Friday, July 31, 2009

July 2009 Portfolio Summary and Review

July 2009 can be classified as an interesting month, as there was some news flow from the companies I owned and there were also two annual reports to read and digest, namely from Tat Hong and Boustead. It was also another month of reversion to the mean in terms of valuation metrics, as Price-Earning Ratios (PER) started to normalize across the board, causing sharp increases in the market prices of most blue chips as well as second-liner companies. If one does a study of the average (mean) PER of companies trading on the Singapore Stock Exchange, one would realize that the period from Oct 2008 to March 2009 represented one of extremely depressed valuations representing a huge doomsday scenario. During such periods of time, if one can suitably identify investment opportunities in stable and solid companies, then it would be the best time to invest as margin of safety would be maximized.

On the matter of valuation adjustments, news flow came in the form of sharply increased economic activity in Singapore, as well as improved earnings in the USA which outperformed expectations; resulting in a sharp and sudden rise in price levels for shares listed on NYSE and NASDAQ as people’s expectations started to re-align. While some people may argue strenuously that nothing much has changed fundamentally and that the economy is still in shambles, the issue of the “worst being over” and is “unlikely to recur” would imply that things can only get better from now on; and higher valuations and expectations are predicated upon optimism and an improved macro as well as micro (corporate-level) outlook. Though this may take several more quarters to fully manifest and materialize, nonetheless investors and speculators have already begun bidding up prices of securities. The careful and cautious investor should remain prudent in his choice of appropriate companies to invest in to ensure margin of safety is not compromised, and that he still has sufficient upside while protecting his downside.

There were no opportunities open for me to add to existing positions, and my time was severely constrained in the area of searching for companies to invest in; thus I made no purchases or sales for this month. I realize time is a very valuable commodity for a value investor, as he cannot possibly analyze ALL possible leads and prospects. By focusing his attention to analyzing just one company, he may inadvertently leave out many other potential ones along the way. But such is the nature of the individual retail investor with limited resources on hand, and who wishes to embark on a do-it-yourself approach to investing. For me, it challenges, motivates and energizes me to see myself getting a decent return on my investment as a result of my hard work.

A detailed Tat Hong AGM review will be prepared soon after my maiden visit to Tat Hong’s offices to attend their AGM. Many questions were posed to the Management and the replies were documented by me either on paper or memory in order to serve as a record of my attendance, and to properly record down what transpired. In addition, the CEO Mr. Roland Ng also kindly gave all shareholders an update on the business and current and future prospects. It was a good learning experience for me and I hope to continually apply Phil Fisher’s “scuttlebutt” approach to speak to Management and stakeholders as part of my investment philosophy.

Moving forward, August 2009 will be a month to look forward to as corporate earnings for 2Q 2009 will be released for Swiber and China Fishery, as well as 1Q 2010 earnings for Tat Hong and Boustead. It will be good to get an update on the corporate situation and developments and to see if there are signs that credit is more easily available and if the recession is showing tentative signs of easing.

For July 2009, corporate updates and result announcements for my companies are as follow:-

1) Ezra Holdings Limited – Ezra released their 3Q 2009 financials on July 8, 2009 and can be viewed on SGXNet, so I will not go into details. More importantly, Ezra released information and slides on their next lap growth strategy on July 16, 2009. I had already prepared a post previously which discussed this, therefore I will not comment further in my portfolio review.

2) Boustead Holdings Limited – Boustead’s Annual Report 2009 made for a good read, and was very detailed in terms of their operations review. I personally feel that FY 2010 will be much worse than FY 2009, as they do not have a one-off gain from disposal of property (from GBI) to boost their bottom line, but since they are a cash-rich company, I would still expect a reasonable dividend payout for FY 2010. The shares go ex-dividend on August 4, 2009 and the final dividend of 2.5 cents/share will be paid on August 20, 2009.

3) Swiber Holdings Limited – There was no significant news from Swiber for July 2009. My concern is that their current order book of contracts may be drying up as the end of FY 2009 approaches, and there is only a US$50 million CUEL contract which is recurring for 5 years. Without the clinching of any more significant contracts, their order book will likely shrink significantly and valuations will be downgraded. It is imperative for Management to come up with a well-defined growth plan on how to tackle the immediate future and to chart growth for the next 2-3 years. Capital was raised at 88 cents per share on June 8, 2009 but to date, there is still no news on how the proceeds will be utilized, and also no indication that the monies were used to grow the business. I await more confirmation and clarity from Management and for now, view this company as the highest risk among the companies I own due to the lack of a defined growth plan, slowing order book, high debt and lack of dividend policy.

4) Suntec REIT – Suntec REIT announced their 2Q 2009 results on July 30, 2009. A dividend per share of 2.977 Singapore cents was declared, and was an improvement over 2Q 2008. Occupancy rate stood at a high 98.4% and they have no immediate need for refinancing. As I own only a small proportion of Suntec in relation to my entire portfolio, I will not comment further on this. The presentation slides on SGXNet explain everything quite clearly for those who are interested in this REIT. My annualized yield based on purchase price of $1.11 is 10.73%.

5) China Fishery Group Limited – There was no significant news from the Company during July 2009.

6) First Ship Lease Trust – 2Q 2009 results were released on July 21, 2009 and FSLT stuck to their forecast of US 2.45 cents per unit, but moving forward they will retain up to 50% of their cash flows for voluntary repayment of debt and hence cut their DPU to just US 1.50 cents per unit from 3Q 2009. Suffice to say that this should have been done a long time ago as the high payout ratio of 100% was not sustainable! I remember making this clear to FSLT Management at their EGM some time back but was rejected by saying that FSLT wanted to maximize payment to unit-holders and thus did not wish to cut back on DPU. Now they do an about-turn and announce the cut-back; so my impression of Management has been dented by this and I feel that they lack focus for the long-term and were instead just trying to maximize cash distributions in the short-term. With the new adjusted payout ratio, there is now a better chance of the Trust being able to survive past 2012, and this is subject to them converting some of their debt to an amortizing loan instead of the current bullet repayment structure. Though I am disappointed with Management’s flip-flopping, I believe the current payout ratio makes the Trust more viable and since cash inflows are steady and expected to continue, I will not consider divesting my stake.

7) Tat Hong Holdings Limited – On July 28, 2009, Tat Hong announced the disposal of KTM Mining Engineering Pte Ltd for a consideration of S$1.099 million, as part of their efforts to streamline operations and dispose of non-core companies. As a result of this disposal, they will recognize a gain of S$863,786 which will be used for the Group’s working capital. The shares are still trading cum-dividend; the ex-dividend date is also August 4, 2009 and the dividend of 1.5 cents per share will be paid on August 18, 2009. Stay tuned for the detailed AGM write-up for Tat Hong.

Portfolio Comments – July 2009

July 2009’s portfolio value saw a sharp rise compared to June 2009, as valuations normalized for most of the companies I own. It has risen from a total gain of 11.3% to a total gain of 27.4% as sentiment improved drastically without a proper explanation. Dividend yields continue to remain healthy and higher than inflation rate.

Moving forward, I will be studying the financial statements of the companies I own in order to review if there are any problems cropping up, and to get a better idea of their long-term prospects. My reading up and study of the property market continues and so far my wealth-building journey has been somewhat successful, with my cash holdings building up nicely in anticipation for deployment into equities and my companies giving me a more than decent dividend yield which is higher than inflation.

My next portfolio review will be on Monday, August 31, 2009.

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