Saturday, February 28, 2009

February 2009 Portfolio Summary and Review

February 2009 can be summarized as a month in which the entire world’s economy deteriorated further, and one can read juice bad news in the papers on an almost daily basis (hourly, if you subscribe to “Breaking News” service by Straits Times). So for those with a morbid fascination for pessimism and depressing news, just tune in every hour to either Bloomberg, CNN or CNBC for the latest bad news. It’s almost a guarantee that this is simply the tip of the iceberg, as the economic situation is expected to go downhill a lot for quite some time yet. Call it gravity’s pull if you wish.

Events are happening at almost lightning speed in President Obama’s office, as he unveils a US$787 billion spending plan and a US$250 billion mortgage loan plan to prop up the economy and to inject liquidity into the system. I won’t go into details as every major financial website probably has more than enough information and commentary on the details and the supposed effectiveness of such methods. The shocking headline news is the US$1.75 trillion Budget Deficit which was announced by the President just yesterday, and this is set to grow to an even more alarming US$3.55 Trillion spending plan for FY 2010, amounting to a total of 12.3% of USA’s GDP. Is spending going to be the solution to an economic crisis of such magnitude ? No one really knows the answer and yours truly (not being an economist) will reserve comments. However, readers are always welcome to share their views via the comments box.

As for Singapore, we seem to be bearing the full brunt of the economic downturn due to our status as an export-oriented economy. Countries with huge domestic demand such as Indonesia and China are able to ride out the crisis relatively unscathed, though of course some negative effects of the credit crunch and recession will still trickle in. Singapore’s GDP is expected to contract between 2% to 5% and all the big shots are warning of rising unemployment (99,000 jobs to be lost this year, unemployment rate to hit 5% by mid-2010) and more retrenchments to come. The huge fiscal stimulus measure unveiled during the recent budget (termed “Resilience Package”) is supposed to pump-prime the economy and ensure money continues to flow, and the effects should be visible from FY 2010 onwards. In the meantime, my advice would be to reduce spending and save for a rainy day as these are uncertain times and one should protect their source of active income. It is also prudent not to rely on just one source of income but to have some form of passive income such as rental or dividend income to prepare for the worst.

In terms of the Singapore stock market, I would describe it as “bleeding slowly but surely”. Volume is dwindling and share prices are making a steady but constant descent. S-Shares took a major hit in terms of confidence when Fibrechem (a former market darling) reported irregularities in its Trade Receivables and Cash Balances and called for a trading suspension. Rumours are now rife of other corporate scandals involving Singapore-listed China companies after this most recent fiasco, as well as the lingering bad memories of China Printing and Dyeing.

February 2009 was a month of earnings releases for most of my companies (except Ezra, FSL Trust and Suntec REIT). Suffice to say they all performed decently, and the brief details shall be outlined in the following commentaries below:-

1) Ezra Holdings Limited – No news flowed from the Company except to mention that they had claimed an amount of US$25 million from the insurance on the sunk Liftboat Titan 1 belonging to Casadilla Group Pte Ltd (a joint-venture company between Ezra and KS Energy). This is pending the issuance of the final loss adjustment.

2) Boustead Holdings Limited – Boustead announced their 3Q 2009 financials and net profit attributable to shareholders for 3Q 2009 showed a healthy increase of 40.2% from S$7.3 million to S$10.2 million. For 9M 2009, net profit was still lower by 23.7% as a result of lumpy contract revenue recognition and slower progress on their Libyan Township project. Furthermore, the S$175 million wastewater treatment project has not contributed yet and earnings will only accrue from late 4Q 2009. The good news is that the Group has net cash of about S$135.2 million and this is before taking into account the sale of a property for S$200 million by GBI Realty to conclude in 4Q 2009. I will not go into more detail as this is a quarterly announcement, but I should be expecting a decent final dividend come May 2009 when Boustead releases their FY 2009 results.

3) Swiber Holdings Limited – Swiber released their financials on February 28, 2009 and off-hand, the numbers look simply terrible. A net loss was incurred for 4Q 2008 of US$11.2 million as a result of inflated cost of goods sold due to the delay in delivery of 2 vessels Swiber Concorde (a pipelay barge) and Swiber Supporter (a dive-support work barge). In fact, the cost of goods sold increased much more than revenues and resulted in a gross loss of US$12.3 million; the first instance a company I owned has ever reported a quarterly gross loss. The delay in delivery was obviously detrimental to the Company's business; and now Swiber's business model must be questioned on whether they are over-reliant on the timely delivery of their vessels in order to make decent profits. Overall, FY 2008 net profit fell by 20.6% to US$39.5 million from US$49.7 million a year back; simply due to this disappointing 4Q 2008 result. I will cover Swiber in greater detail once I go through all the material, and will do a separate post on this later on.

4) Suntec REIT – Suntec REIT’s dividend of 2.858 cents per unit was received on February 27, 2009. There was no other significant news from Suntec REIT for February 2009.

5) Pacific Andes Holdings Limited (PAH) – PAH released their 3Q 2009 financials and net profit attributable to shareholders for 3Q 2009 rose 11% from HKD 79 million to HKD 87 million. For 9M 2009, net profit rose 16% from HKD 261 million to HKD 303 million. These results were better than I expected as the global downturn made me wonder if demand for fishing products had affected their SCM business adversely. Revenues for 9M 2009 were up 13% to HKD 5.45 billion and 4Q 2009 will be a traditionally stronger quarter for CFG and PAH, so I would expect better results as fuel prices have also come down a lot from the heydays of USD 147 per barrel. Debt to total assets stood at 44% which is still very worrying but hopefully, in the months to come, PAH can work towards reducing this debt load. The upcoming ITQ (elaborated in CFG’s FY 2008 analysis) will further allow efficiencies to flow through the entire supply chain structure, translating into higher margins and better performance.

6) China Fishery Group Limited – CFG released their FY 2008 and I performed a detailed review of this in my previous post, so I shall not elaborate further on this.

7) First Ship Lease Trust – FSL Trust’s dividend of USD 3.08 cents was received on February 27, 2009. The exchange rate used was 1 USD = 1.5288 SGD. Other than this, I am just hoping the Trust does not collapse due to the triggering of any covenants as the shipping industry goes through violent convulsions. In the worst-case scenario, I am prepared to write-off my entire investment in FSL Trust, painful though that decision might be.

8) Tat Hong Holdings Limited – Tat Hong announced their results on February 13, 2009 and net profit for 3Q 2009 took a hit from severe forex losses, of which about 70% are unrealized (due to revaluation of trade payables balances and revaluation of inventory at period-end) while the rest were realized (settlement of trade payables). I view this as a one-off event as the JPY has started to weaken after dismal figures thrown up in Japan due to slumping exports. It is possible for a reversal of accounting entries to take place to write-back this loss in 4Q 2008, though it will be good not to hold out too much hope for that. If not for the forex losses, net profit for 9M 2009 would have increased by 33% from S$55.9 million to S$74.2 million. Cash flow generation was decent though demand was affected by the ongoing financial turmoil. I would expect a decent dividend for FY 2009 once results are released in May 2009.

Portfolio Comments – February 2009

February 2009 was at times turbulent as the USA Government came up with measures to help the economy as well as rescue the major banks. Instead of improving, sentiment has worsened considerably as more and more bad news about the economy is reported, while layoffs are increasing dramatically in USA and in Singapore. My portfolio has dipped from a total loss of 30.3% as at end-January 2009 to 34.9% as at end-February 2009. This is somewhat similar to my portfolio structure as at November 2008, if you care to check back. It is still considerably better than the end-October 2008 portfolio loss of 41.8% even though the STI has dipped to its lowest since late 2003 (the previous low was 1,600 points back on October 24, 2008).

Going forward, I would expect more cash to flow in from future dividends from FSL Trust, Suntec REIT, Tat Hong, Boustead and hopefully Ezra as well (in April to June period). Also, with the sentiment being so stinky, I am also increasing my time spent on researching good companies as this would present a golden opportunity to purchase stakes in good, cash-rich companies which have potential to recover (in terms of business prospects, not share price) after this sharp recession is over. I have been steadily increasing my cash reserves since my last purchases in October 2008 and am now sitting on cash which is waiting to be deployed should I see good opportunities. If I do not spot these opportunities, then the cash will NOT be utilized (I just let it pile up).

My next portfolio review will be on Tuesday, March 31, 2009 after market close.


Simon said...

hi musicwhiz,

regarding swiber, were the delay in delivery due to problems from the counterparty/vendor side or problems at swiber? the fact they did not go into specifics as to who is responsible for the delay just make me suspect that it could be problems at swiber, e.g. financing problems etc.

btw, the ships were supposed to be delivered in 3Q08, were the delays mentioned or announced previously? and they plunged into a 4Q loss compared the previous's 4Q profit, but i did not see any profit warning announcement.

frankly speaking, i feel they r not candid and transparent about matters of the company. they just want to keep the bad news hush and tell u the good news only.
that stinks...

Simon said...

i mean, they always dress in nice suits, give fantastic presentations with nice illustrations, talk eloquently, but can't come out with the goods when it matters most....i.e. treat disclosures of bad and good news equally.....then wat's the point?

this companies should trade at a big discount, cos their projected market value will always be higher than their intrinsic value.
makes sense?

musicwhiz said...

Hi Simon,

Regarding your comments, I feel that 4Q 2008 was a time where global trade financing ground to a near standstill, so many ship builders could not secure financing to finish their vessels on time. If you remember, this was after the collapse of Lehman Brothers in Sep 2008, so the fallout occurred in 4Q 2008 (Oct period onwards). Though it was not specifically mentioned, I believe this would be the main reason. The reason I am aware of this is because the same thing occurred with yards contracted by Ezra such that they had to cancel their order with Keppel SingMarine and Karmsund in case the vessels could not be delivered. So from my experience with Ezra, I am aware that it may happen to all players in the industry who are expecting vessel deliveries.

Analysts did mention that a major risk is that vessel delays may cause contracts to not be fulfilled, so this is a risk I was willing to bear as a shareholder. Now that a confluence of factors has caused such as big net loss, I have to take it in stride.

The fact that there was no profit warning is poor communication on the part of the IR, I agree. That's the problem with engaging an external IR company (August Consulting in this case). They tend to dress up the good parts and use marketing language and make everything sound so positive. If you ask me, I would rather a company had its own IR department (e.g. Tat Hong and Boustead) to make things look more realistic.

They were candid in their press release and announcement, but not so for the profit warning. Things may have been beyond their control and I feel they definitely could have explained it further and better, but I think they did give sufficient details about the massive cost overruns.

It's being a bit unfair to say they "always dress in nice suits, give fantastic presentations" because what do you expect top Management to dress in ? Khakis and shorts ? As for "fantastic presentations", all I recall was the deepwater forum where they invited distinguished speakers to talk about deepwater prospects. This was before the downward spiral that scuppered their Equatorial Driller plans and caused their vessel delays.

I will definitely be speaking to them about disclosure of good + bad news and request for equal treatment to be fair to shareholders. I acknowledge this point and admit they are deficient in this aspect.

The trading at discount is also due to prevailing negative sentiment, pessimism and cloudy future prospects. This applies to all companies, good ones and bad, and is not limited to merely Swiber.


dsea said...

an excellent article in pulses on FSL. check it out

musicwhiz said...

Thanks dsea, I read the article and it summarizes the risks of the Trusts. Not really anything new that I learnt apart from what I already stated in my blog; but am aware of the highly risky nature of these Trusts as a result of not having access to capital or debt markets to fund their growth.

A rights issue may be imminent, either that or DRIP may be activated or a severe cut in DPU could result.


Wayne said...

Dear musicwhiz

I enjoy reading your blog and am myself an investor although the only common stock I have with you is FSL Trust. You may be aware that the Trustee-Manager has today posted a Market Update on SGX.

I note that you regard your investment in FSLT as having lost 68.8% in value as at end-Feb. But from my calcuations, you have received $199.00 in distributions since your original investment of $1,105 in Jan 2008. This reduces your cost of investment to $906 for a less painful paper loss of 50%.

Agree with you that the loan-to-market value covenant is a concern but my view is that the banks would probably speak to FSLT first about other options before recalling the loan. This may involve partial repayment which the reduced DPU for FY2009 will help.

What do you think?

musicwhiz said...

Hi Wayne,

Thanks for your comment. You are correct to say that my net cost on FSL Trust is not $1.10 as stated in my portfolio summary. But since I separate my realized gains out of my unrealized, this is why I do not directly adjust the cost of my holdings even if I received dividends.

When all dividends are taken into account, my net cost now is about S$0.89 (roughly). Assuming a payout of USD 2.45 cents per unit starting from 1Q 2009 and lasting for the next 3 years (according to the market update from FSLT IR), that would translate to about SGD 3.43 cents per quarter (using 1.40 Exchange rate for conservatism) and SGD 13.72 cents per year. In 3 years it will add up to about SGD 41.16 cents, which will bring down my cost to about S$0.478. This is roughly in line with current valuations, though of course anything can happen in the meantime and DPU could either get reduced or a rights issue may be on the cards.

I think banks may not pull the plug unless they have to, since FSLT still has consistent cash inflows from lessees who they claim are in no danger of defaulting. Just my views though, I may be seriously wrong on this. :)