Friday, October 31, 2008

October 2008 Portfolio Summary and Review

I would say October 2008 was by far the most interesting month I had encountered in my three years plus of investing, and would include the most amount of volatility caused by Mr. Market’s manic mood swings. It’s amazing that regional bourses can have swings of 10-12% up and down in a day; it’s as if the underlying businesses were really changing on a daily basis to justify such strange behaviour ! Of course, we all know Mr. Market is having his manic moods again and pricing businesses as if they were going to go bankrupt the next day. In such an environment, he normally assigns a very low valuation for most businesses.

In terms of opportunities, October 2008 was a great time for me to average down on the companies which I have been a shareholder of. I don’t think I’ve purchased this much since 2005 (before I started out on my value investing journey), and it felt like there were many bargains out there waiting to be picked up, assuming you had the cash and the holding power. Note that I do NOT advocate using leverage to purchase shares in companies, whether it be a bank loan or loan from loved ones, please purchase with additional savings and extra cash which you don’t need to touch for the next 3 to 5 years. During this month, I purchased more of Ezra, China Fishery, Boustead, Tat Hong and Swiber. The Excel sheet reflects the reduction in my purchase price (highlighted in blue) as a result of Mr. Market offering very attractive valuations for me to pick up on. Accordingly, my investment cost has increased from S$109,000 as at end-September 2008 to S$125,800 as at end-October 2008, an increase of about S$16,800. My last two purchases were as recent as yesterday when I picked up more of Tat Hong and Boustead. More details will be given when I review each company in my review below.

Singapore has already reported being in a technical recession, and economists are predicting more “pain on the streets” when the recession hits Main Street and starts affecting the jobs and livelihoods of Singaporeans. Already retailers are anticipating a slowdown in sales and luxury car sales have dropped sharply. I personally have heard stories of people in financial trouble because they had borrowed heavily to fund share purchases and had to top up their margin call; and also of people in trouble because of retrenchments as they had a high-liability lifestyle. Always remember to have at least 6 to 9 months of cash for emergencies.

Meanwhile, the economic crisis seems to have deepened with many countries about to fall into a deep and prolonged recession. Some countries like Iceland and Pakistan are on the verge of bankruptcy as their central banks do not have sufficient reserves to tide through the crisis. The USA Federal Reserve has already cut interest rates to 1%, so they would not have much room more to boost the stock market; while LIBOR rates have remained stubbornly high despite measures by G7 and worldwide governments to inject more liquidity into the global financial system. In the months to come, many businesses which have been choked of credit and which do not have sufficient operating cash inflows or cash reserves may fall and go bankrupt. To my knowledge, the companies I own should be able to withstand this unprecedented period of credit strain; but I remain cautious on their near-term outlook till more clarity emerges.

There was significant news regarding the companies I own, broken down as follows:-

1) Ezra Holdings Limited – Ezra released their FY 2008 results on October 21, 2008. Net recurring income stood at US$49.9 million, an increased of 55% over FY 2007’s recurring net profit of US$32.1 million. My full review can be found in an earlier post. The Group did not declare a dividend as they are conserving cash for the funding of their MSFV and also their Vietnamese yard and training school. On October 28, 2008, the Company announced the unfortunate news that a vessel called Lifeboat Titan 1, which was owned by a 50:50 joint venture company called Casadilla between Ezra and KS Energy, sank in high seas and was lost. However, the vessel was fully insured by KS Energy and the financial impact of the loss is expected to be insignificant. The vessel was on-route to fulfill a contract with Siemens to install wind turbines, and the value of the contract was to be US$43.9 million, commencing in October 2008 and lasting till December 2010. KS Energy has deployed another vessel to complete this contract. I had added to my position in Ezra on October 21, 2008 by purchasing more shares at S$0.595, thus reducing my average cost to S$0.629.

2) Boustead Holdings Limited - There was no news from Boustead for the October 2008. The company has bought back a total of 1.5 million shares so far at an average price of S$0.6747 per share. I added to my position in Boustead on October 30, 2008 by purchasing more shares at S$0.40, reducing my average cost from S$0.6475 to S$0.58.

3) Swiber Holdings Limited – On October 6, 2008, the company sealed an LOI worth US7.3 million in Vietnam and on October 13, 2008, they also announced a maiden sub-sea contract worth US$7 million in India. On the same day, they also announced a 50:50 formalized joint venture with Rawabi Group of Saudi Arabia to explore oil and gas EPCIC opportunities in the Middle East. Finally, on October 21, 2008, Swiber announced another joint venture, this time with PetroVietnam Joint Stock Corporation to pursue more oil and gas opportunities in Vietnam (note this is just an MOU, no formal JV contract has been signed yet). Swiber are building their foundation for growth in further years and I am willing to wait for them to build their customer base in order to fatten their order books. I added to my position in Swiber on October 8, 2008 by purchasing more shares at S$0.79, reducing my average cost from S$1.01 to S$0.93.

4) Suntec REIT – Suntec REIT released their FY 2008 results on October 30, 2008. The trust declared a DPU of 2.854 cents per unit for 4Q 2008 amid strong committed tenancy and rising rental rates. Moving forward, I am cautious about the trust sustaining its dividend payout and will continue to monitor the situation. The payout represents an annualized yield of 10.3% based on my purchase price. As the counter is currently cum-dividend, this amount has NOT been added to my realized gains.

5) Pacific Andes Holdings Limited - There was no news from PAH for October 2008.

6) China Fishery Group Limited - There was no news from CFG for October 2008. I added to my position in China Fishery on October 8, 2008 by purchasing more shares at S$0.71, reducing my average cost from S$1.211 to S$1.12.

7) First Ship Lease Trust – FSL Trust announced its results on October 21, 2008 and declared a DPU of US 3.05 cents per unit for 3Q 2008, in line with their original guidance. They also mentioned that they had no commitments for more vessels and are positioned to protect the yield rather than to grow it under such volatile and uncertain market conditions. Using a conversion rate of 1.48 to the USD, the DPU is about SGD 4.50 cents which represents a yield of about 16.3% based on my purchase price. Since the counter has gone XD, I have included this as part of my realized gains.

8) Tat Hong Holdings Limited – There was no news for the company for the month of October 2008. The company has bought back a total of 1,961,000 shares at an average cost of S$0.9054 per share. The CEO Mr. Roland Ng did mention in an interview that earnings will slowdown in FY 2010 onwards, as a result of the crisis. He wants to position Tat Hong as a rental company as companies tend to rent instead of buy during lean times. Considering that rental of crawler cranes has a much higher gross margin than sale of cranes, I am optimistic this strategy will add value to shareholders in the long-term. Meanwhile, I am gearing up for short-term pain including the possibility of no dividend being declared when the company releases its 1H FY 2009 results in November. I added to my position in Tat Hong on October 30, 2008 by purchasing more shares at S$0.375, reducing my average cost from S$1.055 to S$0.715.

I sincerely thank Mr. Market for making it possible for me to purchase more shares in these companies at very attractive prices. Without a bear market to take prices down to attractive levels, an investor who practises value investing would not be able to purchase shares in the companies he is eyeing cheaply.

Portfolio Comments

The month of October 2008 will be known as “meltdown month” for a long time to come, as stocks and stock markets dropped very sharply during this month. As at end September 2008, the STI was trading at 2,358.91; but by the end of October 2008, it had dropped by 24% to 1,794.20. Considering the index traded as low as 1,478 on October 24, 2008, this shows the level of fear and pessimism in the market, as this represents a close to 62% drop from the peak. Economic recovery will be long and slow with credit markets thawing slowly and businesses just starting to feel the effects of the global slowdown.

My portfolio correspondingly suffered a fall of 49.4% from cost, and was 41.8% down after factoring in realized gains of S$9.5K from dividends received. Value investing will sometimes result in periods of sharp under-performance as shares of even fundamentally sound, cash-rich companies are sold down indiscriminately. However, I see this as a golden opportunity to accumulate shares in companies which can weather the downturn and emerge stronger 3 to 5 years later.

My next portfolio review will be on Friday, November 28, 2008 after market close.

28 comments:

Anonymous said...

Hi MW,

thanks for providing us with so much details with regards to your portfolio and the actions you took to add to your positions. Very much appreciated

regards
Gori kun

Anonymous said...

Hi MW,

I think it will be a good idea to put down the intrinsic value of the companies you bought, beside the market value.

Also, it make no sense to compare your portfolio drop in percentage to STI peak to present value, due to the fact that you average down your positions several times.

regard,
Ryan

musicwhiz said...

Hi Gori Kun,

Thanks for visiting. I will do a once-a-month update for my portfolio. It will be rather detailed as many events can occur for my companies in one month, including results releases too.

Regards,
Musicwhiz

musicwhiz said...

Hi Ryan,

Intrinsic value is an ever-changing thing and is very subjective, I'd rather not include it because I don't compute a hard and fast intrinsic value per se for each company. I think you should know my style of analysis by now - about 40% quantitative and 60% qualitative.

Just to clarify - I am NOT comparing my portfolio performance to STI performance. The % drop in STI is just for reference only, to show that we can deep into bear market territory. I believe we are only safely out of the bear market when the drop is less than 20%. Correct me if I am wrong.

Thanks,
Musicwhiz

Anonymous said...

Hi MW,
Thanks for providing the fundamentals of Companies on your block. By the way I have been visiting your block for abour 8 months. I think and hope you will be seeing profit in 12 months Keep up the good work.

Regards
Dick Toh

Anonymous said...

Hi Musicwhiz,

Thank you for sharing with us, your readers, your journey in the investment field and I wish you all the best.

I am new to your blog and I am keen to have your views on one of your investments, Swiber, on the following issues :

a. On Sept 2, Swiber announced a USD 225m sale and leaseback agreement with 2 Norwegian lessors.

This material deal is subjected to shareholders' approval meaning that this is not a "done deal" yet.

It has been 2 months from the date of the original announcement and yet, the date for the EGM to approve this deal has not been announced.

This is a critical deal for Swiber but given the prevailing credit crunch, will the 2 Norwegian lessors still go ahead with it?

b. In the event that the deal with the Norwegians fall through, has Swiber, the cash resources to meet this USD 225m obligations when the vessels are scheduled for delivery between July 2009 and Sept 2010 ?

Granted, this USD 225m is most likely an overstatement because it incorporated an element of profit in the deal for Swiber and that probably the 25% initial downpayment have already been made as well.

Swiber has a net debt position of USD 217.5m as at end June 08 and, yes, a big chunk of it, is due only on end March 2011.

The net operating cash inflow less taxes and interest payments for Q2 08 was USD 25.34m. Extrapolating it, we are talking about USD 100m net cash inflow (from operations ) a year.

This USD 100m is on the low side because there will be the element of growth for 2009 and 2010 but still, there may be a shortfall, funding-wise.

The analysts briefing later this month, after the release of the Q3 results, should be interesting.

Let's just hope the management sheds more light on the cash flow front.


Warm regards,


ICAEW

Simon said...

ezra up to 71 cents!

now where is the guy who said it will go down to 10 cents?...

Anonymous said...

hi,

why do you say you are cautious about suntec sustaining payouts?

am also invested here and know quite a bit about reits in general, lets exchange views.

cheers

Anonymous said...

hello everyone,

somehow i still feel uncomfortable with this stock - China Fishery
although it is more finanical sound than Pacific Andes.

China fishery has usd 114 mio current liability, usd 286 mio long-term liability and usd 305 mio

equity. it seems like heavily leveraged company.
may i know what market use to measure the gearing of a company?

its cash & equivalent is usd 25.6 mio and its half-year fixed expenses is approx usd 30 mio.
thus, its cash & equivalent can cover 6 month of fixed expenses, which is okay.

its finance cost is usd 13.6 mio for half a year. thus,its finance cost is usd 27.2 mio for a

year. thus, cash & equivalent (usd 25.6 mio) can barely cover its one-year finance cost.

is this how market analyse its financal status?
is there an alternative ?


as long as it is still making money at current rate, it looks attractive since its earning is

good.

please enlighten me why this is still a good buy.

Brendan Lee said...

Thank you for your sharing, it always attracts so much remarks.

Even though I think stock valuation are cheap now, it can go much cheaper if this crisis persist.

I still stick to my forex trading and sell EURJPY and USDJPY to tap on equity downturn.

My forex trading journal: http://www.forexandbinary.com/

BlackCat said...

Hi Musicwiz,

Congrats on buying Boustead at 40c almost at net cash!

I'm also looking at it now, but before 'catching falling knives' in a bear market, I like to look at the 'worst case scenario' to determine how much I would buy and would be comfortable holding. Allow me to play the devils advocate here - I'm a little worried by the nature of their main business, Engineering services. It is project based (lumpy revenue), cyclical (depending on oil/gas, construction, also maybe on the general availability of credit), and there will also be large credit risks (Libya?). Their business model is not simple like selling hamburgers.

Do you happen to have a copy their annual reports in 97, 98 and 99? I would like to see how their Engineering business stood up to past financial crisis.

musicwhiz said...

Hello Dick Toh,

Thank you for visiting. Hope you can provide your comments more often, appreciate them ! My time horizon is longer than 12 months and I have the patience to weather through this economic crisis.

Regards,
Musicwhiz

musicwhiz said...

Hi ICAEW,

I do not anticipate a problem with the sale and leaseback transaction. The delay could be due to Swiber finalizing the details and preparing the circular and EGM details for shareholders. I would expect it to be a done deal.

In the event that they are unable to finance the deal, it may materially affect their ability to expand their business operations; and the company will have to raise funds through other methods, or relying solely on internal cash flows. That said, I am reserving it as the worst case scenario.

Swiber will release their 3Q 2008 results on Nov 14, 2008. Yes, let's see what updates they bring for shareholders.

Cheers,
Musicwhiz

musicwhiz said...

Hi Simon,

I think we can all safely ignore the predictions of people who base their comments solely on price movements and who ignore the underlying fundamentals of companies.

Regards,
Musicwhiz

musicwhiz said...

Hi Anonymous,

Suntec REIT has locked in quite a lot of their tenancy, but if the property market were to decline in the coming years, this means rental rates will also slump when tenancy agreements are due for renewal. That may precipitate a fall in future DPU.

Regards,
Musicwhiz

musicwhiz said...

Hi Anonymous,

You are right to say CFG is a highly leveraged company. In this industry, it is often a necessity to have high borrowings to fund acquisitions of vessels and fishmeal plants. The high barriers to entry offer margin of safety to me as an investor, in spite of the high gearing. I guess only time will tell if I made the right choice.

Thanks,
Musicwhiz

musicwhiz said...

Hi Brenden Lee,

If valuations are cheap, isn't it a good idea for you to purchase shares for the long-term ? Currency trading can be very volatile and is rather speculative in my opinion.

Musicwhiz

musicwhiz said...

Hi Blackcat,

Boustead's Engineering Services is not expected to contribute much to revenues for FY 2009, in my opinion. If you look at contract flow, Boustead Projects has been the star performer with many projects being awarded and they also have the new township Al Marj project in Libya. Salcon is currently tackling the Libyan wasterwater treatment deal too and should see an increase in revenues.

As for Engineering, C&E and Boustead Maxitherm may not be reporting many new contracts due to the fact that Maxitherm is consolidating its position, and could also be because small contracts clinched are not worthy of press releases. I think you got mixed up by saying Libya is involved in their Engineering division - that's more for wastewater and real-estate solutions.

You can try the company's website for old copies of Annual Reports, or just send an email to their IR to request for them.

Regards,
Musicwhiz

BlackCat said...

Hi, Thanks for the clarification,

Not sure of the terminology, but I meant actually 'Engineering Services' to refer to all their engineering/construction business...(energy + salcon + real estate)...as opposed to Geo Spatial, where the business model is a bit more like selling hamburgers.

From their FY02 annual rpt, they mentioned how margins for Boustead Projects (now called Real Estate Solutions???) were affected:"However, gross profit margin was eroded from 29.7% of FY 2000/2001 to 19.8% of FY 2001/2002 because of the generally soft construction industry that was weakened by excessive competitive pricing.". I try to estimate the effect of this, not sure how useful since too many variables: http://profithunting.blogspot.com/2008/11/value-hunting-4-boustead.html

Do you mind if I post a link to your boustead entries in my blog? Your work has been very helpful to me in investigating this stock.

Thanks
BlackCat

Anonymous said...

MW,
#1 Moving forward, your cost means nothing. You should ignore it and consider whether you should still want to own the business.
Alternatively, you just need to review your previous decision to buy the business and see whether it is still valid.
If yes, then what's the minimum MOS you demand before you make the next purchase.
With the current moody Mr Market, you can be a little bit greedy.

#2. Does averaging down make sense?
Yes, if you've a lot of cash and you know the business well (eg. you know the managers, etc)
Yes, if it reached your MOS.

In any other cases, why average down when there are so many babies that Mr Market is throw out of the window (with good mgmt, biz, cash and MOS)?

Anonymous said...

MW,
rgds to your holding period.
Just a reminder.
If a stock drop 50% of it's price, it will takes it to increase 100% before it reach it's original price.

I am not sure about you, but I'll never DREAM that my stock can goes up 100%.

At least, not in the next 12 months.

musicwhiz said...

Hi Blackcat,

Yes, please do thanks. You may wish to check out Boustead's 1H FY 2009 results, I think it's a decent set of results. Am looking forward to a much better 2H 2009.

Cheers,
Musicwhiz

musicwhiz said...

Hi Anonymous (Chris),

#1 yes I do still want to own the businesses I own, and I am proud to own them. The original rationale for owning them still stands, and I will purchase as long as valuations are under 5x historical or current PER. Other measures come into play as well, of course.

#2 I average down because I know my companies well. For other companies, they may present good value but may be outside my circle of competence.

Thanks,
Musicwhiz

musicwhiz said...

Hi Anonymous (Chris),

You'd be surprised how much prices can rebound in a bear market.

Some recent examples include Ezra (from 33 cents to over 70 cents, now 60+ cents, almost 100% increase in just 2 weeks). Tat Hong has also rebounded from a low of 36.5 cents to touch 67.5 cents some time back, an increase of nearly 85%.

And don't forget that shares over time reflect the underlying business, so they can go up 2-3% each day for an extended period of time. The net effect may be 100% before you know it !

Cheers,
Musicwhiz

financial freedom said...

Thanks for sharing MW. It really takes courage to share your losses. I am sitting on a huge paper loss too right now.

musicwhiz said...

Hi Financial Freedom,

No problem and you're most welcome. I am of the belief that if you do not face up to facts and learn from past mistakes, then you will be doomed to repeat them.

Anyhow, my investing horizon is long-term and I have no problems owning the companies I own now, so I do not see myself making a "loss" per se, just owning several good companies. :)

Regards,
Musicwhiz

SGDividends said...

Hi Music Whiz,

We have been looking at Boustead ( no positions yet) and we are very impressed with the Free cash flow consistency and the fact that it is in the infrastructure business and it has survived for many many years.

We have looked at the annual reports and also the product and services brouchures on their website and it seems that they are dealing with project based business as what BlackCat mentioned.( lumpy revenue stream).

Do you happen to know if any part of their business is recurring business? And if there is, roughly what percentage is recurring?

We don't want it to be like Inter-roller who is suffering now...partly cos of its lumpy contract based revenue stream.

musicwhiz said...

Hi SGDividends,

As far as I know, only their geo-spatial services division is made up of recurring revenues. For the other divisions, revenues are based on project-basis. I would say about 90% of revenues are project-based, but recently the contracts have gotten larger in size (depsite the fact that the credit crunch has been full-blown for some time now).

It would not really be fair to compare Boustead to Inter-Roller due to the very different nature of their business. Boustead have a more diverse range of businesses and they also have "niche" capabilities for high-end high tech industrial solutions.

Hope you can also share your thoughts (if any) on Boustead based on the research your team has come up with thus far.

Thanks,
Musicwhiz