End-July 2008 Portfolio Summary and Review
The second half of July 2008 was much quieter, if you compare it to the flurry of activity which characterized the first half of July 2008. There were no significant updates from the companies I own and only Suntec REIT and FSL Trust released their results. DPU, fortunately, was higher than expected and continued to provide me with high yield amid the current high inflationary conditions. China Fishery is expected to release their 1H 2008 results on August 14, Swiber’s will be on August 13, while Boustead will be releasing their maiden quarterly results (for 1Q 2009) some time in late August 2008.
The USA continued to suffer bouts of crisis of confidence, and Merril Lynch was the next “victim” of the credit crunch as it urgently needed to shore up its Balance Sheet as a result of massive write downs. As at time of writing, it is not known if there are further “skeletons in the closet” for other major banks, as it seems they keep getting pummeled one after another. Sometimes I wonder who or what will deliver the knockout blow ! Many smaller banks are also quietly folding in the fallout of the sub-prime crisis, in what is reminiscent of the Savings and Loans Crisis of the 1980’s. Home prices are falling about 16% in what is a continued drag on the USA housing market.
Of course, all this is very good news for investors who wish to buy cheaply. Just slightly more than a year ago, it was all good and positive news headlines in the paper but now it’s nothing but “doom and gloom”. Such conditions are conducive for investing as valuations will be reaching trough levels (assuming they have not) and one can then cherry pick at his own time.
Below is the summary of my investments and related news as at July 31, 2008 (STI at 2,929.65 points).:-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.00, Gain 210%, YTD Loss 39.8%. There was no news for Ezra for the half-month ended July 31, 2008.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.33, Gain 80%, YTD Loss 3.3%. Boustead held its AGM on July 30, 2008 and approved all resolutions in its AGM and EGM circular. The shares will trade cum-entitlement to the share split until ex-entitlement date of August 18, 2008. Ex-dividend date is August 4, 2008 for the 5 cents/share final dividend and 2 cents/share special dividend.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $1.93, Gain 91.1%, YTD Loss 43.7%. Swiber announced on July 16, 2008 that their Dalihao vessel had successfully wrapped up the offshore installation mission for Brunei Shell without incident and on time (there was no mention of whether they were cost overruns though). Dalihao’s next project is with ConocoPhillips in Indonesia. Subsequently on July 25, 2008, Swiber announced the appointment of 2 new CEOs to head the Offshore Construction Services and the Offshore Support Services divisions. They are Mr. Nitish Gupta (former COO of Swiber) and Mr. Darren Yeo (current Executive Director of Swiber). With this streamlining, the company can be more focused on building business in its three core divisions. Mr. Raymond Goh will remain as overall Chairman of the Swiber Group.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.55, Gain 39.6%, YTD Loss 9.4%. Suntec REIT released their results on July 30, 2008 and declared a DPU of 2.793 cents per share. This was significantly better than expected and represents an annualized yield of about 10% based on my purchase price of S$1.11.
5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007 and July 3, 2008) - Buy Price $0.5475, Market Price $0.445, Loss 18.7%, YTD Loss 29.4%. The AGM for Pacific Andes was held on July 30, 2008, and I will post my view on the AGM as well as some updates from the Chairman Mr. Ng Joo Siang. I will also be commenting more on the scrip dividend scheme in a subsequent post, for those who are still unsure about it.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.30, Loss 13.3%, YTD Loss 29.7%. There was no news from China Fishery for the half-month ended July 31, 2008.
7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.21, Gain 9.5%. FSL Trust released their results on July 22, 2008 and declared a DPU of 2.80 US cents per unit for the period ending 2Q 2008. This was above their previously announced projected DPU of 2.77 US cents per share. At my purchase price of S$1.105, this represents a yield of 13.6% using an exchange rate of SGD 1.36 to the US dollar. The counter has gone ex-dividend and the exchange rate will be fixed closer to the payout date of August 26, 2008.
The gain on my current portfolio is 28.5% from a cost of S$89.2K as at July 31, 2008. The market value of my portfolio is S$114.6K. Realized gains have increased to about S$7.0K as a result of the dividend from FSL Trust. Boustead, Suntec REIT and Pacific Andes will also go ex-dividend soon, providing me with some cash inflows.
Comparison against STI
Using my new benchmarking technique:-
The FTSE STI had declined by 15.9% since the start of 2008. My portfolio (without FSL Trust and the new PAH purchase) has to date declined 30%. Therefore, I have under-performed the STI by 14.1 percentage points.
FSL Trust has gained 9.5% thus far from my date of purchase while the benchmark STI has fallen 9.0% (from my date of purchase Jan 14, 2008 when STI was 3,218.14); I am happy to report that FSL Trust has managed to out-perform the index for FY 2008 thus far.
The new Pacific Andes tranche which was purchased at 44 cents per share on July 3, 2008 will be analyzed separately from the rest of the portfolio. STI as at July 3 was 2,880.45 and STI today is 2,929.65, thus this represents a 1.71% gain. Current share price of Pacific Andes is 44.5 cents, representing a gain of 1.14%. Hence, my purchase of Pacific Andes has lagged the index by 0.57 percentage points.
My next portfolio review will be on Friday, August 15, 2008 after market close.
Thursday, July 31, 2008
End-July 2008 Portfolio Summary and Review
Sunday, July 27, 2008
I've recently begun reading more about Personal Finance, thanks in part to Panzer's blog and also my increasing thirst for knowledge about how to become financial independent and to escape the rat race. Interestingly, as I read more and borrow books on personal finance, my desire to break free from the rat race becomes more evident and more pronounced. After all, the idea of financial freedom is to be able to do what you love without being burdened by the idea that you NEED to work. In other words, you can literally fire your boss and live off your passive income until a ripe old age - assuming your lifestyle does not change.
But the crux of this post is that people's lifestyles DO change, and Parkinson's Law is a little known pehnomenon which helps to explain this. The original Parkinson's Law dealt with work and time with the saying: "Work always expands to fill up all available time". This simply means that the less work you have, the more you seem to wrap your time around the amount of work given to you; while if you are given more work, it simply fills up all the time you currently have, making it seem as though you never have any "free" time at work ! This law can also be applied to personal finance by re-phrasing it as such: "Expenses rise to fill up all available income". What this means is that as one gets wealthier, one's lifestyle also changes to accommodate the rise in income, such that one's saving ability is the same as before the increase in income.
This phenomenon is extremely pervasive and prevalent in our Singapore society, and I see this being manifested in many people (friends included) from all walks of life. As one's salary increases (over the years through job hopping, promotions or increments), one also tends to scale up one's lifestyle and spend more. In other words, a person earning S$2K a month has a lifestyle which accommodates his S$2K salary; while a person earning S$8K a month will adjust his lifestyle upwards (more branded goods, more expensive restaurants) such that he will be spending the same proportion of his income (as a %) as the guy earning S$2K (heck, sometimes the proportion is even more !). This makes it very hard for the average person to build wealth because he is consistently and persistently spending away his excess income.
This effect is psychological - many people are of the idea that they "deserve" a better lifestyle since they are now earning more, so why should they "deprive" themselves of the comforts and luxuries of life ? While this argument is sound, many of the youth these days tend to over-indulge in these "pleasures" to the extent that it becomes a NEED for them to have certain luxuries (rather than being just a WANT). When one confuses NEEDS with WANTS, then their spending is apt to go haywire and they will be unable to save enough money for investment or retirement. For example, an iPod is a WANT and an iPhone is a WANT but many young adults these days cannot live without these devices. Similarly, a car is also a WANT for many people (excluding those in sales line or with infirmed elderly or very young children) but many indulge in the almost zero downpayment requirement and get one as soon as they earn a salary.
Hence, this downward spiral will start to occur when one falls victim to Parkinson's Law. I have heard of couples each earning S$6K a month who buy a condo worth S$900K or close to a S$1 million and a car as well. They take out 30-year mortgages and work their butts off to pay their liabilities; not realizing that such leverage is risky in that one small incident (e.g. a layoff or retrenchment) can cause much financial distress. This leads to the saying that "it's not how much you make, it's how much you can keep" which matters. A person can be earning S$10K and saving just S$500 while another earning S$3K could be saving as much as S$1K a month. Some people who earn a lot also may not have safety nets such as insurance and/or passive investments such that should they lose their job, they have zero sources of income to fall back on. With a high liability lifestyle to fund, this would make the situation even more dire. The buzzword these days is "quality of life" which basically translates into spending a lot of your income just to keep up with the Lims and Tans, the way I see it.
So the way to beat Parkinson's Law is to be acutely aware of it and its insidious effects. There is nothing to say you HAVE to scale up your standard (and cost) of living once you start earning more or getting a promotion. If one consciously controls his urge to spend more and instead falls back to his usual routine, then one can still feel happy because most WANTS are fleeting and the pleasure that they give is momentary. For myself, I have been consciously tracking my spending (cash and credit card) monthly over a couple of years to ensure I do not start spending more even though my income has increased over this time period. In addition, I also measure myself against my total net worth (assets minus liabilities) instead of using total income so that I can see a positive relationship over time (increasing net worth). This motivates me to build more wealth by reducing my liabililies gradually and also growing my sources of active and passive income.
Tuesday, July 22, 2008
This final section discusses the prospects of Boustead’s business units and also the plans put in place by Management to grow each division. A little of the macro-environment will be discussed as well as FF Wong’s view of how the company, as a whole, will explore new opportunities to further enhance shareholder value. This section was compiled from Boustead’s recent audiocast, FF Wong’s interview with Pulses Magazine in June 2008 as well as Boustead’s recent press releases and announcements.
Prospects and Plans for each Business Unit
This division is expected to perform better for FY 2009 as the demand for Boustead’s services (waste-to-energy conversion and its boiler technology) continue to remain firm. The solid waste energy division is expected to contribute to a better performance after its re-structuring in FY 2008. According to the company’s forward statement, they have received numerous enquiries and are optimistic of converting a significant portion to contract awards for FY 2009. Soaring energy prices (oil recently hit a new record high close to US$147 per barrel as at time of writing) and demand for alternatives will ensure growing demand for Boustead’s services; and the Boustead boiler commands a premium as the company is renowned for its boiler technology and has an edge over competitors who may have bid lower but do not have the expertise.
FF Wong however, mentions that oil majors are delaying projects due to rising material costs and higher labour costs (resulting in labour shortages), so many projects are on hold at the moment and he is frustrated that deals which are being negotiated cannot be concluded. It will be possible, however, to pass the additional costs down to the customer level as inflation is driving worldwide prices higher. Hence, I prefer to remain conservative on the growth of this division and project only a marginal improvement of 5-10% for this division for FY 2009.
Water and Wastewater Engineering
The most notable recent win for this division was the announcement, on June 30, 2008, that Boustead had clinched a S$175 million wastewater project for the Libyan Township (which Boustead Projects is also working on). Boustead will take a 65% stake in this project and it is Salcon’s biggest contract win to date (at about S$113.75 million over 3 years). FF Wong had earlier mentioned a possible contract win in the Middle East and this has come to pass. Salcon is also working on a new cutting-edge technology using a commercial scale textile pilot plant in China, and have sunk in considerable amounts of cash into R&D. Hopefully, if this new technology is successfully implemented, it will give Salcon the competitive edge which has been so elusive all this while.
That said, FF Wong did reiterate that this division suffers from low barriers to entry and that there are many players; hence the poor margins. Lots of money may have to be spent before any decent returns come out of this division, and cost overruns tend to occur as a result of unforeseen circumstances. Closing down the Salcon UK office also took a toll on the division and further restructuring and streamlining is necessary before the division can see the light of day. I recall someone mentioning in a forum in 2006 about Salcon doing an IPO – I think those days are still very far away as a company will need 3 consecutive years of profits before it can even consider going for a listing. Now, the most important thing is to cut costs and work towards turning the division around. I project a 40-50% increase in revenue, but profitability is hard to forecast as per the reasons mentioned above.
Real Estate Solutions
Boustead’s order book has been growing steadily for this division, which includes Boustead Projects (specialized buildings and facilities) as well as Boustead Infrastructure (new Township). The recently announced slew of contracts is a good gauge of Boustead Project’s competitive strength and FF Wong had mentioned that in future, Boustead may tweak its business model by looking to purchase land stakes in countries such as Vietnam and China, which may present significant upside.
With the introduction of the Green Mark Scheme by the Singapore Government, Boustead is actively training its staff for this and will remain up to date when bidding for future projects. The key is to remain competitive and to innovate in order to stay ahead and to clinch future contracts. FF Wong also does not rule out potential acquisitions using Boustead’s cash hoard which will boost the recurring income for the Group, as a weakness with their current business model is that they rely heavily on project-based revenues.
With the increasing need for governments and agencies for timely and updated information on geographical formations and maps, this division will show steady growth in years to come. FF Wong mentioned in the audiocast that they are working with PUB to try to come up with a consortium to market Boustead’s experience in the Middle East using this technology, but that will probably take a few years to bear fruit. He also dismisses the idea of selling the division since growth is pretty low (5-10%) because it is a good cash cow (unless someone offers an irresistible price !). Boustead is now the fourth biggest supplier of geo-spatial services in the world and over 95% of their revenues come from the government sector. The division will continue to explore new technologies to enhance its service offering, by developing them in collaboration with universities around the world or buying their licences from the West.
Conclusion and Summary
Boustead currently has a healthy cash stash to take advantage of potentially earnings accretive acquisitions during the sub-prime turmoil. FF Wong also mentions being adaptable and flexible in order to stay ahead and relevant in the current fast-changing society. Boustead has already started making inroads into Vietnam, China, the Philippines and Indonesia while the Middle East is set to become a major market for its infrastructure and engineering services. FF Wong’s vision is to grow the company steadily over the next 20 years till it becomes a regional MNC. With the man’s vision, strategic focus and track record thus far, there is a very high probability that he can pull this off successfully.
Thursday, July 17, 2008
Segmental and Divisional Review and Analysis
The table below shows the breakdown of revenues by business segment, for FY 2008 versus FY 2007.
Engineering services formed the bulk of revenues, contributing 83.6% of total revenues. This was not much different from FY 2007 where it took up 81.2% of total revenues. However, the Engineering division saw growth of 31.2% in total revenue, and this is considered decent. Geo-Spatial technology, which involves selling technology systems which optimise resource-finding and are mainly used by government agencies, saw decent revenue growth of 8.7%. This is a cash cow division which brings in a lot of cash but has low growth prospects. I suspect Boustead is using this division to generate the cash to fund the growth of the Engineering Division. As mentioned in the operational review, the Australian business unit saw double-digit growth which was offset by the flat performance from the Asian business units.
A further breakdown of Engineering Services reveals some very interesting insights. The rest of the explanations into the increases can be found in the company’s financial statements and press release. I would like to highlight a few things which may not have been mentioned:-
The growth in Energy-Related Engineering (BIH and C&E) was slower than expected due to the integration of the recently purchased Australian business with the existing Indonesian Business. This move stunted the short-term performance of Boustead Maxitherm but enhances the long-term competitive edge and revenue contribution from this division, and can be seen as a positive move for the future. As a result, revenue contribution (to total engineering services) from this division dropped from 46.8% in FY 2007 to 37.4% in FY 2008.
Real estate solutions took over as the dominant division for FY 2008, contributing more than half (52.8%) of revenues for the Engineering Division compared to just 44.7% in FY 2007. Stripping out the sale of 2 industrial leasehold properties in FY 2008, comparative revenues actually increased 58.9% (according to company announcement) rather than just the 54.9% featured in the table. With the recent slew of contracts clinched by Boustead Projects, including the Libyan Township project, FY 2009 should set to be an even better year for this division (more on this in Part 3).
The disappointment is in Salcon, representing the water and wastewater division. Although revenues grew 50.8% to S$35.9 million, it was because of the low base, and FF Wong mentioned that the division had incurred a loss of S$14.8 million for FY 2008 (from audiocast transcript) compared to a loss of S$7.7 million for FY 2007. As explained by FF Wong in the audiocast, this was because of two unfortunate events which caused the division to slip into losses when it was supposed to have turned around. This was the only blemish in an otherwise excellent year for Boustead in terms of growing all its business units. Part 3 will touch on Salcon’s plans and also cover a little on the Libyan Wastewater contract offered to Boustead for FY 2009.
Tuesday, July 15, 2008
The first half of July 2008 was relatively exciting, as there were several key business announcements and updates from the companies which I own, culminating into a busy half-month in terms of tracking and following my companies’ progress. Fortunately, most of the news reported has been positive (not always the case, when you consider that a fire broke out at Kreuz Shipyard just last month), and encourages me to know that despite the global downturn and the sub-prime problems, the companies which I own are still doing fine.
The most notable news from Wall Street and USA is the collapse of Indymac following a bank run, which basically translates into a crisis of confidence that the USA’s second-largest bank would be unable to honour deposits. The US Government had to provide financial support to the bank and it will now operate as Indymac Federal Bank. Separately, Fannie Mae and Freddie Mac, two of the largest mortgage institutions in the USA, suffered a massive selldown in the value of their shares after a similar crisis of confidence erupted that the two companies were technically insolvent and would be unable to honour their debt obligations. As at the time of writing, Congress had already come up with a plan to bolster the capital of the two companies if need be and they have prepared a rescue package to restore confidence in the financial sector (similar to the Bear Stearns issue back in March 2008). The sell-off across all markets has made valuations a lot more attractive and hopefully the good news will continue in the coming months as equities become more affordable.
The reporting season for 1H FY 2008 for my companies will begin very soon, not counting Ezra which reported its 3Q 2008 recently (and will be reviewed in a separate future post). FSL Trust will report results on July 22, 2008 while Suntec REIT usually releases its 3Q 2008 results close to end-July 2008. Following this would be Swiber 1H FY 2008 (mid-August), China Fishery 1H FY 2008 (end-Aug) and Pacific Andes 1Q FY 2009 (end-Aug).
Below is the summary of my investments and related news as at July 15, 2008 (STI at 2,830.75 points).:-
1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.27, Gain 250%, YTD Loss 31.9%. Ezra released their 3Q FY 2008 results on July 10, 2008. Net profit was up 78% while revenues were up 85% for 3Q 2008, as a result of the delivery of vessels during FY 2008. Gross margins were down somewhat due to the delays in delivery of other vessels and so Ezra had to resort to third-party charter. In addition, construction projects also traditionally have lower margins and so dragged down the gross margin. I will comment more on their results in a separate future post.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.46, Gain 90%, YTD Gain 2.1%. Boustead had a busy half month as it announced a slew of new contracts. First on the list was Salcon’s largest water contract to date announced on June 30, 2008, worth S$175 million in which Salcon has a 65% stake. Next was a S$37 million contract which Boustead Projects won on July 7, 2008 for building the Singapore Aero Engine Services Facility. Just two days later, Boustead Projects announced a S$67 million contract for the construction of a semi-conductor equipment manufacturing facility. As a result of these contracts, Boustead’s order book is at a record high and there is much anticipation for more contracts to be clinched as the Energy-Related Engineering Division has yet to announce any wins. Boustead’s AGM is on July 30 at 10:00 a.m. and consequently, they will be holding an EGM to approve the share split of 1:1 and also to approve the resolution allowing for the company to buy-back its own shares. Their Annual Report for FY 2008 mentions that the company will begin quarterly reporting starting from FY 2009, with the first quarter results due out in late August 2008. The company cautions, however, that due to the nature of some infrastructural projects, revenues and profits are likely to be lumpy (similar to a property development company). They therefore advise investors to use yearly figures for comparison rather than place too much reliance on quarterly numbers.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.14, Gain 111.9%, YTD Loss 37.6%. Swiber announced, on July 14, 2008, that they had clinched a “substantial” LOI in Vietnam (a market they have been targeting for some time) through their joint venture partner Vietsovpetro since September 2007. The contract value was not specifically stated (probably due to confidentiality reasons) but the company did mention that it will boost their order book past the US$476 million for May 2008. As part of the contract, Swiber will provide project management, engineering, transportation, installation and PLEM, including tie-in and pre-commissioning. The contract is expected to commence in 1Q FY 2009 and be completed by 2Q FY 2009.
4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.40, Gain 26.1%, YTD Loss 18.1%. There was no news for the company for 1H July 2008. Results for 3Q 2008 should be out by end-July 2008, with dividend to be paid usually by end-August 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 and July 3, 2008) - Buy Price $0.5475, Market Price $0.44, Loss 19.6%, YTD Loss 30.2%. Details of the scrip dividend scheme have been released in a circular, and I had commented on this in detail in a previous post. The AGM of the company will be held at Raffles Hotel at around 3 p.m. o July 30, 2008.
6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.40, Loss 6.7%, YTD Loss 24.3%. China Fishery announced on July 7, 2008, that it had acquired additional 3 purse seine vessels from a fishing company in Peru for a total consideration of US$11.7 million. This will provide the company with an additional fish hold capacity of 550 Square Metres, bringing their total fish hold capacity to 9,945 square metres or 5.6% of the Peruvian Industry total. The company also formally announced the introduction of the ITQ system in Peru, which will probably be implemented within the next 2 fishing seasons.
7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.25, Gain 13.1%. FSL Trust will release their 2Q 2008 results and DPU on July 22, 2008. It is expected that they will pay US 2.77 cents per unit as per their previous guidance. Guidance for 3Q 2008 is currently US 3.05 cents per unit, pending the financing for the third Yang Ming vessel which may raise the DPU about US 0.02 cents.
The gain on my current portfolio is 35.8% from a new cost of S$89.2K as at July 15, 2008. The market value of my portfolio is S$121.2K. Realized gains remain at S$6.2K until the ex-dividend of Boustead on August 4.
Comparison against STI
Using my new benchmarking technique:-
The FTSE STI had declined by 18.7% since the start of 2008. My portfolio (without FSL Trust and the new PAH purchase) has to date declined 25.1%. Therefore, I have under-performed the STI by 6.4 percentage points.
FSL Trust has gained 13.1% thus far from my date of purchase while the benchmark STI has fallen 12.0% (from my date of purchase Jan 14, 2008 when STI was 3,218.14); I am happy to report that FSL Trust has managed to out-perform the index for FY 2008 thus far.
The new Pacific Andes tranche which was purchased at 44 cents per share on July 3, 2008 will be analyzed separate from the rest of the portfolio. STI as at July 3 was 2,880.45 and STI today is 2,830.75, thus this represents a 1.73% loss. Current share price of Pacific Andes is 44 cents, representing no gain or loss. Hence, my purchase of Pacific Andes has managed to bear the index by 1.73 percentage points.
My next portfolio review will be on Thursday, July 31, 2008 after market close.
Saturday, July 12, 2008
I guess this was long overdue, but a review and analysis of Boustead should not be done in a hurry anyway. The company is slowly and steadily growing its business and its order book, and the CEO has expressed optimism recently that a turnaround can be expected in the water and wastewater division. I will be analysing the P&L, Balance Sheet, Cash Flow Statement as well as commenting on Boustead’s 3 main divisions (not counting ESRI which does geo-spatial – I will touch briefly on this) for Part 1. Part 2 will analyze and comment on the segmental business units for Boustead and their performance and prospects. Part 3 will touch on the future – how Boustead has progressed thus far in FY 2009, the direction each division is taking, as well as future endeavours that the company is planning to make (from FF Wong’s interview in Pulses magazine as well as his audiocast replies).
Profit and Loss Review
If one takes a close look at the Income Statement, revenues for FY 2008 had increased 27.5% compared to FY 2007, while COGS had increased by 33.5%. As a result, gross margin dropped from 34.1% in FY 2007 to 31.0% in FY 2008. This can probably be attributed to the slew of constructions projects which Boustead Projects had taken up, in which the cost of materials had been rising in the past year. Some of these costs had not been hedged and the company would suffer some margin erosion as a result. Real estate solutions revenue for FY 2008 was S$193.3 million, making up about 44.1% of total revenues for FY 2008, hence the impact of the margin erosion would be substantial. Moving forward, the Company has mentioned that it will use cost-plus pricing for its Libyan Township project, so as to mitigate the effects of rising costs.
However, the company has managed to actually reduce its selling and distribution, admin as well as finance costs even though revenues had increased. It is interesting to note this and is a clear indication that economies of scale are present to be able to allow the company to grow its top line without consequently increasing its expenses. Many companies show impressive top line growth of 80-100% only to see its expenses balloon about 300-400%, effectively negating the increase in revenues. Hence, as a result of this, Boustead’s net profit is up 45.7% to S$58 million, which exceeds the increase in revenues of 27.5%. Net margin increased to 13.2% from 11.6% in prior financial year.
Balance Sheet Review
Boustead’s Balance Sheet is one of the “cleaner” ones I have seen during my investing lifetime, as compared to my other companies as well. Most companies would carry significant amounts of debt, receivables or inventory in their Balance Sheet, which creates risk of uncollectibility (receivables), obsolescence (inventory) and high finance costs (debt). Boustead avoids taking on excessive debt and instead relies on short term loans (just S$5.8 million) for its contracts. In fact, long-term debt was paid off in FY 2008 compared to FY 2007, and total debt decreased from about S$20.4 million to just S$14.5 million. The company’s receivables also did not increase in tandem with revenues, but was only a 13.1% increase. Its inventories are kept low (S$8.8 million) and most of its current assets consist of properties held for sale as well as costs capitalized from uncompleted contracts (to be billed later on as progress billings). Hence, I would say the Balance Sheet is very “clean”. Current ratio had dropped slightly from 1.83 in FY 2007 to 1.67 in FY 2008, mainly due to an increase of 51.5% in trade and other payables.
Cash Flow Statement Review
It is very clear from the cash flow statement that Boustead generates a lot of cash from operating activities, as net cash from operations amounted to S$81.4 million, an increase of 70.7% from FY 2007’s net cash inflow of S$47.7 million. In a further testament to Management’s move to enhance shareholder value, cash flows were used to acquire shares from minority shareholders (S$9.6 million), which consists of acquiring the remaining 10% interest in Boustead International Heaters on June 20, 2007. Purchases were also made of fixed assets and quoted equities (available for sale investments) amounting to a total of about S$12.5 million, while the disposal of a property (warehousing facility at 40 Changi North Crescent) yielded a gain on disposal of about S$6.4 million (recognized in Income Statement) and cash of S$10.2 million. Overall, net cash outflows from investing activities amounted to S$10.1 million.
Clearly obvious too, is Boustead’s ability to fund their contracts and projects from operational cash flows, as the cash flows from financing activities do NOT include taking up bank loans or issuance of any form of debt securities. Neither does it entail the issuance of any equities or rights, which is admirable indeed. Many businesses (including those which I own) need to grow through debt and equity issuances in order to fund purchases of fixed assets which then help to generate recurring revenues, but Boustead is able to carry on growing its business purely on cash flows alone. During FY 2008, they paid down some long-term bank loans of S$8.3 million and also paid dividends to minority shareholders. The bulk of cash outflows actually came from dividends paid to majority shareholders of S$17.1 million.
Overall, the company is in a very strong cash position with a cash hoard of S$163.1 million, which the CEO had mentioned will be used to acquire businesses which generate a sustainable recurring source of revenue.
Part 2 will continue by reviewing each of Boustead’s divisions and commenting on their performance.
Wednesday, July 09, 2008
The circular for the proposed scrip dividend scheme implemented by Pacific Andes (PAH) had just arrived yesterday, and I spent some time reading it and digesting the facts; and some more time after that lying in bed thinking about the ramifications, possible effects and choice to be made. Suffice to say that this scheme is new to me as well as I had never invested in a company which came up with a scrip dividend scheme before, and I am now analyzing this scheme using my own understanding of how it works (as described in the circular) as well as my own personal interpretation of the merits and demerits of this scheme.
First of all, some of the salient points in this scheme should be mentioned:-
a) The scrip dividend scheme is optional. This means that shareholders can opt for the cash dividend or for the scrips, depending on their preference. They can also issue a standing order for all future dividends to be paid out as scrips, which can be terminated at any time in writing should the shareholder wish to revert back to receiving the dividend in cash.
b) You CANNOT elect to opt for only part of your holdings to be paid in cash, with the rest in scrip. This means that you either choose for ALL of your shareholders (as at books closure date) to be paid fully in cash or all in scrip (additional shares of the company). Unless one receives more than one Notice of Election (NE), this is not possible and anyway it would be an administrative nightmare should the company allow for this.
c) The computation for the number of scrips issued is based on the formula X = (A x B) / C, where X is the number of scrips issued, A is the shareholding as at books closure date, B is the dividend per share declared (net of corporate income tax) and C is the issued price of each scrip share. The interesting part is how C is computed, as A and B are known variables and are objective facts. The price per scrip is taken as the arithmetic average of the closing market price of PAH for the last twenty (20) market trading days prior to books closure date, with a maximum allowed discount of 10% to this price.
a. Note the word arithmetic is used and not weighted average, thus this means the simple average of all the closing prices taken from 20 days BEFORE the books closure date (i.e. not inclusive of the actual day of books closure);
b. 20 days is used as a benchmark seemingly to even out any fluctuations in the share price which may result from speculation or panic selling, and I think it is intended to assuage investors that they are getting a fair price based on market conditions;
c. A maximum discount of 10% is allowed to this average price, but is up to the sole discretion of the directors, which means this is the only wild card in the equation which cannot be determined by shareholders until AFTER books closure date. Thus, the discount can be anything from 2% to 10%, but of course everyone who chooses the scrip option hopes for 10% so that they can get the maximum number of shares for a lower price.
The analysis of these facts yields the following conclusions:-
i) By choosing the cash dividend instead of the scrip, one must believe that one is able to grow the amount of money which is received at a higher rate of return than that which PAH can provide. This is because choosing the scrip is actually a form of reinvestment of dividends, and is similar to what Berkshire Hathaway does when it chooses NOT to pay dividends but instead reinvests them for higher compounded annual growth. If one believes that one’s ability to grow his/her own money is better than that of the company, then one should choose to take the cash and reject the scrip.
ii) Choosing the scrip dividend has advantages to the company itself as well, as they would be able to conserve cash for reinvestment into the business and also grow their equity base at the same time. The amount of dilution to earnings will be very minimal and immaterial, and I think PAH’s intention to declare this scrip dividend was precisely for this reason – they are hoping more shareholders choose scrip over cash so that the company can conserve cash for expansion.
iii) Shareholders should also note that should they choose NOT to accept the scrip dividend, they will suffer mild dilution as the equity base of the company will grow but their shareholdings will remain the same. Thus, the pie will grow larger but your share of the pie (in percentage terms) will be reduced. However, the effect is not very pronounced and can also be considered immaterial.
iv) The choice will also depend on whether the scrip is being offered at a price which is attractive relative to one’s own cost of investment. I will use a hypothetical example to illustrate my point. Assuming Mr. T has 10,000 shares originally purchased at 60 cents per share. The arithmetic average of the closing price of the last 20 market trading days is about 48 cents per share (as at today). Hence, assuming a discount of 5% (to be prudent), this works out to be 45.6 cents per share. Mr. T would then receive a total of 453 scrip shares based on the final dividend of 2.07 cents per share for FY 2008. Thus, his total cost would now be S$6,206.57 on a base of 10,453 shares, which means his new average cost per share will be reduced from 60 cents to 59.38 cents. This simple example shows that this is one good method for averaging one’s cost assuming the final scrip dividend price is lower than one’s original buy price. One more additional plus point is that such scrip dividends do not incur brokerage costs or commissions and are free of transaction costs.
v) One negative aspect of this exercise is that one would almost surely end up with odd lots (i.e. shares which are not rounded to the nearest thousand which are traded as board lots on the SGX). This means that disposing of the additional scrip shares may prove a problem as one has to sell it in the odd lot market, which is generally more illiquid and has wider bid-ask spreads. However, if one adopts the perspective of a value investor and is willing to hold on to their additional scrip as the company’s value increases, then he will eventually reap the fruits of his patience.
Based on the analysis above, as well as my personal perspectives of the company and its growth potential, I will prefer to opt for scrip dividend. It allows me to increase my stake further to participate in the growth of the company, allows the company to conserve cash, allows me to average down my current cost and also prevents me from being diluted when others exercise their choice for scrip dividend.
Saturday, July 05, 2008
On July 3, 2008, I increased my stake in Pacific Andes at an attractive price of 44 cents per share, thereby taking advantage of Mr. Market's manic and depressive mood swings. Below are a list of reasons (including some risk factors outlined) which underlie my decision to purchase more of this company. This move was a calculated and well-thought out decision and was not made on the spur of the moment as I had been studying and reading up on the company and industry since my first purchase, and have been waiting for Mr. Market to sell to me at an attractive valuation. Please feel free to criticize or discuss the reasons below:-
1) Pacific Andes is in an industry which has high barriers to entry. Only a few large players have access to fishery resources and many players are limited by the high capex which is required to operate a fishing SCM system and fishmeal plants. Smaller players only own a few vessles and cannot achieve the economies of scale which will make their operations more efficient; thus they risk being bought out in an industry consolidation (which has been occurring during the last few years). PAH also owns 64.1% of CFG which is growing its business with respect to its trawling operations and has expanded its activities and fleet through their 3rd and 4th VOA. CFG has plans to grow its revenues and bottom line which will enhance the earnings flowing to PAH.
2) Dividend yield is attractive at my purchase price of 44 cents per share as the final dividend declared is 2.07 cents per share. This translates into a yield of 4.7% which is 5.3 times better than the prevailing interest rate offered by Maybank’s iSavvy account (0.88%) where I am stashing my opportunity fund.
3) Peru had recently, on June 28, 2008, introduced the ITQ (Individual Transferable Quota) system, and this will be applicable for the next 2 fishing seasons once all the applicable regulations and legislation are passed through. The benefits of this system are as such:
a] Ensuring the long-term sustainability of fish sources and preservation of the environment – this move will prevent over-fishing and is good for the long-term future of the industry and for all players within the industry;
b] Austevoll Seafood ASA and Copeinca have both commented on the ITQ as opposed to the old method using the “Olympic” system. Austevoll says that this will ensure a move away from an “expensive” way of harvesting to one which is more focused and will reap economies of scale and improvements in the quality of raw materials and finished products. This would translate into higher prices for the industry overall as higher prices accompany higher quality. Copeinca has also commented that it envisions a 30-40% increase in EBITDA as a result of greater efficiencies in fishing processes and deployment of vessels (in a separate press release). However, one small downside is the imposition of a new fee of USD 1.95 per ton of fish unloaded which is to be set aside for the fisherman’s retirement fund (this also helps to build loyalty among the fishermen and minimizes strikes and riots which could disrupt operations);
c] The new ITQ system makes it easier to schedule and plan for vessels to be allocated to various fishing grounds as it is no longer a “mad rush” to fish as much as you can before the season ends and the quota is reached. Thus, this benefits all players within the industry as they can now selectively deploy their vessels and schedule them for maximum efficiency; further enhancing economies of scale.
4) In the last 2 quarters (3Q 2008 and 4Q 2008), there has already been evidence of PAH achieving better efficiencies in terms of lowering their COGS with respect to their revenues. The growth of revenue is greater than the increase in COGS, which implies economies of scale from the Peruvian acquisition of fishmeal plants and vessels should be kicking in and showing its effects. For China Fishery’s 1Q 2008 financials, the results are very dramatic in that revenues dropped 2% while COGS dropped 42.3%, thus it shows the dramatic efficiencies being achieved for CFG with respect to its new fishmeal business as well as trawling operations. The ITQ system should help to enhance this efficiency and make it even more pronounced, but this will take time (probably in 2-3 years).
5) Valuations are attractive as PAH is only trading at a historical PER of 6.2 times (using net profit attributable to shareholders of HK$481 million @ 1:5 divided by share capital of 1.35 billion shares to get EPS of S$0.0713). Compared to global peers such Copeinca which are trading at 10-12x, this makes Pacific Andes under-valued (perhaps due to the China inflation factor depressing the valuations of many S-shares listed on SGX, regardless of the nature of the business or inherent characteristics of the company).
6) Management has a good track record and understanding of the business and they have built up many years of growth for the company by using strategies to grow their fleet organically (through fleet enhancements) and through acquisitions. It is because of this track record that I have confidence that Management can steer through any rough patches (which any normal business will encounter). Many Chinese companies have just come into the market (in 2 to 3 short years of operation) and hence lack a good track record to justify purchase.
7) Management is planning to add a new revenue stream from July 2008 by deploying 3 upgraded super-trawlers to South Pacific to fish in Chile. They will target a new species (Mackerel) and a new market (South Africa). This will add to the company’s top line and hopefully, bottom line as well.
8) Mr. Dennis Chan has mentioned in an earlier interview that PAH intends to increase its investment in Peru, though he did not give details due to disclosure confidentiality requirements. The fishing industry there is still very fragmented (according to a discussion with him during CFG’s AGM) and there are many opportunities for PAH to acquire smaller players in order to boost their fleet.
Risks involved in this investment decision
9) Even though a key risk is bunker costs rising as a result of record high fuel prices, this is an industry which can raise prices without affecting demand too much as it is controlled by a few large players, and fish are part of the staple diet of much of the world’s population and also a good source of protein. Hence, I see short-term price pressures which may push down net margins due to high fuel costs; but the trend for fish and fishmeal/fishoil prices is upwards over time, due partly to food inflation and rising consumption of fish by the world. In the long-term, I believe this risk will be mitigated.
10) PAH has always had high gearing and finance costs are a major source of expense which will eat into their net margins. However, CFG and PAH are in a business with high operational cash inflows, as observed by their financials over several quarters (adjusted for some timing difference in recognition of receivables and inventories). Thus, I see this gearing as merely assisting them in aggressively expanding their fleet, which they can then use to generate FCF to pay off their loans, bonds and notes gradually. As mentioned in a previous posting on leverage, it is difficult to determine the optimal amount of leverage required for a company operating in a certain industry, unless we are keenly aware of how that industry works. For example, Olam is also aggressively taking on debt in order to finance acquisitions which are earnings accretive to its business, and which help it to vertically integrate. Thus, it can be argued that high gearing is not necessarily bad as long as the company knows how to properly manage it and not to let it get out of hand.
11) As a result of high finance costs and record-high oil prices (US$146 as at time of writing July 3, 2008), PAH and CFG could see short-term margin squeeze which would affect profits in the next few quarters. However, taking a long-term perspective, there is much to look forward to with regards to their business model and expansion plans as Management have a clear vision of what they wish to achieve and are NOT in a hurry to execute. Instead, they are adopting a more cautious stance amidst the current economic slowdown and choosing to conserve cash; while trawling out (mind the pun !) for quality opportunities to increase their asset base through acquisitions of vessels or plants.
My average cost has been reduced from 65.5 cents per share to 54.75 cents per share as a result of the purchase. This will be reflected in my next portfolio review due on July 15, 2008.
Wednesday, July 02, 2008
On the topic of retirement, many books and articles on the Net have been written about this but truthfully, one must always apply the principles to one's own unique situation and circumstances in order for it to be relevant. Most books can only give a guide as to what constitutes a proper retirement when it comes to finances, planning and budgeting; but each person has different needs and time horizons; thus it can be a pretty difficult topic to properly advise on unless one does a mental self-reflection first.
To start off the topic, please see Panzer's post on retirement which I think sums up the idea of retirement very nicely. Retirement can be defined as "one stopping work as he has enough passive income to continue to support himself through his golden years". Of course, many of us may have our own interpretation of what constitutes a proper and satisfying retirement. As I was discussing this with my wife, it occurred to me that no two people can have exactly the same definition of retirement. On one hand, one may wish to continue doing something he enjoys while being "retired", while another may consider retirement as travelling the world and enjoying the sights and sounds which one never had the chance when one was working in the ratrace.
For myself, retirement is more of a financial situation where I have achieved financial independence, rather than a specific age such as the government-mandated retirement age of 62. As Panzer rightly pointed out, at a certain age we can have access to our CPF monies; and assuming we have the minimum balance in place, can enjoy a "windfall" gain. My opinion is that CPF is hardly sufficient to tide us through retirement and our senior years; even as the Government introduces CPF Life scheme which promises to pay an annuity to us till the day we die. The CPF, being a compulsory savings plan, cannot tailor itself to meet the needs of every single citizen as it is just a general plan catering to the man on the street. One definitely needs passive income sources and his own cache of cash to tide him through the years after he officially stops earning active income.
The idea of financial independence is not new and I had mentioned this before in several posts. Basically, your passive income sources from dividends, rental or interest need to be able to sustain your current lifestyle; thus one technically can stop working and yet enjoy the same quality of life without compromising anything. This is, of course, easier said than done. With uncertainties such as illnesses and inflation, one's carefully built nest egg may suffer sudden "shocks". Hence, it is always good to maintain a buffer when one is planning for retirement; which means getting it in surplus rather than doing an exact computation. This is to provide for contingencies and unforseen events (which usually do tend to crop up as one goes through life !).
Investing is one method I use to grow my net wealth in preparation for retirement. By ensuring I have steady dividend income as well as capital appreciation from my investments, I can slowly but surely move towards building up enough funds to ensure I can have a comfortable and worry-free retirement !