Wednesday, April 30, 2008

End-April 2008 Portfolio Summary and Review

The latter half of April 2008 was indeed a fruitful period as I managed to attend two AGMs of the companies I own. One was China Fishery on April 28 and the other, Swiber Holdings Limited, was just held today at 1 p.m. There were also a couple of announcements from Ezra, FSL Trust and Swiber while FSL Trust also released their 1Q 2008 results. I will be expecting Suntec REIT’s results this evening after market close.

May 2008 will be a more interesting month as I will be expecting results releases from Pacific Andes (FY 2008), Boustead (FY 2008), Swiber (1Q 2008) and China Fishery (1Q 2008). There will be a lot of reading and analyzing to do and I should be kept busy most of the month.

Below is the summary of my investments and related news as at April 30, 2008 (STI at 3,147.79 points).:-

1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.40, Gain 272%, YTD Loss 27.2%. Ezra announced, on April 21, 2008, that they had acquired a company in UK called Telemark Limited over a period of 4 years. Telemark is meant to enhance Ezra’s Engineering and Fabrication division and they possess the skill set and expertise to add value to Ezra’s Vietnam Yard. The company is currently profitable even though it has NTL and Telemark’s expertise will be integrated with Ezra’s, thus creating more value for clients. The third part of my Ezra review is also pending as I have been busy attending AGM and analyzing the Annual Reports of China Fishery and Swiber, so please do bear with the delay.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.05, Gain 58.3%, YTD Loss 14.9%. This evening, Boustead announced that they had increased their stake in GBI Realty Pte Ltd by 10% from 30% to 40%, through an aggregate cash consideration payment of S$9.25 million. The principle activities of GBI are those relating to commercial property development and I guess the company is using its cash hoard to increase stakes in companies which show potential, in order to recognize more profits from them for shareholders.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.45, Gain 142.6%, YTD Loss 28.6%. On April 29, 2008 (yesterday), Swiber announced a small contract with a repeat customer (NuCoastal) for the EPSC of an SPM Calm Buoy. This Buoy is to be used by NuCoastal at its Songkla Field and the contract value is worth S$7,752,576. It will be targeted for delivery in the 4Q 2008, so the revenues from this small contract will be recognized in FY 2008’s financials. I also attended Swiber’s AGM today at 1 p.m. and will be providing a write-up on the snippets of the meeting and my interactions and discussions with various Board Members (including the chairman Mr. Raymond Goh).

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.51, Gain 36.0%, YTD Loss 11.7%. Suntec REIT will be releasing their 1H FY 2008 financial statements this evening, after market close.

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 $0.49, Loss 25.2%, YTD Loss 22.2%. There was no news on Pacific Andes during the period ended April 30, 2008.

6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.51, Gain 0.7%, YTD Loss 18.4%. There were no announcements from CFG; but I did manage to attend the AGM and speak to the Finance Director, Mr. Dennis Chan; as well as the CEO Mr. Ng Joo Kwee. I will be posting up snippets of my discussions with them on the prospects and growth plans of the company soon.

7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.05, Loss 5.0%. FSL Trust released their 1Q FY 2008 results on April 23, 2008. A DPU of USD 2.59 cents per unit was declared and it will be payable on May 30, 2008. At the same time, on April 21, 2008, the Trust also announced the acquisition of two crude oil tankers from Turkey-based Geden Lines for US$140 million, drawn down from their US$ 290 million credit facility which was in place since Jan 2008. This acquisition is immediately accretive to DPU and will add 0.16 US cents DPU for the next quarter (2Q 2008) and 0.28 US cents DPU for every subsequent quarter thereafter. FSLT is still maintaining its policy of 100% payout and is not retaining any cash so far; thus it can be said to be pretty aggressive. The Trust is confident of meeting their target of US$300 million of acquisitions for FY 2008 (they only have another US$160 million left to achieve this goal). As the exchange rate for the DPU has not been finalized as at the time of writing this post, I will NOT be factoring in the dividend as realized gains within my portfolio review.

Overall Portfolio

My overall portfolio has increased by 57% without taking into FSL Trust’s cost. If included, the gain is 40% from a cost of S$80.4K as at April 30, 2008. The market value of my portfolio without FSL Trust is S$91.5K, and if FSL Trust is included then the portfolio value is S$112.4K. Realized gains remain at about S$4.9K until the ex-dividend date for China Fishery and Ezra come along, and I have also not included FSLT’s dividend because of the exchange rate.

Comparison against STI

The FTSE STI had declined by 9.61% since the start of 2008. Without FSL Trust, my portfolio has declined 21.6%.To date in 2008, my portfolio has under-performed the new benchmark FTSE STI by 12 percentage points.

My next portfolio review will be on Thursday, May 15, 2008 after market close.

Sunday, April 27, 2008

China Fishery Group - FY 2007 Annual Report Highlights

Sorry for the lack of updates - life is getting busier and I took the liberty of taking a short vacation to "chill out". Though one is a full-time investor at heart, one cannot practically devote too much time to investing; otherwise other aspects of life will be neglected. Money is, after all, simply a means to an end, and not an end itself.

Since the AGM of CFG is tomorrow (April 28, 2008 4 p.m. at Raffles Hotel), I shall post some of the highlights of the Annual Report after browsing. I will attempt to capture some of what goes on during the AGM proper in another separate post.

1) The Group's blended margins have dropped year-on-year. GP margin has fallen from 38.2% in FY 2006 to 34.8% in FY 2007. Net margins have fallen from 30.7% to 21.8% year-on-year (Page 4). This is due to the debt financing of the Peruvian operations and also the structure of the 4th VOA (which Management is negotiating to change right now). As a result of expansion, net margins have fallen but I feel this is tolerable for now as it is part of CFG's plan to expand their operations significantly. Once everything stabilizes, margins should start to creep up again as Management has a good track record of improving margins.

2) Trawling grounds will be extended to the South Pacific to increase CFG's area of influence and open up new catch areas. This is a promising development as it may open up new species and fish sources for CFG to tap on. Management plans to deploy 3 super-trawlers there in FY 2008, wit the intention to send more in FY 2009. The cost of upgrading was US$40 million which was funded through strong internal operating cash flows, and will increase the fish hold capacity for each vessel (Page 8).

3) Prices for fishmeal are expected to stabilize and trend upward slowly as aqua-culture will be heavily promoted by the Chinese government. Fishmeal is an important component of feedstock and will continue to show strong and sustained demand (unlike certain energy sources which may rise rapidly in popularity and later "fizzle" out due to unsustainable demand or a new alternative source).

4) CFG intends to streamline their new fishmeal plants and vessels to achieve better economies of scale. Management has stated their intention to acquire more fishmeal vessels if possible, and I will clarify what other plans Management has to expand their fishmeal operations during the AGM/EGM.

5) It remains to be seen how CFG is planning to move towards repaying their 9.25% senior notes (which in my opinion, is an obscenely high interest rate to be paying !). But from a glance at their operating cash inflows, I at least have some assurance that they are reaping good cash flows from their trawling and fishmeal operations, and that their investments in equipment, plants and vessels is going to be a one-off thing (at most stretching over 2 financial years). VOA acquisition may still continue, however, and hopefully the Group has thought about how to finance this. This is another point to bring up during AGM - the possibility of a 5th VOA ?

6) Another point I plan to raise is whether expenses/costs will increase in line with business expansion, or will they increase over and above the business growth ? If such is the case, we may witness more margin squeeze. Management should give sufficient assurance of cost control and give examples of how operations are being "stream-lined" and "consolidated" to ensure smooth synergies between trawling and fishmeal. Also, the rapid increase in head count and staff strength will undoubtedly add manpower and overhead costs. If this is a one-off thing related to the expansion into Perucian fishmeal, then it is acceptable. But if costs remain persistently high with no visible increase in productivity or economies of scale, then Management has to rethink their strategy moving forward.

7) Note 4 on Capital Risks Management is a new note (it is also in Swiber's AR) and suffice to say the auditors are getting more and more zealous in quantifying risks. They have detailed tables and explanations about the effects of currency fluctuations on profits as well as interest rate changes. I won't go into too much detail as this Note is very technical, but only wish to mention that CFG is locked into many fixed rate loans (bank loans and notes), thus their exposure to floating interest rates is minimal and is quantified in the Note 4b ii as US$258,000. At the rate things are going, I may soon have to review extensive disclosures just to determine if the Group is exposed to unnecessary risk; hopefully the auditors will decide when TOO much disclosure is deemed onerous to the shareholder and limit their facts to the necessary. I realize this statement may sound controversial but it may be a case of too much information (info overload).

8) Under Note 9 (Page 57), the amount of VAT recoverable is US$13.5 million, up about three times from last year's US$3.5 million. It will be good to ascertain the nature of this receivable.

9) Inventory has almost doubled in terms of fishmeal (US$19.3 million in FY 2007 compared with US$10.5 million in FY 2006). This can be found in Note 11 Page 58. It will be helpful to know if this is merely a temporary backlog of fishmeal, a timing difference or if there is a genuine problem in selling off their inventories.

10) Note 15 Page 62 - Interestingly, under Intangible Assets, fishing permits are treated like land in that they are assumed to be in force in perpetuity (no finite term). Hence, there is no amortization applied to these permits and CFG is permitted to state them at cost in the financial statements (not net book value). Let's hope this continues to be the accounting treatment for fishing permits, otherwise it will be a very unpleasant surprise to suddenly see amortization on fishing permits some time in the future.

11) The part about goodwill on acquisition is rather technical and complex and I will reserve comment until after the AGM as I currently do not see a problem with this. Suffice to say that all these numbers and explanations pertain to CFG's acquisitions during FY 2007.

12) Under Note 36 Page 86, CFG has contingent liabilities amounting to US$3.87 million for various legal claims against them. They have made a provision of US$1.459 million being amounts that they deem to be likely to materialize as liabilities. Shareholders should also raise the question of whether there might be further environmental effects of over-fishing or fishing in certain areas in South America which may precipitate more potential lawsuits. If so, can the company vigorously defend these lawsuits and what will the liability be ?

Comments are welcome on the above points, or if readers think there are other points to be raised for discussion and analysis.

Saturday, April 19, 2008

Skepticism in Investing - How Much is Enough ?

This may seem a minor topic in investing; but it's something which has had me thinking some nights while lying in bed. Skepticism is a daily part of our lives when we encounter salespeople, financial planners and fund managers who try to sell us something we may or may not want. It's something inherent in human beings which help us to protect ourselves from getting fooled or swindled in this dog-eat-dog world. It has often been reported that the opposite of skepticism is called blind faith - trusting in something too much such that we are hoodwinked or blinded to its flaws.

How does this apply to investing ? I think skepticism should be a part of every investor, due to the fact that we have to read and digest mounds of information every day which may be coming at us from all angles. This makes it imperative to sieve out the important from the trivial, and to apply selective retention to ensure we do not get "flooded" by information which we may not need. Sometimes, articles and commentaries are written by certain celebrated people (also termed "gurus") which may comment on a specific trend, cycle, economic aspect or asset class. The prudent investor should exercise a certain degree of caution and a healthy dose of skepticism when reading such articles. This is because the writer may have been influenced by views culminated from other sources which he may have then incorporated into his own philosophy; or worse, there may be a hidden agenda behind what he says.

When I use the word "healthy dose", I am implying that one should, at the minimum, question certain facts and assumptions made by the writer and not blindly accept everything as the gospel truth. One can argue that one may not have the knowledge, experience or expertise of the writer but if one reads extensively enough, sooner or later one would be able to form opinions which may lend credence to what was read, or to counteract it. Skepticism is necessary in order for us to question the seemingly obvious; which in a way also contributes to our learning process and helps us to grow as individuals and as investors.

However, one must be wary of extreme skepticism, which is known as "cynicism". A cynic is a person who disbelieves or distrusts almost everything he reads as he thinks he either knows better or that everyone has a hidden agenda. This is skepticism taken to an extreme and is not healthy because cynicism causes one to reject ideas which may help to enhance knowledge, on the pretext that it cannot be true or there must be something more to it than meets the eye. Hence, I must advise all to have a healthy balance of skepticism and belief when reading and analyzing news reports or financials. This is especially applicable also to CEOs giving forecasts of radiant growth or commentators trying to determine if the market has topped or bottomed.

Add in a pinch of skepticism to your cup of knowledge, stir well and you will get a good mix of wisdom !

Wednesday, April 16, 2008

Ezra – 1H FY 2008 Results Review and Analysis (Part 2)

To continue my analysis of Ezra’s 1H FY 2008 financials, I shall touch on the Cash Flow Statement in this section as well as give general comments on the company’s plans and prospects. A little will be mentioned on EOC (48.9% owned by Ezra) as well with regards to their expansion and latest news and how the earnings will flow up to the Group level.

Cash Flow Statement Analysis

As Ezra fleet comes on-stream, the Group is increasingly capturing mid-term charter contracts for their new vessels at higher rates than previously. This, coupled with their charters for their older AHT and AHTS, form a good base for which cash inflows can flow into the company, thereby forming a core cash flow base. I would therefore expect to see strong cash inflows from operating activities every period, notwithstanding the fact that sometimes credit may be extended to customers in order to maintain good relations, and this may cause a temporary decline in cash using the indirect method of preparing the cash flow statement. There may also be periods of time where recognition of revenue is out of sync with the actual receipt of cash, hence this is more of a timing issue (an accounting problem) rather than a case of cash flow difficulties.

For operating activities, the net cash inflows for 6 months ended Feb 29, 2008 amounted to S$14.2 million. This represented a healthy cash inflow position but of note was the interest paid of S$5.2 million which was an 82.2% increase over Feb 28, 2007’s S$2.8 million, as a result of higher gearing (taking up of more bank loans). The Group will be taking on its first FPSO in July 2008 and this should contribute strongly to operating cash inflows, thus hopefully the impact of the higher interest costs will be negated.

Under investing activities, there was a receipt of S$203.9 million of cash being the proceeds from the disposal of 51.1% of EOC Limited, leaving Ezra with a 48.9% stake. About S$110.6 million was used for investing in fixed assets to grow the business, thus demonstrating that Ezra is indeed a very capital-expenditure heavy company. As mentioned, the possible downside risk is high if the vessels remain idle (unutilized) or if rates start to fall precipitously.

Interestingly, for financing activities, there was S$21.6 million raised through taking up of more bank loans but this was offset by the payment of S$20.6 million worth of dividends. From the recent declaration of a S$0.05 dividend per share, this means Ezra will be paying out another S$29.3 million worth of cash which will be reflected in the next quarter under cash outflows from financing activities. One should hope that the Group has retained sufficient cash for servicing of loan interest payments and to finance their new vessel construction, in view of the high dividends declared. Obviously, as a shareholder, I would prefer if the company reinvested the dividends towards growing the business; but I trust that Ezra’s Management is prudent enough to manage their cash flows well to ensure they are adequately covered.

Review of EOC and Discussion of Potential

EOC is the production and construction arm of Ezra and is now 48.9% owned by them after an exercise was conducted back in FY 2007 to sell part of EOC to raise cash. EOC owns Lewek Chancellor (their second accommodation crane barge) and Lewek Champion (accommodation, construction and pipelay vessel), which were delivered in 2H FY 2007 to them. On April 8, 2008, EOC reported an interim net profit of US$12.4 million for 1H FY 2008, up 318% from US$3 million in 1H FY 2007. Of this, Ezra recognized S$7 million worth of the net profit (not a direct 48.9% of US$12.4 million as the net profit was probably staggered, and also depending on exchange rates used) as share of profits from an associated company.

Looking forward, EOC is expecting to take delivery of its first FPSO in July 2008 and this is expected to contribute strongly to its 2H FY 2008 results. Mr. Lim Kwee Keong, CEO of EOC, has mentioned that the FPSO will add breadth to EOC’s services and allow it to open a new and growing market for the Group. Mr. Lionel Lee, MD of Ezra, has also mentioned that EOC intends to add one new FPSO every 12 to 18 months. Ezra is currently bidding for FPSO and FSO contracts worth over US$800 million, and there are increasing signs of higher profitability in recent bidding and contract awards.

EOC’s track record has been very impressive, with the recent Galoc Field project in the Philippines being completed by Lewek Champion on time and without lost time incidents (as reported on EOC’s website on April 15, 2008). In Jan 2008, EOC also successfully completed the installation of jackets, topsides, pipelines and FPSO moorings for a platform located in the Bualuang Field in the Gulf of Thailand (contract awarded by Green Fields International).

With these plans in mind, the future looks promising for EOC to build itself up as a premiere provider of quality service which requires a high level of technical and project management capability.

In Part 3 of my review, I will be touching on Ezra’s segregation of its business units, the new Energy Services division and also plans for its Vietnam fabrication yard business.

Update - A comment from a reader mentioned including ROIC (Return on Invested Capital) and FCF (Free-Cash-Flow) levels for Ezra. I will be adding this in Part 3 after I do my requisite research for my write-up. I would like to thank this reader for his suggestion to enhance my analysis of the company (I had planned to do this for some time but was procrastinating - a human flaw).

Tuesday, April 15, 2008

Mid-April 2008 Portfolio Summary and Review

The first-half of April 2008 was peppered with news bits from the companies I own, including the release of 1H FY 2008 financials by Ezra Holdings Limited. The fact that Management of these companies is taking a pro-active approach to grow the business is indeed encouraging, and supports my view that such companies will prove to be good long-term strategic investments which are able to grow my money above the inflation rate.

As of today, I am still waiting for the Annual Reports of both Swiber and China Fishery. With about two weeks to go before the actual AGM, I will have a lot of reading to do to familiarize myself with the details of each AR. I will usually follow-up with a list of questions and points to discuss with Management on the actual day, as a form of preparation to understand the company’s strategies better. In the second half of April 2008, I will be expecting financial results releases from Suntec REIT and FSL Trust.

Below is the summary of my investments and related news as at April 15, 2008 (STI at 3,056.49 points).:-

1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.16, Gain 234%, YTD Loss 34.9%. Ezra released their 1H FY 2008 results on April 8, 2008 along with a ppt presentation for their future plans. Part 1 of my review was released in an earlier post, and I will be working on Parts 2 and 3 after digesting the information provided by the company. An article from The Edge Singapore highlighted increasing risks for the company moving forward, and I will also highlight this when reviewing the company’s prospects. The company declared a tax-exempt special dividend of 5.0 cents per share, representing a yield of 7.75% at my purchase price.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $1.98, Gain 52.9%, YTD Loss 17.8%. On April 9, 2008, Boustead announced their first batch of contracts for their engineering division worth S$25 million from the oil and gas industry, marking their first contracts announced for FY 2009. The Company should be expected to release their FY 2008 results by late May 2008.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.49, Gain 146.5%, YTD Loss 27.4%. There was no significant announcement by the company other than the sale of shares in subsidiary and giving notice of their AGM and EGM to be held on April 30, 2008 at 1 p.m. at their office premises. I suspect this is one way of reducing costs as booking a conference room at Raffles Hotel (as they did last year) would definitely cost more than having the AGM at their own conference room. Kudos to the company for this cost-saving measure !

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.41, Gain 27.0%, YTD Loss 17.1%. There was no news on Suntec REIT in the half-month ended April 15, 2008.

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 $0.515, Loss 26.0%, YTD Loss 23.0%. There was no news on Pacific Andes during the period ended April 15, 2008.

6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.51, Gain 0.7%, YTD Loss 18.4%. Just yesterday, CFG announced the acquisition of their eighth fishmeal plant in Pisco, on the southern coast of Lima. The purchase consideration was US$19.9 million to be satisfied by the payment of US$2.9 million on signing of the S&P agreement, and the rest in 7 equal installments from June 2008 till December 2009. Importantly, this new plant is able to process steam-dried fishmeal with a capacity of 110 tonnes per hour, which will increase CFG’s fishmeal processing capability to 655 tonnes per hour. Steam-dried fishmeal can command better prices than standard flame-dried fishmeal and thus higher margins as well. The new plant will also enhance the geographical spread of CFG’s fishmeal plants by reducing the amount of time for vessels to unload their catch; thus improving efficiencies. CFG’s AGM will be held at Raffles Hotel (4 p.m.) on April 28, 2008 Monday and it will be a good chance to question Management on the pro-active steps they are taking towards building the business.

7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.09, Loss 1.36%. There was no significant news from FSL Trust for the period ending April 15, 2008.

Overall Portfolio

My overall portfolio has increased by 50.1% without taking into FSL Trust’s cost. If included, the gain is 35.9% from a cost of S$80.4K as at April 15, 2008. The market value of my portfolio without FSL Trust is S$87.5K, and if FSL Trust is included then the portfolio value is S$109.2K. Realized gains remain at about S$4.9K until the ex-dividend date for China Fishery comes along, and also because Ezra has yet to announce their dividend payment details.

Comparison against STI

The FTSE STI had declined by 12.2% since the start of 2008. Without FSL Trust, my portfolio has declined 25.0%.To date in 2008, my portfolio has under-performed the new benchmark FTSE STI by 12.8 percentage points.

My next portfolio review will be on Wednesday, April 30, 2008 after market close.

Friday, April 11, 2008

Ezra - 1H FY 2008 Results Review and Analysis (Part 1)

Ezra released their 1H FY 2008 financial statements on April 8, 2008 after calling for a trading halt at 2 p.m. that day. I shall be reviewing their financials in three parts as I had done with Swiber. The first will touch on their Income Statement, margins and expenses as well as their Balance Sheet. The second will talk about cash flows as well as prospects. The third will comment on the general climate and how it may affect Ezra's business, and also discusses some of their plans for expansion based on their powerpoint presentation slides.

Income Statement Review

For 2Q 2008, revenues rose 92% as a result of 2 additional vessels, Lewek Kestrel and Lewek Kea, being delivered during 1H 2008 as well as the additional vessels contributing for 1H 2008 as mentioned in Ezra's press release. However, this was offset by much higher costs which rose 122% year-on-year, thus eroding gross margin and causing only a 53% rise in gross profit from S$15.8 million to S$24.3 million. Gross margins contracted from 43.8% in 2Q 2007 to just 35% in 2Q 2008, but note that 43.8% is uncharacteristically high for Ezra as their gross margins have usually hovered around 35-38%. If we look at 1H 2008 versus 1H 2007, the gross margin was 38.4% against 38.3% respectively, which is an insignificant difference. Of course, it can be argued that higher costs incurred in SGD have caused the fall in margins as most of their revenue is understood to be denominated in USD (the USD has been depreciating against the SGD, hitting a low of about 1.351 to the SGD recently).

For 1H 2008, core net earnings came up to about S$35.6 million (S$16.6 million as reported by the company for 1Q 2008 + S$19 million for 2Q 2008), while core net earnings for 1H 2007 came up to about S$15.4 million (net off exceptionals). This represents a 131% increase in core net earnings. Net margins for 1H 2008 stood at 26.0% against net margins of 22.5% for 1H 2007 (using core net profits). This shows a slight improvement over the previous year but do note that part of this was due to Ezra's sale of EOC in order to "lighten" its balance sheet and take a lot of debt off its books. EOC contributed about US$5.5 million (around S$7 million) in net profit to the Group for 1H 2008, and is expected to be a more significant contributor moving forward. Also, admin expenses increased by just 47% for 2Q 2008 although revenues rose 92%; but for 1H 2008 admin expenses actually increased by 225% against a 101% increase in revenues. This can be attributed mainly to a one-off provision for staff incentive scheme (announced in 1Q 2008) and also higher staff costs as a result of recruiting more personnel for Ezra's new divisions and to spearhead their expansion plan(s).

Overall, there was nothing particularly outstanding or poor about their performance and I would say things are on-track. However, a close watch on 3Q 2008 financials is necessary to determine the extent of the currency depreciation on Ezra's costs, and whether admin expenses do indeed increase less than revenues (implying economies of scale). Financial expenses for the next quarter are also expected to increase as Ezra's MD has mentioned taking on more bank loans to finance the construction of the 4 new MSFV instead of relying on sale-and-leasebacks. In addition to all these, there will also be expenses incurred in relation to the setting up of their new Energy Services Division (more on this in Part 3) which will impact margins. Thus, in the short-term, I do not see margins improving much.

Balance Sheet Review

Ezra's Balance Sheet has undergone significant change after the sale of EOC, as they now do not have to consolidate EOC into their Group (EOC used to be 100% owned but was divested by Ezra in FY 2007 through a share placement to 88% and subsequently to 48.9% through a listing on Oslo Bors). This has resulted in numbers which are not very comparable, but I will nevertheless touch on a few key numbers which I feel summarizes the current financial position for Ezra.

Current ratio for Feb 29, 2008 stood at 1.64 versus 1.43 for Aug 31, 2007. This was mainly due to the monetizing of EOC into cash as Ezra had sold off a portion of it to institutional investors via a listing on Oslo Bors. This had substantially improved their cash position and allows them to use the cash for growing the business further. A receivable still sits in Ezra's books for about S$45.7 million due from EOC which is classified as "Long-term", I think this receivable will remain there for some time as EOC may need the cash flow and hence may not pay back this amount to the Group any time soon. (Readers should note that for Aug 31, 2007, various assets and liabilities of EOC were classified as disposal group assets and liabilities in accordance with FRS requirements, thus any ratios computed based on Aug 31, 2007 figures may not be directly comparable with Feb 29, 2008).

Note that the Balance Sheet also reflects higher bank term loans (under current liabilties) which have increased by 92.7% from S$59.9 million to S$115.4 million. According to the company, they have reduced their net gearing from 0.9 times to 0.4 times, largely due to the increase in equity base from S$424 million to S$527 million. Bank term loans are used to finance their expansion and this will lead to higher interest costs and eventually, gearing will increase. Several research reports have also speculated that Ezra's gearing could rise in the next few financial years as it has resorted to using debt financing rather than sale-and-leaseback financing. This could be due to the fact that interest rates for borrowing are becoming attractive in light of the sub-prime crisis.

In a recent interview with The Edge magazine, Mr. Lionel Lee mentioned that Ezra did not have any problems thus far obtaining financing for their new vessels and so far all their newbuilds have adequate financing. In the event that the Group wishs to order new vessels for delivery in FY 2010 and beyond, they will probably resort to more debt financing as the market turmoil has caused their share price to plunge, thus making equity financing unattractive.

I will continue with the Cash Flow Statement and Prospects and Plans review in Part 2.

Wednesday, April 09, 2008

Approaching Investing in a Business-Like Manner

I've been rather busy the past few days, which explains the lack of posts. Anyhow, today I will be exploring how one should view investing, with regards to value investing in particular. Investing is actually part and parcel of growing our wealth, albeit slowly and steadily instead of instantly. Thus, the attitude one should take when approaching this important activity should be one of utmost seriousness, which is why the title mentions "business-like manner".

So what exactly does business-like manner mean ? This means observing a company as if you are a stakeholder who wishes to do business with the company, or acquire the company. Think of the company as a business and examine all facets of it. First of all, one should apply what I call a "common-sense" view of a business, by examining the nature of its principal activities. Companies which are in "commodity" businesses or those with a weird business model (a.k.a. something overtly innovative and which has no history of commercial success) should be shunned because it is unlikely that they can sustain increased earnings or ensure steady and predictable profits.

This is what I consider the “raw filter” for assessing companies for investment purpose. By using common sense to review whether a business has endearing characteristics or not, one can then make a conscious decision to pick and select the better businesses to drill down in detail. The SGX has over 700 companies listed on it and it will be impossible to drill down into each one as it would be too onerous and impractical. Finer filters can then be applied to assess the fundamentals and prospects of each individual company so as to ascertain its merits and demerits. One can then apply Phil Fisher’s 15 basic criteria as well to ask oneself if a particular company is investment-worthy. I shall be starting a new series soon on each of Phil Fisher’s tenets to elaborate and give examples, so watch out for it !

By adopting a business-like attitude towards investing, one can approach companies from a more practical stand point to see if their business will be viable and sustainable in the near to medium term. Of course, any events may occur which may cause our initial assumptions to be invalid, but detailed research and in-depth reading about the company’s industry and the company’s financials should mitigate such risks. Still, there will always be residual risk in any investment which cannot be eliminated, such as Acts of God (e.g. fires, floods, earthquakes and typhoons) and also deliberate and pervasive fraud. This is why the margin of safety concept always applies to protect the investor from massive losses, and how it will always remain a central concept in value investing.

Note: Ezra has just released their 1H FY 2008 results yesterday (April 8, 2008). I will be doing a 3-part review of their financial statements and ppt presentation in my subsequent posts.

Friday, April 04, 2008

Investment Sins Part 4 - Lust

In the fourth installment of the investment sins series (which is taken from the book "The 7 Deadly Sins of Investing" by Maury Fertig), we take a look at Lust. The word lust is defined as "to have a yearning or desire, have a strong and excessive craving". The important words to take note of within the definition are "excessive" and "craving". Lust essentially stems from uncontrolled desire for something which overrides normal judgement and thinking. In relationships, lust has been known to result in cases of marital breakups as third-parties come into the picture. Lust usually has a negative connotation associated with it which implies a loss of control over one's faculties or objectivity; thus succumbing to their object of desire.

So after the English lesson, how does this all tie in with investing ? In investing, lust can manifest itself in various ways. Some examples of different types of lust are provided in Mr. Fertig's book, and I will detail each one briefly with an example:-

1) Holding on to a beloved investment much too long - This is a fairly common phenomenon for many investors and occurs when an investment that used to be a high performer starts to exhibit signs of deterioration. Remember that share prices are correlated to the earnings of a company; thus if a company can manage to grow or maintain earnings consistently into the future, there is no danger of gradual share price erosion. This case arises when one can only see good years ahead for his investment and fails to realize that the company has lost its competitive edge or perhaps its product is now "commoditized". As a result, margins begin to erode and profit begins to decline, leading to a drop in the value of the company. The lustful investor mistakenly believes that Mr. Market is mis-pricing the value of the company and continues to hold on even though it may be clear that fundamentals are decaying. Eventually, the share price will end up as a mere shadow of its former glory and the investor will be sitting on substantial paper losses; his dream and bubble pricked as if a child had pricked a balloon.

2) Becoming infatuated with an investment's surface looks and buying too soon - This is actually also a sign of sloth (not doing enough research) which I shall touch upon in a later part of this investment sins series. When one does not assess the risk/reward ratio of a potential investment and is attracted merely by the "sales talk", then it is also a sign of lust. Lusting after attractive products that is ! Most fund managers and those in the business of promoting alternative investments such as wine investing and land banking will come up with elaborate brochures (wuth large font sizes) as well as a mountain of positive data to support their claims of exceptional returns. It is all part of the sales tactics used by such individuals to generate more revenue and fees for their company. While I am NOT saying that all such investments are bad and that the salespeople are trying to con, one must be ever wary of tactics which may create an image of good returns while masking the true returns for an investment product. Sometimes, people may be lying by not telling the whole truth; or it may be a grey area. As an investor, we should NOT be too turned on by a product which appears to be appealing (and which seems to attract many "prominent" clients) and to compromise on your criteria for investing.

3) Developing an obsession with Plain Jane investments - This essentially means that one can lust after less "risky" investments in money-market funds which typically pay only about 1-2% return per annum; not even enough to cover out high inflation rate of 6.5%. Some people are obsessed with "safety" and refuse to place their money in unit trusts or equity markets for fear of losing everything; they thus become a lustful victim of the fallacy that fixed income securities are always "safer". On the contrary, being paid 1-2% by the bank or fund while inflation is 6.5% means that the real rate of return is a negative 4.5% (at best); thus your money is eroding away even as you feel secure that it is "safe". I have seen this happen with some of my friends and have been advising them to at least consider an index fund which gives market rates of return; instead of leaving their money in a fixed deposit (current rates are about 1.7% for 24 months and 1.9% for 36 months, and your money is locked in).

4) Lusting after gurus or certain fund managers - This is a particularly dangerous form of lust which involves the worship of one or more "gurus" who seem to know all about how markets move and what is best to invest in at any given point in time. There will always be talking heads on television and the news proclaiming that bear markets have arrived, we are in a recession or that commodities will enjoy a 10-year bull run. The lustful investor will latch on to one particular guru whom he/she adulates, and follow his/her recommendations blindly and without thinking. This can result in a lot of bad decisions beause failure to think about your investments usually gets one into big trouble. Thus, do NOT lust after a particular celebtiry (no matter how influential he may be). Instead, use your own logic and objective thinking and avoid those lustful thoughts !

In the next segment on investment sins, I will be touching on Avarice or Greed; one of the most pervasive investment sins ever !

Wednesday, April 02, 2008

First Ship Lease Trust - AGM Highlights

I attended FSL Trust's first AGM for unitholders held at Marina Mandarin Capricorn Ballroom today at 2:30 p.m. There were about 30 or so shareholders and quite a few proxies appointed to vote on behalf of shareholders as well, and the atmosphere was relaxed. The Board of Directors consisted of 5 people, of mention were the CEO Mr. Philip Clausius and the CFO Mr. Cheong Chee Tham whom I had the chance to speak to. From what I gathered, the general mood of the Management was that of optimism and confidence as they knew what they wanted, and were going to go about executing their strategy to ensure yield-accretion for shareholders.

Below are the highlights and snippets from the AGM which I managed to gather (some from memory). Please note that this is NOT a comprehensive list of all that was discussed as there was more than one "camp" of people and many topics and issues were thrown back and forth. I am just summarizing what I can remember and what I feel is more crucial to understanding Management's philosophy for growing the trust and the DPU:-

1) The true underlying economic return on assets acquired is around 7-7.5% (i.e. IRR). This pertains to the higher depreciation charges for FSL's assets as compared to say, a ship owner. FSL uses a more aggressive depreciation policy compared to normal shipping companies and so the depreciation charge will be higher in the initial phase of the ship's lease. However, in time to come, assuming debt amortization takes place, the amount of finance costs will correspondingly decrease and profits will improve as a result. (Note: A shareholder was voicing his concern that net profit after tax was only about 1% of net asset value as at Dec 31, 2007).

2) A question was asked of PT Berlian Laju Tanker (BLT). Apparently BLT had a technical default on one of their debt covenents (unrelated to FSL Trust) and the shareholder was concerned about possible default risk of BLT with regards to the long-term leases signed with FSL Trust. Mr. Clausius replied that BLT was working on a de-leveraging plan and that it is true that there was a technical default; but they had done their due dilligence and BLT were fine before the lease agreement was signed. When asked if there was any recourse for FSL Trust should BLT default on their lease payments, the CEO mentioned that since FSL Trust had legal title to their vessels, they would proceed to re-possess the vessels according to the lease agreement. He also assured that the market value of the vessels is currently higher than its book value, which limits FSL Trust's risk exposure.

3) The BOD was also quizzed on FSL's target capital structure of 1:1 debt/equity. The CEO 's mentioned that it was not attractive to raise equity at 12% yield (FSL Trust's current yield) at the market price of S$1.12. Thus, the trust would have to rely exclusively on debt to acquire ships from ship operators and this debt was "cheap" at 3-month LIBOR + 120 bps. They could essentially borrow more as their Debt/Equity ratio is only 34% currently. There was a US$290 facility ready to be deployed for accretive acquisitions and this would bring the ratio to the eventual 1:1. Of course, the CEO admitted that the aim was to eventually rely on equity to raise funds in future for further acquisitions, and that he believed this could happen when yield compression occurred till yield adjusted to about 7-8%.

4) A point was brought up about the possibility of the market not recognizing the value of FSL Trust, thus all it could do was to just borrow more in order to acquire, which would bring its debt/equity ratio up much higher than the targeted 1:1. The CEO laughed and asked if the market would still accord the same unit price to the trust and let it trade at 16% yield ? He feels it will be a little ridiculous should that happen as the upcoming planned acquisition will increase the DPU per unit hence increase yield. Later on, he did mention other shipping trusts listed in the USA which were trading at yields of about 6-8% on average.

5) The CEO mentioned that shipping was cyclical and that certain classes of vessels were "popular" for certain periods of time; FSL Trust took on different types of vessels in order to diversify their risk and to ensure that they were not at risk of a protracted downturn in for example the dry bulk shipping sector. This is unlike other shipping trusts (e.g. Rickmers) which concentrates on specific types of vessels.

6) When asked about their payout ratio and whether it would still be 100%, Mr. Cheong chipped in and mentioned that the minimum payout ratio was 90%; but the question asked was whether any cash needed to be retained in the trust in order to pay off finance costs (interest on loans) as well as to prepare for the bullet repayment of 2014 when the current loan facility was due for full repayment. Mr. Clausius said that the Trust does not intend to actually pay down that loan in full as he believed in raising more funds along the way through more loans and even through equity. As a result, they would be able to re-finance the loan such that it could be paid down gradually in stages rather than the current arrangement of one bullet repayment. I assumed he meant that negotiations would take place to restructure the loan since it was only 2008 now (there are 6 more years till repayment).

7) Another shareholder asked how the Trust mitigated the risks of default and credit risk when selecting a potential lessee. Mr. Cheong categorically stated that FSL Trust was the only Trust which employed a full time risk assessment officer to assess the credit-worthiness of potential lessees on an ongoing basis. Most of the customers which FSL Trust transacts with need to have a relatively good credit record and also be prominent enough to be considered. FSL focuses more on small to medium sized shipping companies as the giants are all in the container shipping industry. This risk assessment can help to mitigate the risk of default. The worst case scenario (as mentioned earlier) was that the lessee went bankrupt or insolvent and FLS Trust would have to re-possess and re-deploy their vessel(s).

8) When asked about the prospects of the Trust getting good acquisitive deals, Mr. Clausius mentioned that the sub-prime crisis in the USA has tightened credit around the world, and that ship operators are increasingly turning to alternative forms of financing in order to lighten their Balance Sheet. Lease terms negotiated with FSL Trust offer flexibility with early buy-out options on some of the leases, and under lease accounting rules, the lessee can take their vessels off balance-sheet while raising the cash to fund future acquisitions (this is akin to what Swiber and Ezra have done which I have detailed in my earlier posts). But he did caution that there could also be a global recession which could also affect the ship operators and increase the default risk. Thus, the current crisis can be seen as a double-edged sword.

9) A question was also raised on whether there was competition which FSL Trust was up against in terms of getting good deals (i.e. against other shipping trusts or ship financiers) and how they would be able to distinguish themselves. The CEO said that competition was stiff in the time charter industry; but for bareboat chartering the competition was few and fragmented, thus he does not see a problem in competition. He also feels that increasing investor awareness through extensive marketing efforts by FSL Trust has also allowed corporate investors to better appreciate the way a shipping trust functions and how it can add value.

10) The CEO is all of 39 years old and he started the company (FSL Trust Management Pte Ltd) back in 2003. FSL was relocated from New York to Singapore and he said it was not even his initial intention to list the Trust on SGX. When quizzed on why he decided to list in Singapore and not New York where shipping trusts are more recognized, he said that in NYSE it was a case of "here today, forgotten tomorrow" when the next hot thing comes about (he is referring to rotational interest in different asset classes). In Singapore, he feels that shipping trusts are relatively new and that it can command attention due to its business model; and by being mid-cap (market cap of about US$500 million) it could also attract fund attention. I feel that his point was that by listing over here, he could capture and retain more focused attention on the Trust as Singapore had a smaller market, rather than listing on NYSE where the action was frantic and fast-paced (personal opinion).

11) He also mentioned that the older ships get higher leases but the problem was that older assets had the chance of going "out of fashion". If the tide should turn against older assets in the shipping industry, then the market value of those assets could plummet suddenly. He thus emphasized that it was important for a shipping company to have a very new and modern fleet so that even if the industry went into a slump, the company could still rely on their new vessels to generate some form of income. I was relating this statement to Ezra and Swiber; both companies are constantly ensuring that their fleet is new and up-to-date, unlike some companies such as CH Offshore (which is selling off older vessels to replace them with newer ones; albeit slowly) and Taiwan-based Courage Marine (which owns a fleet of old dry bulk carrier vessels).

12) A shareholder also brought up the point about the lessee not taking care of the vessel as it did not technically belong to them; thus in the last 2 years they would cut corners and cause the vessel to be poorly maintained. Mr. Clausius assured that there was a 5-year technical inspection (Mr. Cheong added that this was compulsory) for all vessels and that the lessee would have to pass this inspection before they could return the vessel to FSL Trust at the end of the lease period. Thus, this minimized any physical wear and tear or under-maintenance of the vessels (recall that under bareboat chartering, the lessee is responsible for the maintenance of the vessel at their own expense).

13) Mr. Clausius did not, however, assure that yield compression would SURELY take place; after all he emphasized that the market would determine the yield of FSL Trust and that he HOPED that yield compression would eventually benefit all shareholders, including the IPO shareholders who were "below-water" now. But he did reiterate that the 3 cornerstone shareholders had NOT sold out their stake. One had increased their stake a little, another had sold a little while the third had maintained his stake. Together with FSL Trust Management, they owned a total of 54% (30%+24%) of FSL Trust and the major shareholders were happy with the DPU thus far and see more potential ahead for DPU accretion.

14) Mr. Clausius had a possible explanation for the unattractiveness of FSL Trust at the present moment. The DPU is given out in USD currency and the USD is currently at its weakest against the SGD; this means that Singapore shareholders would receive a correspondingly lower SGD DPU as compared to their USA counterparts who were not affected as they received their DPU in USD. However, he said that even if the USD should weaken further, the current yield was still very attractive by any standard and the absolute DPU would increase further should the Trust make more acquisitions.

Candour and Disposition

The general mood that I could detect from the CEO was that he was candid and willing to take questions from all shareholders; he was also not evasive and did not deflect questions away. But he was cautious about being too optimistic about the Trust's prospects, as the unit price has thus far not done well. He was confident about the Trust's business model and also in his Management Team which had extensive experience and knowledge in structuring operating leases to maximise value for shareholders. This confidence shone through when he spoke to many of the unit-holders. He was also jovial and relaxed and was willing to stay for 45 minutes after the official business ended to take questions from unit-holders. Mr. Cheong was also very chatty and was explaining the business model of the Trust and various technical aspects to another group of unit-holders, but I did not stay to listen.

Please note that the FSL Trust website has mentioned that the forecast DPU for FY 2008 is expected to be 10.432 US Cents per unit. This translates to about 2.61 US cents per share, or about 3.57 Singapore cents using a rate of 1.37 to the USD. This would mean a potential DPU of 14.30 Singapore cents for FY 2008; implying a forecast dividend yield of 12.4% at today's closing price of S$1.15 per unit.

Overall, it was a very good experience to attend the AGM and to speak to Management about various aspects of FSL Trust. It remains to be seen if Management can successfully execute their long-term growth strategy for the Trust but thus far they have done better than the forecast DPU for FY 2007; so this could be an early indication of their ability to deliver.

I will be providing more updates of FSL Trust as they come around, but please feel free to contribute comments on the AGM and share information too.