bankrupts continues to hit new highs, meaning people are spending money which is meant for the future. This linked to the concept of good debt versus bad debt, as the author mentioned that credit card debt (which carries an interest rate of 2% per month or 24% per annum) is "bad", while other forms of debt which carry a lower interest rate may be deemed "good". Let's go into a little more detail.
Good debt is debt which boosts personal wealth and cash flows, and this would include debt taken to for example finance an education (a Masters degree perhaps), or to start a business. Everyone can understand the concept of taking a loan to start a business, as most people may not have the initial capital required to start a business. It is a form of debt which helps you to grow your money (assuming your business does well), and is similar to building knowledge and wisdom through studies, which is why such debt (study loans) can also be classified as "good debt". Bad debt, on the other hand, are debts which involve loans which are not sustainable or affordable; this includes credit card debts and debts from gambling (call it loan shark debt if you will !).
I fully agree with this concept as I feel that I am able to grow my money better than prevailing interest rates, thus I go for "good debt" over bad. An example is my housing loan which I pay 2.6% per annum HDB concessionary interest rate on. It would be silly to use my CASH to pay off this debt quickly as I am currently earning dividend yields of between 5 to 7% on the cash I invest in equities, which is almost 2.5 times higher than the interest rate on my HDB loan. Thus, I stick to using my CPF contribution to deduct against my home loan, as the interest rate on the Ordinary Account is only 2.5%, which is 0.1% lower than the HDB loan rate. Also, I avoid all credit card debts by paying my full balance promptly and also avoid borrowing money to invest in shares as this represents a form of leverage (margin) which means I may be subject to a margin call if short-term price changes dictate. This would violate my principle of capital preservation.
Another point the article makes is for us to examine why we are taking up a particular debt, to see if it makes financial and common sense to take up the loan; and also to assess if we have the ability to pay if back. I had considered taking up a car loan for a car some time back, but considering the running expenses (including ERP, parking, gasoline etc) can come up to more than S$1K a month, I decided against it as I figured I could not afford this kind of "debt" and commitment. Thus, one must ask oneself if you can afford to service the debt, assuming the worst case scenario (e.g. losing your job).
Interest rates are another factor to consider when reviewing loans. In Dennis Ng's interview, he gives an overview of the broad interest rate levels for various types of loans. Housing loans come in at 3-4% per annum (HDB concessionary rate is 2.6%), car loans 6%, renovation loans 8%, loans from GE money 20% and credit card debt 24% ! Thus, logically speaking, one should clear the debt with the highest interest rate first (i.e. credit card debt) before moving on to clear other forms of debt. The article gives an example of a PR practitioner Ms. Wee Hwee Leng, 28, who used to roll over half her credit card balance of S$2,000 per month, thus incurring hefty interest charges along the way. A friend taught her to be wiser and she has since paid off the balance in full and saved on all the interest charges which represents the cost of using "future money".
To summarize, I believe that most youngsters nowadays (i.e. those who just started working) prefer instant gratification rather than delayed gratification. In the words of Ms. Wee, she feels that she deserves to be pampered and most people who abuse credit cards also have this mindset, which leads to debt spiralling out of control. If we can adopt more "good debt" rather than destructive "bad debt", then we can move faster toward growing our wealth and achieving financial freedom. Comments are most welcome for this post as I am interested in readers' opinions too.
Note: For an alternative point of view on "good" and "bad" debt, check out this posting on kleer's blog. He does not believe in the concept of "good" and "bad" debt and considers all debt as "bad".
Saturday, November 03, 2007
Delegation or Dereliction ?
I have been thinking about this idea for quite some time, but only recently did I decide to blog about it. This title basically addresses the issue of whether one should be an active or passive investor. An active investor is defined as one who constantly reads up on business news, reviews and analyzes macro-events and company-specific events and generally is interested in the entire investing process and the hard work that comes with it. A passive investor is one who does not take an active role in managing his investments, and may delegate part of or all of it to another party. Note that passive investing also includes index investing, and throughout this entire article I will call passive investing a form of “delegation”, and discuss if it amounts to dereliction (forsaking of duties).
Value investing is a form of investing which involves a significant amount of active involvement, whether it be in the investing process or analyzing the companies in which one is interested in investing in. On the other hand, buying into mutual funds (unit trusts) or doing index investing is a passive form of investing, as it requires the investor to hand over the control of his portfolio to the “experts” who deem to have more knowledge than the common man on the street. Such delegation may or may not be a good thing if one considers the fact that fund managers may not have the requisite skills or knowledge to consistently do better than the market index. But does this necessarily amount to dereliction ? First of all, the most important question is how to define the term, and see if it impacts positively or negatively on the investment decisions which one makes.
For a passive investor, he prefers to delegate part of the investing process to another professional, usually an expert on certain industries or countries, in the hope that the returns generated can beat the market average. Most investors would use the market average as a benchmark to gauge their performance, and the fact is that sometimes delegating one’s investing (whether to a friend, a relative, family member or fund manager) just may not give the comfort level that the person can beat the market average. Warren Buffett actually recommends a “sloth-like” approach to investing, whereby an investor (after selecting the right companies) can just sit back and watch the value of his holdings grow instead of fervently trading in and out in order to “maximize” his returns. The problem lies with the fact that for most delegators, they have yet to build up a decent portfolio of good companies, yet they choose to take their hands off the investment process, hoping that somehow, the person who has been delegated to invest on their behalf can achieve supernormal returns. So far, this has happened only 5% of the time as 95% of professional funds managers under-perform the index due to high churn rates and frequent transaction costs.
Thus, I would still consider delegation a form of dereliction (I know this sounds controversial) as I believe that no matter how much you think you do not know, or how lazy you are, it is still YOUR money after all and you have a responsibility for ensuring it grows at a rate better than inflation rate. In fact, the only form of passive investing which can give you market returns is index investing. Although passive investing prevents you from losing big, it also prevents you from achieving exceptional returns.