Friday, January 30, 2009

January 2009 Portfolio Summary and Review

January 2009 saw a continuation of the financial turmoil which engulfed the major banks throughout 2008. Citigroup has now officially split into two divisions – CitiCorp and Citi Holdings, while selling their brokerage Smith Barney to Morgan Stanley (thanks to comment by dream for this correction). Bank of America also saw a much needed bailout and in the UK, RBS reported a massive loss of €28 Billion and together with Lloyds and Barclays, needed a lifeline from the UK Government. It would certainly seem that the end of trouble for the banks is far from done, as more and more write-offs appear and banks are still urgently in need of capitalization to strengthen their Balance Sheet.

What I personally feel angry about is how the banks managed to wind up in this massive mess. Those who had been following the progress of this major financial crisis would have known that the trouble started from the sub-prime mortgages and CDOs, and gradually spread to other classes of debt and resulted in massive write-downs on illiquid assets. The problem is more insidious than this of course, and involves not just the banks doing lax lending (to mortgage home owners who could not pay up), but also the rating agencies such as Standard and Poors and Moodys which rated these complex debt securities as Triple-A ! I shudder to think of the amount of greed and oversight that must have occurred for such massive financial bailouts to be carried out by Governments in developed countries. One thing’s for certain – the financial system would require an entire overhaul and new regulations set in place after this crisis recedes, to ensure such events do not play out again and wipe out the wealth of millions worldwide.

The wave of corporate failures is piling up, with Jurong Technologies being the latest victim of statutory demands served by a total of six banks. In addition, many companies have been announcing profit warnings as the crisis hits demand for goods and services and causes sales and profits to be drastically reduced. In the real economy, layoffs are also being announced by local companies as well as MNC with Singapore operations, with Microsoft shocking the world by announcing the layoff of 5,000 workers. More retrenchments are set to follow as our Government has warned of worse days to come and to brace for the storm.

Singapore has unleashed its boldest Budget to date as the Government dipped into our National Reserves for the first time ever, to come up with a fiscal stimulus package to save jobs and to pump prime the economy. Assistance was also given to families and wage-earners to help them preserve jobs and to put food on the table, but sadly I felt more could have been done for those who had already lose their jobs as Singapore does not have a welfare system in place (the closest is “workfare” but this means you need to have a job to enjoy the benefits !). It remains to be seen if the Government would introduce more off-budget measures to boost the economy and help citizens if the recession worsens considerably as 2009 progresses.

In terms of corporate activity, January 2009 was another slow month (unsurprisingly) due to the worsening of the global crisis. It has become much harder for companies to secure new business as most sectors and industries are grinding to a halt as financing becomes harder to secure. FSL Trust, Ezra and Suntec REIT announced their results this month and are briefly summarized under the respective company headings.


For February 2009, I would be expecting the results announcements of my remaining companies; being Boustead (3Q 2009), Tat Hong (3Q 2009 to be announced on Feb 13, 2009), China Fishery (FY 2008), Pacific Andes (3Q 2009) and Swiber (FY 2008). My expectations are for all my companies to announce a fall in profits year-on-year, as the turmoil has probably affected all of them adversely. The most important aspect for me, however, is to monitor their cash flows and future plans to tide through this recession. Of course, any dividends declared would be an added bonus, but it should be at the expense of retaining cash to tide themselves through this difficult period.

1) Ezra Holdings Limited – Ezra their 1Q 2009 results on January 14, 2009. Recurring net profit was up 260% from US$2.6 million to US$9.3 million year-on-year, as a result of more charter revenues from an expanded fleet, as well as contributions from their Energy Services Division. Note that the net profit comparison is after removing the effects of the unrealized exchange losses for both years, as the Company had foreign exchange balances denominated in NOK which were subject to revaluation at period-end, resulting in the exchange loss. Keppel Singmarine is still in negotiation with Lewek Shipping on the cancellation of their MSFV contract, and more information should be provided in February 2009. The Company has reported decent operating cash inflows though capex at this stage is still high, but with the overhang gone on its MFSV newbuild program, this situation should gradually be alleviated. Moving forward, the Company should conserve its cash till visibility improves for the oil and gas sector. No further analysis will be done until they release their 1H 2009 results some time in April 2009.

2) Boustead Holdings Limited – Boustead had announced, on January 15, 2009, that their Energy Services division had secured contracts worth S$65 million, including one in USA for which they had scored their maiden contract. It is heartening to know that the company can continue to secure business under difficult conditions, and I look forward to an update by the Company on various aspects of the business in their 3Q 2009 results release next month.

3) Swiber Holdings Limited – There was no news from Swiber at all for January 2009, and the lack of updates for the third sale and leaseback is particularly worrying. It is possible that financing could not be readily secured for the vessels, which is resulting in this unreasonable delay. Also, the company has not announced any new contract wins for the last 3 months, which is a sure sign of the swift deterioration in business conditions during the last quarter (their last LOI announcement was in October 13 when they announced breaking into the Indian sub-sea market). However, a quick check on 2008 showed that most of the contracts and LOI were secured in the period from early February till late March, so until this period has passed, it will not be possible to pass such quick judgement that the Company is unable to secure new business.

4) Suntec REIT – Suntec REIT announced their 5Q 2008 results on January 23, 2009 (they changed their year-end from Sep 30 to Dec 31). The DPU was 2.858 cents per unit, giving me an annualized yield of about 10.3% at my purchase price of $1.11. No further analysis will be done on this REIT as it constitutes less than 2% of my entire portfolio.

5) Pacific Andes Holdings Limited - There was no news from PAH for January 2009. Their 3Q 2009 results are expected in late Feb 2009, and I am bracing for a further drop in profits as export trade and SCM activities slow down due to the ongoing financial crisis.

6) China Fishery Group Limited - There was no news from CFG for January 2009, and their full-year 2008 results are expected to be announced in late Feb 2009. Hopefully, the Company will declare a decent final dividend. I am expecting a dividend of 2 cents per share as the Company may have to conserve cash amid the sharp recession and drop in export activity.

7) First Ship Lease Trust – FSL Trust released their financials on January 21, 2009 and declared a DPU of 3.08 US cents per unit. Using a conservative exchange rate of 1.45 SGD to the USD, DPU is about 4.466 Singapore cents per unit which translates into an annualized yield of 16.24%. However, FSL Trust announced that payout would be reduced to about 2.45 US cents in 1Q 2009, as a result of them wanting to conserve cash to repay debt. The financial turmoil has caused my investment to suffer a permanent financial loss due to the collapse in the shipping market, which has raised the risks of client defaults and breach of loan-to-market value covenant. Though I will continue to monitor FSL Trust as the quarters pass by, I am very much prepared to acknowledge this investment as a major mistake.

8) Tat Hong Holdings Limited – Tat Hong announced a profit guidance on January 15, 2009, stating the profits for 3Q 2009 would be lower than the corresponding 3Q 2008 due to unrealized forex losses due to the purchase of inventory in JPY (and hence revaluation of creditor balances as at period-end due to strengthening of the JPY against SGD); as well as a drop in business demand due to the ongoing financial conditions. I can safely say that this profit guidance was more or less expected by me and I am even projecting a possible 4Q 2009 and FY 2010 profit guidance for lower profits due to the deep recession. However, with the Singapore Government announcing fiscal measures to boost infrastructure spending and the release of projects for the construction sector, Tat Hong could possibly benefit from this. I remain cautiously optimistic on the Company’s medium-term prospects amid difficult business conditions.

Portfolio Comments – January 2009

January 2009 saw a much more subdued stock market with less volatility, though sentiment did not improve much at all. My portfolio has dipped from a total loss % of 25% as at end-December 2008 to 30.3% as at end-January 2009; but thankfully was still better than the -34.5% registered for November 2008. Part of this loss was offset by dividend from FSL Trust and Suntec REIT (both to be received on Feb 27, 2009).

My next portfolio review will be on Saturday, February 28, 2009.

12 comments:

dream said...

mw,

I think citi sold Smith Barney brokerage unit to MS, not ML.

dream

Leader of Akasuki said...

http://finance.yahoo.com/banking-budgeting/article/106507/Where-the-Financial-Gurus-Are-Putting-Their-Own-Money

Leader of Akasuki said...

Hi Mw, just to encourage you with the link above. As for FSL trust, i don't think its an investment mistake , maybe should the shipping industry recover the stock might just be worth your $$. However, lets say FSL where to go brust, we investors get back its NAV value? say around 80-90cents per share? not much lose blah considering you bought at $1.11 :)

musicwhiz said...

Thanks dream, the changes have been made in my post with credit given to your good self.

Happy CNY !

Musicwhiz

musicwhiz said...

Hi Akatsuki,

Thank you for the link. A good article.

Regards,
Musicwhiz

musicwhiz said...

Hi Akatsuki,

I am pretty hard on myself and impose high standards so as to continually improve. Even if time proves that FSL Trust was not a total washout, I would still attribute it to be a mistake due to the fact that I had not thought of the negative consequences as much as I would like to. In addition, I also failed to use a more appropriate dividend discount model to value the shipping trust and failed to note that their aggressive payout policy of 100% was unrealistic and not conservative. To me, these glaring oversights are considered "mistakes", and I will not repeat them again should I consider investing in such assets again in future.

Thanks,
Musicwhiz

Akatsuki said...

Thats why youre one of listed as one of my investment mentors haha.

Seo Long said...

I do not understand your disappointment about your investment in FSL. All counters have come down in value due to the financial turmoil, including FSL. Unless you do not see any future in holding the shipping trust, or you do not think the industry would pull through the hard time, the trust at least has an annual yield which is considered reasonable vis-a-vis the risks. Let us hope that this period will pass us by sooner to enable us to see a clearer sky again.

musicwhiz said...

Hi Akatsuki,

While I do appreciate your admiration, I still feel I have a lot to learn and have yet to really grasp the principles of value investing. As some had mentioned before, some of the companies I purchased have high gearing which is a clear violation of the value investing concept. Perhaps I need to read more in order to be a better investor.

Cheers,
Musicwhiz

musicwhiz said...

Hi Seo Long,

The way I classify mistakes is not due to the battered down share price, it's more due to my ineffectiveness in analyzing and anticipating the downside risks for an investment, as in FSL Trust's case, the fundamentals have clearly deteriorated and I may suffer a permanent loss of capital, which violates my principle of preservation of capital.

I hope to do better when I analyze future companies.

Regards,
Musicwhiz

Akatsuki said...

Hmm, i got a question regarding this investment mistake/preservation of capital. Say for example, you did all the studies that involve investing in FSL trust, knowing the risks and likewise knowing the downside. So you put your $ in that stock at a share pirce of $0.47 per share.
Ok, so lets assume FSL faces even more risks that didnt occur to you or there was no way to assume it will at that pt in time. Do you regard that as a mistake? More importantly, will you still hold on to FSL?

Then basied on another instant, FSL company fundamentals were to deteoriated, obviously the market will react faster then the regular investor, therefore casuing the Share price to drop to 0.40 or lower,is this consider a valiation of the princial of preservation capital? Just becuase youre slower then the market to react?

musicwhiz said...

Hi Akatsuki,

I think this question cannot be answered as a general question, but needs to be looked at on a case by case basis. For any investment, there will always be unforseen circumstances occurring which may frustrate one's original investment decision, but in FSL Trust's case I did not anticipate the downside and did not go into detail into reviewing and analyzing the aggressive DPU payouts and factors like loan-to-market-value covenants. It's a little like those people on Wall Street who are over-confident that Lehman CANNOT fail, but it did ! I must admit I was counting more on the upside and was blinded to the dangers of the downside, hence I will classify it as a mistake of judgement.

I will hold on to it as this was originally a dividend play and as it is still paying dividends (albeit much reduced), I do not see a point in disposing of it. I am already prepared to lose 100% of the investment should anything drastic happen to the Trust, thus there is already mental preparation on my part for that possibility.

Sometimes the market may not be aware of all the facts, or investors can react based on emotion rather than fact, so I won't say one is slower or faster. It's not a matter of speed of reaction, it's whether in the long run, are you right or wrong ? Such things take time to prove, so you cannot tell in the short-term.

Cheers,
Musicwhiz