Value Investment - Musicwhiz's Journey

January 2012 Portfolio Review and Final Post

2012-01-31T17:28:00.000+08:00

It is with some bittersweet feeling that I pen this last and final post, along with my portfolio review for January 2012. As mentioned in my previous portfolio review for 2011, heavier work commitments and a desire to spend more time with family and friends has resulted in my decision to stop blogging after this final post. However, please be assured that all historical posts and information will be left intact, so readers can continue to browse and access sections of my blog for information and learning.

For the month of January 2012, I added about $10,200 worth of SIA Engineering to my existing holdings, as I noted that there was quite a vicious and unexplained sell-down on one of the days of the month (I think it was January 13, 2012) which allowed me to comfortably pick up some lots. As a result of this, and interestingly, at the close of my blog today, my portfolio cost has hit the $250,000 mark (it stands at $252,000 to exact). More will be explained in the summary below the corporate summaries section.

Below please find my portfolio as well as corporate summaries for January 2012:-

1) Boustead Holdings Limited – There were a total of four announcements from Boustead for January 2012. Three were minor ones and I will not state them here, but the fourth one, on January 21, 2012, was that of an investment of S$23.3 million to purchase an 8.6% stake in an ASX-listed company called OM Holdings (“OMH”). Boustead will purchase 50 million shares of OMH at a price of A$0.35 per share, representing a discount of about 5.2% to the 30-day volume-weighted average price. The entire subscription will be satisfied in cash and funded by Boustead’s internal cash reserves.

OMH is a company dealing with metals trading which involves the sourcing and distribution of manganese ore products (which are used in the making of steel) and in processing ores into ferro-manganese intermediate products. OMH also operates commercial mining operations spanning Australia, China and Singapore and they are in advanced negotiations to kick-start an ambitious US$502 million smelting plant beside a hydro-electric power station. The rationale for the transaction was for Boustead to carve out a new business segment and to allow the Boustead Group to deploy its project management and engineering expertise to a new industry. Interestingly, Mr. FF Wong was until recently a non-executive director of OMH but had resigned on December 12, 2011.

2) Suntec REIT – On January 19, 2012, Suntec REIT announced its FY 2011 results. A DPU of 2.479 cents/share was declared for 4Q 2011, which was 7% higher year on year and 19.9% higher than forecast. The dividend will be paid on February 28, 2012.

3) MTQ Corporation Limited – There were no announcements from MTQ, other than the scrip dividend allotment of shares.

4) Kingsmen Creatives Holdings Limited – There was no news from Kingsmen Creatives for the month of January 2012. The Company should be releasing its FY 2011 results in late Feb 2012.

5) SIA Engineering Company Limited – SIA Engineering released results on January 31, 2012. Revenue was 12.6% ($33.9 million) higher as compared to the same quarter last year, but operating profit for the quarter decreased 17.7% to $28.4 million due to higher sub-contractor and staff costs. Net profit attributable to shareholders for 3Q 2012 was 5.3% higher compared to last year, and the Cash Flow Statement continues to show healthy OCF of $40.4 million for 3Q, with FCF standing at $65.2 million. However, this was considerably lower than the same period last year ($110.7 million). I guess the probability of a good dividend may be lessened due to the lower cash inflows, but we will have to wait another three months to find out.

6) VICOM Limited – There was no news from VICOM for January 2012. VICOM will be releasing its FY 2011 results on February 9, 2012.

Portfolio Review – January 2012

Realized gains have increased slightly to $69,550 due dividend from Suntec REIT.

For the month of January 2012, the portfolio has increased by +1.1% (using XIRR in MS Excel to compute) against a +9.8% rise in the STI; thus my portfolio performance has severely under-performed the STI by -8.7 percentage points. This was an eye-opener for me in terms of seeing just how damaging a rally can be for my portfolio in terms of relative performance. However, keeping in mind that the principal aim of my investment philosophy is the preservation of capital and to obtain an adequate return, this has been achieved for this month as there was a slight gain on the portfolio, and as far as I can tell, the businesses are still running along fine.

My cost of investment has increased to S$252,800 as a result of a purchase made of shares in SIA Engineering on January 13, 2012 at a price of $3.38 per share (an increase of about $10,200) and unrealized gains stood at +4.3% (Portfolio Market Value of S$263,600). By factoring in a potential cut in dividends of about 20% from 20 cents (full-year) to 16 cents, yield at my purchase price would still be about 4.73% (acceptable for me as it close to current inflation rate of 5.5% which is an elevated rate). Assuming a more drastic cut of 40% to a full-year dividend of 12 cents/share (translating to only a 6 cent final dividend), the yield would be 3.55% at purchase price, which is still decent considering the business model of the company and that the long-term prospects for the airline and MRO industry are positive.

My latest purchase should adjust my projected full-year 2012 dividends to about $13,600 (assuming I accept all future MTQ dividends in CASH, not scrip), which translates to about $1,130 per month).

This being the final post on this blog, I wish to take the opportunity to wish all my faithful readers a very fruitful and successful investment journey, and good luck and good health to your good selves and your families!

Readers who wish to contact me may choose to do so by emailing me at musicwhiz55@gmail.com. Adios!

My Value Investing Journey

2012-01-26T08:15:00.000+08:00

It has been about 4.5 years since I first started serious blogging about investing and investment, and since then it has been a very steep learning curve for me in terms of acquiring knowledge, improving my analysis and sharpening my focus on companies. At the same time, I had also acquired important character traits and temperament which also aided in my journey to compound and grow my money. I guess this second-last post is to summarize my journey so far, and to collate all that I had learnt. I will also be penning down my plans in the medium-term, and how I plan to grow my portfolio; along the way I will also talk a bit about personal finance and its importance in helping one achieve one’s money goals.

Acquiring the right skill set and mind set for value investment

I guess you could say that I started out on the “right” path for investing by taking a Bachelor’s degree in Accountancy, for it laid down the basic foundation for me to read, understand and interpret financial statements, which are the language of business. Along the way, I also obtained my Masters in Business Administration (MBA), which further enhanced my knowledge and understanding of businesses and how they operate. I credit my alma mater with providing me with concrete, real-life examples of companies, their corporate strategies and business models for me to analyse as part of group projects and assignments. At the same time, I also took up many modules (as an elective) on marketing such as consumer behaviour and promotional marketing, and thus understand better how companies market and sell their products, target markets, market segmentation and product positioning strategies. All these constitute my “skill set” and competency for investing, which I feel is very important if one wishes to pursue value investing.

Additionally, reading up many good books on value investing and the value philosophy such as “The Intelligent Investor” also helped me to build up and solidify my framework for prudent and conservative investing. I guess my other name for value investing would be “sustainable investing” as it can take you through economic cycles relatively unscathed. While it is not a method which can grant you instant riches, it can help you to avoid crippling losses and prevent you from becoming poor. Therefore, it is a slow and steady way to wealth, which gels very much with my psychology as well – I was never a showy person who needed to fling my wealth around or to prove that I can earn lots of money.

Acquiring the right mind set for investing took a little more time, and was noticeably tougher because after all, this is psychology and emotions we are talking about (mentioned in detail in my previous post), which is not something you can easily imbibe into your life. It was only through reading books like “Your Money and Your Brain” and going through a real-life (harrowing) experience of a full bull-bear cycle (while being fully vested all the way) did I manage to cultivate the necessary tolerance to pain, discipline, patience and calmness in order to survive the emotional ups and downs thrown out by Mr. Market. So for those who are working on the psychological aspect of investing, do not be discouraged – continue to read and learn about your own psychological and emotional make-up, while at the same time testing your reactions in real-life investing situations (by analysing and putting real money down, not phantom funds). Please understand that the process of acquiring the right mind set will take time, and one should not rush the process.

Improving savings rate and embarking on lessons in personal finance

Over the years, as I learnt and read up more on personal finance, I also began to improve my own tracking and monitoring (and control) of my own finances. Blogging about it also helps, as it crystallizes my thoughts and embeds the concepts deep within my cranium. Over the years, I can boldly declare that my income had not risen as much as I had hoped for (sadly), but as a result of living a relatively simple lifestyle, I have been able to save (on average) about 45% to 50% of my take-home salary (after deductions for CPF). The same is also done for my wife, who lets me manage her finances on her behalf. With this savings habit, it has translated into a lot of buffer and financial security, even during periods of sudden distress (such as the hospitalization of my daughter middle of last year). I am glad that this habit of “paying myself first” has afforded me the luxury of having a cash hoard with which to tap in case of emergencies, and it also acts as a good source of funds for investments into equities should juicy opportunities come by.

Besides the afore-mentioned savings habit and prudent spending, I had also, over the years, begun to meticulously track various aspects of my finances, which was detailed in a previous post. Whether it be my mortgage loan, equity portfolio, passive income, cash flow or CPF Balances, I have spreadsheets for them and can monitor the balances at any time, instead of waiting for the official statement to arrive from the relevant Government bodies (HDB, CPF, MND). These have helped me to gain a better grasp of various financial aspects of my life and made it easier for me and my wife to understand our financial situation at any point in time.

In keeping with a prudent (and healthy) lifestyle, I have avoided purchasing a car during my entire adult working life; and instead choose to take public transport, walk or cycle to my destinations. This is not only a good method of conserving the environment (greenhouse gas emissions are on the rise globally), but it also allows me to enjoy more of Singapore. Cycling allows you to go to places seldom accessible by car, while public transport allows one to see a microcosm of life in our hectic and frenetic little Red Dot. Of course, most times I see people absorbed in their iPhones and Blackberrys, but observing people has been one of my little hobbies and public transport allows me to do so, while cutting costs as well.

Along the way, I have also avoided being trapped by materialism – I have no branded items myself.

Gaining a better understanding of behavioural finance

From my very first bad trade and mistake made in Yellow Pages (panicking and selling at a loss), to my current situation in handling potential bad news coming from my companies, I have realized and been aware of the importance of emotional control and psychology in investing. This is why I had starting reading up fervently on a new branch of economics and finance called Behavioural Finance as early as 2008, and picked up books such as Your Money and Your Brain by Jason Zweig, and also wrote many posts on aspects of behaviour, emotions and psychology. Value investing is not complete without the proper temperament and emotional framework, no matter how expert an analyst you are. There are people around me who I would proclaim to be much better at analysis, discounted cash flow and other arcane methods of valuing companies; but they love the thrill of speculation and therefore may be ill-suited for the value investing process.

Behavioural Finance also exposes our weaknesses and frailties when it comes to making decisions involving money, and how humans love to sabotage themselves when it comes to financial decision-making. A thorough understanding of heuristics, biases, fallacies and illusions can help us to better control our base instincts in order to make more rational choices which would benefit us in the long-run (though it may cause severe pain in the short-term). Humans also prefer certainty and this is why we read about so many “predictions” and “forecasts” once the Year of the Water Dragon arrives. I also read about many people flocking to fortune-tellers to find out what they should do in the coming year. Ultimately, the choices you make will influence the outcome of your investments, and uncertainty is actually the friend of the rational buyer because it creates situations in which pricing of the security is below intrinsic value (discounted for an unknown future).

Thus, I am glad to have been endowed with knowledge on behavioural finance and feel that as a result of this knowledge, I have also become a more calm and objective investor.

Acquiring knowledge on alternative investments – Bonds and RCPS

Through the years, and after countless conversations on value forums regarding investments, I had also picked up considerable knowledge on other forms of investments such as RCPS (Redeemable Convertible Preference Shares) and bonds (fixed income instruments). Healthy and constructive debates over the months and years have provided me with a good foundation of knowledge which I am actively and rapidly building on. Knowing about such investments gives greater breadth to my own portfolio and allows me to include other asset classes in order to buffer the portfolio in case of any extreme and adverse events. Also, as one ages, one should shift their portfolio towards a mix of equity and bonds as an old investor may not have the luxury of time to sit out a protracted and prolonged bear market. Therefore, knowledge of alternative investments is important to have in our arsenal should we decide to deploy our monies. (I do not consider Gold and Silver as investments as they do not generate cash flows for the investor – it is essential a buy higher, sell higher mentality which I classify as speculation).

Learning about portfolio management, asset allocation and portfolio rebalancing

The important aspects of portfolio management (monitoring my companies, and adding shares to more promising ones), asset allocation (to equity and fixed income components, in the future perhaps) and portfolio rebalancing (switching out of a lousy investment in favour of a better one) are all essential skills which an investor needs to have in order to ensure a consistent decent long-term return on his portfolio.

Investing for Growth and Yield – A Potent Combination

Over the years, I have learnt the power of investing for both growth and yield; and the combination can grow one’s wealth over time above the rate of inflation. Of course, the balance between growth and yield is a delicate one, but the companies within my portfolio all have some measure of growth even as they pay half-yearly dividends. The key to sustainable growth is to ensure the Company has a competitive edge, honed either through years of experience in serving customers or else through the build up of strong customer relationships or a wide network of branches and client locations. Not to be forgotten is also the concept that growth should not be too fast and furious, but should be steady and well-paced. An organization which focuses too much on top-line growth, for example, may end up being too aggressive and would fizzle out over time, destroying shareholder value in the process.

The secret to being able to sustain a decent yield yet offer growth is in the cash flow statement. As they say, the devil is in the details and it pays for the investor to closely study the cash flow statement in detail; not just for two consecutive years in comparison but to do a ten-year historical study if possible. This is to glean information about the Company’s ability to generate strong, consistent and healthy FCF and if they are more than sufficient to cover average capex required to keep the Company up to speed in terms of technology and knowledge acquisition. For companies which can generate excess cash flow, this means that they have sufficient resources to plough some of that cash back to grow the operations and ROE, while also afford to pay out some of the cash as dividends as a reward to shareholders. It is my job to search for more of such companies which are being sold by Mr. Market at a decent discount to intrinsic value.

Imbibing good lessons and practices from other esteemed value investors

I would like to take this opportunity to thank the many value investors and bloggers over the years who have contributed to my knowledge base and also injected in me a healthy scepticism regarding companies and corporate announcements. There are also people who provided constructive criticism and allowed me to rethink on my choices and decisions, and have ultimately steered me towards the correct path in terms of thinking about investing. Some of these people have also advised on aspects of personal finance which have helped to guide me to build up my savings and war chest.

These people are (in no particular order of merit): d.o.g., dydx, donmihaihai, Nick, Drizzt, cookieguy, la Papillion, tvf, dantzig, notti_boi and Munger (nicknames). For those I had inadvertently left out, please be assured that all of you had some part to play in making me a better investor, and ultimately a better person as well. Thank you very much.

Plans and Strategies for the Future (three to five years later)

With portfolio rebalancing and management already explained in a previous section, I guess the question would be – what will I be doing with my portfolio and how do I intend to grow it and nurture it to achieve my personal goals? My current portfolio stands at about $250,000 in cost and $259,000 in market value. Assuming a 5% yield (conservative), that would generate an average of $12,500 a year in dividends, meaning around $1,000 monthly. My target and goal would be to increase this to $2,000 per month of passive income, which translates to about $24,000 per annum. For this to happen, either yield has to increase or else if yield remains constant, then the portfolio size has to at least double to $500,000.

I plan to go about this in two ways – organic growth of the portfolio through an increase in the share prices of the underlying securities; as well as additions to the portfolio from time to time through savings and bonuses obtained from my profession (i.e. day job). The organic growth aspect will come about through time as my companies grow their business operations and also their top and bottom line. As for regular additions to the portfolio, these will be made at opportune times when Mr. Market is absolutely manic and pessimistic, in order to achieve an adequate margin of safety. The plan is to add at least $50,000 on average to the portfolio per year, to scale up the portfolio to a cost of $500,000 within 5 years (when I hit age 40). By then, I anticipate that the market value of the portfolio could see a 10% gain over cost, or be about $550,000. Assuming a constant yield of 5%, annual passive income would then hit my target of $25,000 per year.

The reason for this rather lofty target is to ensure that as I grow older and am faced with more responsibilities (e.g. kids’ education) and more chances of being laid off, I also grow my asset base and passive income source so as to reduce reliance on my active income from my day job. This also will eventually free me up to do what I really want in my life- whether it be starting my own business (dealing with music and CDs no doubt!) or travel around the world. Financial Freedom can be achieved in my lifetime with discipline and patience, and for myself, without the use of leverage.

Value Investing Recap Part 2 – Psychology and Temperament

2012-01-20T00:09:00.000+08:00

Part 2 of my investing recap will focus on the psychological, mental and emotional aspects of investing, which are arguably just as important (if not more) than the quantitative and qualitative aspects of analysis into a Company and its business model. This is because having the wrong psychology can often scuttle an investor’s best intentions, even if he is a certified expert in analysis. The inability to control and master destructive emotions can cause significant losses for an investor and result in him not being able to preserve capital. Behavioural Finance is a very new field which combines finance theories with psychology to come up with models of investor behaviour which deviate from the rational and logical “standard” model. I will be touching on aspects of behavioural finance research with quotes and simple examples from the book “Investing and the Irrational Mind” by Robert Koppel. At the same time, I will also elaborate on some of the emotional and psychological attributes necessary for an investor to be successful in achieving a decent long-run return.

Patience, Discipline and Fortitude

The above attributes relate to the mental state of the investor as he observes Mr. Market’s erratic price fluctuations. It also embodies the attitude an investor should have when confronting investments which may look attractive from an analytical standpoint, but unattractive from a valuation standpoint. Patience is a key trait which investors should have, as there is always the temptation to swing for the fences even though one may not be prepared. Impetuous behaviour often leads to grief, and the ability to stand still while others are moving like whirling dervishes shows the strength of one’s conviction.

Discipline is needed to ensure that one stays true to investment principles and philosophies, and does not stray off the well-trodden path. Often, Mr. Market’s exciting gyrations will entice the unwary investor to cross over to the gilded path of speculation, wherein he may feel that it is harmless enough to commit a small portion of his wealth to speculative activities; all in the name of feeling the pulse of the market and to experience the adrenaline rush which comes from placing a gamble. In order to cultivate discipline, one must shut out the noise and “advice” which comes daily in the form of recommendations, exhortations and forecasts. To be disciplined also means strictly following your original plan for investment and not deviating from it, as this may mean an erosion of capital.

Fortitude is defined as the “mental and emotional strength in facing difficulty, adversity, danger or temptation”. This is probably the hardest mental and emotional quality to have as a paper loss can feel extremely painful due to the human tendency for loss aversion. Having fortitude means being able to overcome the mental anguish that you may have made a bad decision and to soldier on even though the odds seem against you. It is a character trait which is honed through many years of being in the market and getting used to Mr. Market’s manic mood swings. By focusing on the business of the Company, one can build up fortitude and be more emotionally resistant to such adversities and difficulties.

Calm, Rational and Realistic

An investor needs to maintain a calm attitude when approaching investing, and not get unduly excited, panicky or exuberant. Calmness helps one to think more objectively and to evaluate possible courses of action in a rational manner. This trait also means that one should logically think through all potential outcomes, including the so-called “Black Swan” ones, and be mentally prepared for significant losses should these events come to pass. If one is certain of committing capital, then the calm investor should proceed to do so only after considering all the possibilities.

A rational investor is more likely to react more calmly should any unexpected events occur, as he can maintain his sense of balance amid turbulence and uncertainty. In order to remain rational and objective, it is necessary to cultivate a mindset which does not react adversely to sporadic and unexpected events which most certainly will crop up in an investor’s lifetime, be they a sudden terror attack, a large drop in earnings or a natural disaster just to name a few.

Finally, an investor must learn to be realistic about companies. In the world of business, nothing is certain and sometimes the best laid plans and strategies may be fruitless if a new competitor or complementary technology/product is introduced. Hence, an investor must learn not to be too optimistic – according higher valuations to a company which is supposedly the next big growth engine or with the next new groundbreaking product or technology. Neither should the investor be unduly pessimistic and see only dark clouds ahead, which may cause him to unnecessarily divest of his holdings when the setback may just be temporary or transitional. These extreme emotions should be tempered by realism and business sense, which would allow an investor to logically and rationally assess the business prospects of the companies within his portfolio.

Behavioural Finance – Heuristics, Biases, Fallacies and Illusions

Now we come to the area of behavioural finance, which in recent years has been the subject of extensive and groundbreaking research. This is because it is a new field which can determine investors’ behaviour outside of the standard economic model of rational behaviour and profit maximization. Apparently, a lot of what we do actually runs counter to common sense and some of it even actively destroys our wealth! I shall not go in depth into the above four aspects but will just touch briefly on them. My reference is Robert Koppel’s book “Investing and The Irrational Mind”.

Heuristics simply refers to rules of thumb – shortcuts which our mind uses to arrive at conclusions. In any activity (investing included), our brains are hardwired to look for shortcuts which would make like easier and make decision-making quicker (though not necessarily more efficient!). For investing, we need to ensure that we rely on the correct and accurate heuristics in order to support our conclusions, and must actively avoid shortcuts which may results in flawed decisions.

Biases are cognitive and psychological in nature, and refer to a particular form of behaviour which arises due to personality traits inherent in human beings. Examples are over-reaction bias, endowment effects, hindsight bias and anchoring bias just to name a few. Over-reaction bias exaggerates the effects of bad news and makes us over-react to events, thus bad news is magnified in terms of emotional impact while the effects of positive news is muted. Endowment effects make it seem like what we own is more valuable than what we do not own, and is usually used to describe the fact that once one owns shares in a company, they would seem more valuable to him than an outsider viewing the same shares. Hindsight bias is one of the most pernicious and common biases and relates to people thinking that they would know what was going to happen, after the fact! This fools people into believing that they could predict what was going to occur. Finally, anchoring bias causes our minds to anchor on a specific price or event and we tend to use this as a benchmark even after it is long obsolete or irrelevant. For more info, please borrow or buy Robert Koppel’s book.

Fallacies are misconceptions resulting from incorrect reasoning that often triggers an emotional response (Koppel, 2011). Some of those discussed in the book include the Fallacy of Accident (Black Swan Theory), Gambler’s Fallacy and Psychologist’s Fallacy. The Fallacy of Accident is a fallacy based on the faulty logic of a generalization that disregards exceptions, thus this applies to assessment of companies without considering scenarios which seem too “impossible” to occur, even though there may be a reasonable chance of it occurring. Gambler’s Fallacy was discussed before in one of my posts, and I shall not dwell on this further. Psychologists Fallacy is interesting because it is the case where the observer assumes that others have the same information and perceptions of the world as he does, and thus he bases his assumptions and logic based on this.

Illusions are pretty interesting phenomena, and this was the first time I had stumbled upon such an extensive array of illusions which can play tricks on our minds. Basically, an illusion is defined as perceptions which differ from objective reality. There are several discussed in the book, but the two worth mentioning (in my opinion) are “jumping to conclusions” and “clustering illusion”. Jumping to conclusions is a case where one believes they possess superior knowledge, therefore they take shortcuts with respect to decision-making, which may end up costing them an arm and a leg. Clustering illusion is the belief in the existence of patterns where none exist, and can usually be found among chart readers who swear by a certain pattern, though nothing may actually exist. I liken this to seeing picture of animals or familiar shapes in clouds, whereas everyone knows clouds are just random collections of water droplets.

Conclusion

The above is a very summarized list of the psychological and mental attributes which an investor should strive to possess in order to manage the “softer” aspects of investing. While having a firm foundation for analysis is important, it is also equally important that the investor does not neglect the emotional aspect of investing. This is because as humans, we do not always behave rationally and with cold logic (like a computer), therefore it is important to understand these emotions and harness them to make better investment decisions.

My next post (my second-last post) will focus on my four and a half year investment journey, and what I had learnt along the way, mistakes made and lessons learnt. I will also pay tribute to value investors who had inspired me as well as people (including bloggers) who had taught me about life, personal finance, wealth building and money management.

Value Investing Recap Part 1 – Research and Analysis

2012-01-14T23:17:00.002+08:00

As part of my concluding posts for this month, I shall be doing two major recaps on value investing and will be focusing on two major aspects which I feel are equally important if an investor wishes to obtain a successful, consistent and decent return on investment. These two sections shall be split into “Research and Analysis” which gives a revision on what one should focus on with regards to the numbers, financials and operating statistics; and “Behavioural Finance and Temperament” which sums up the emotional fortitude and attitude an investor should have when he approaches investing and the stock market. I guess readers can take these two posts as a final culmination of my 4.5 years of blogging and intensive thinking and analysis on various companies. I shall give my best attempt to distil my current knowledge and understanding of the proper concepts of investing into these two posts.

Note that following these two posts, there will be another final post on my investment journey and (this) journal, which will essentially sum up my personal thoughts and feelings on my investment journey through these years, and how I have grown and matured as an investor. No doubt the input of many other esteemed value investors was also taken into consideration in making me who I am today, as well as a list of very established authors and articles which I had read (and absorbed) over the years. I wish to thank these people in advance for enriching my life and journey and making it more meaningful and fruitful.

The Research Process

This involves preliminary research and gathering relevant and useful information about a potential investment opportunity. The research process is often rather time-consuming and tedious as multiple sources of information would have to be found in order to move on to the next stage – the Compilation Stage. An investor can usually start out with the most basic source – the Company’s Annual Reports for the last ten years. This should be followed up by recent corporate announcements, and then any industry reports if applicable.

Research should attempt to be as broad-based as possible, and to include all pertinent and relevant sources of information which may assist in the decision-making process. Most of the information obtained will be from public sources, but it does not hurt to go direct to the source if possible and set up and interview with either the Operations Manager, CFO or even CEO. This is truly a case of Phil Fisher’s “Scuttlebutt” technique, where the investor “gets his hands dirty” in gathering information directly from the Management themselves. Of course, such information is necessarily biased, and the investor should objectively assess the information to ensure he is not unduly influenced by Management’s expected optimism.

The Compilation Process

Compilation is a process which collates and aggregates the information, either on a Word document or an Excel spreadsheet. This enables the investor to better make sense of the huge influx of information which he must have obtained from the previous process of research, and also to summarize and make sense of the information in a meaningful manner. Compilation may take quite some time as the facts need to be arranged in a logical sequence, which could includes (but is not limited to) chronological sequence of events, arrangement of inter-connected facts and figures (examples, setup of new business divisions and their associated operating margins) and year-on-year comparisons of key ratios and metrics (like ROE, margins etc).

At this juncture, perhaps I should mention that the way the information and data is compiled has quite a heavy bearing on the next process, which is analysis. If the information is not compiled in a logical manner which makes it easy for the investor to trace the fortunes of the Company over the years, then he is likely to be either unable to make a conclusion on the investment worthiness of the Company, or worse still, may make an erroneous conclusion which may result in permanent loss of capital. Generally, the “proper” and sound way of compiling information is to ensure that one moves through the Company logically, from quantitative to qualitative; from business divisions to strategy, and so on. It can be argued that the substance of what is compiled is more important than the form, but I would insist that the presentation of the information also be coherent to an outside reader such that the investor and him would be able to glean the same insights using the same sets of data.

The Analysis Process

The analysis process can be described as the most difficult aspect of investing as everyone may look at the same data or information, yet come up with completely different conclusions. This is where the “skill set” of the investor comes into play, as he must draw on multiple disciplines (as mentioned by Charlie Munger, Warren Buffett’s business partner) in order to form a mental model of whether an investment looks attractive. Numerical and quantitative data must be assessed and analyzed to identify trends or spots of competitive advantage which differentiate one company from another; and the same investor must also be alert to potential danger signals or “red flags” within the numbers (e.g. inventory levels, receivables days, declining gross margins) in order to identify potential weaknesses. Suffice to say that the investor requires a very keen eye and an even sharper mind in order to make sense of the voluminous amount of information and draw meaningful and logical conclusions.

Numbers aside, analysis also involves areas of business analysis (as shares are, after all, part-ownership of a business) such as marketing, corporate strategy, management, human resource (staffing), operations and administration. Obviously, one cannot be knowledgeable in all aspects of a business, but it is important to at least have some awareness of how major decisions in these key areas influence a company and affect its competitive advantage, growth prospects and stakeholders. Porter’s Five Forces come in handy and some investors also take it upon themselves to do a SWOT analysis to enhance their understanding of where a Company stands. Other types of analysis which may be employed would also include (but is not limited to) a PEST analysis.

The final and possibly most important (yet somewhat nebulous) aspect of analysis is that of the integrity and character of key Management personnel and Directors. This aspect can only be independently assessed if the investor undertakes to personally visit and interview the Management and/or Directors. A very good opportunity usually arises by attending the AGM or EGM of the Company, whether as a minor shareholder (e.g. buy 1 lot to be invited to the AGM) or as an observer. Subtle cues can be picked up to see if Management is evasive, upfront, candid or simply cannot resist the so-called “institutional imperative”.

The Decision Process

The decision process would immediately follow the analysis phase, and is a validation of the analysis process. Once the all-clear is given in terms of the analysis portion, meaning there is green light to go ahead, the only “hurdle” left would be to determine a suitable valuation to purchase. This is the tricky part where one has to assess metrics such as P/B, PER or use a rudimentary form of DCF analysis with assumptions in order to “model” a fair value for the Company. While Buffett uses “intrinsic value” to encompass the entire business and its characteristics (including intangibles such as goodwill, patents and trademarks), this concept would imply a value which is in excess of the sum total of the net assets on the Balance Sheet, and therefore is difficult to pinpoint with precision. Hence, being approximately right in obtaining a value and purchasing at a margin of safety is much better than being precisely wrong.

Conclusion

The above pointers are just a brief summary of the research, compilation, analysis and decision-making process which has now become an integral part of my stock selection process. My criteria has been mentioned before in previous posts and I will not repeat them here again, but this post is just to collate my final thoughts on this topic and to provide a summary of how to go about the often tedious, but ultimately rewarding process of finding and purchasing an excellent company.

In my next post (third-last post), I shall weigh in on the psychological, mental and emotional aspects of investing, which I feel are as important as the business analysis portion.

December 2011 Portfolio Review and FY 2011 Year-End Review

2011-12-31T12:00:00.013+08:00

For this year-end review, I will be doing a comprehensive review of various aspects of my portfolio, covering cost, yield and also benchmarking against the STI during various months of the year. The reason for this is to get a better understanding of how my portfolio has been growing to date and over a period of two years, and how my returns have been affected (if at all) by the recent crisis. Another aspect which I will be looking at is the benchmarking as it would indicate whether I should simply stick to index funds or whether I should doggedly continue my pursuit of analysing individual companies and investing in them. Obviously, if my stock-picking skills are so bad that they stink, I would be better off saving my own time buying into ETFs than wasting it on futile analysis. At the same time, at the end of each section, I will also include my 2012 plans and aspirations.

Portfolio Growth

Portfolio growth tracks the growth in my portfolio over the last two years, and it was interesting to compile this to see how I had injected money and taken money out during this period. I started the year 2010 with a portfolio cost of about $151,000, and at the time the market value of the portfolio stood at about $160,000, with a gain of 5.9%. A total of about $51,000 was injected into the portfolio during 2010, and though it looks like there were no withdrawals, a quick glance at last year’s portfolio summary actually showed two divestments – one of FSL Trust and another of China Fishery (for a loss and a gain respectively). The proceeds were immediately reinvested into other promising companies, and 2010 actually ended with a portfolio cost of about $202,000 and an unrealized gain of 20.2% translating into a portfolio market value of $243,000 as at end 2010.

Looking back on hindsight, the performance for 2010 was way better than for 2011, largely due to the Europe Crisis which broke out in 2011 and caused a sharp fall in overall market prices. If we just base on share prices alone, the performance of the portfolio would definitely pale in comparison for 2011 compared to 2010, as the average gain was 13.7% for 2010 across twelve months, while for 2011 it is a mere 8.8%. But note that the money injected into the market amounted to about $40,000, which was comparable to 2010 if you factor in the turbulence in my personal life during 2011, as compared to a relatively calmer 2010. Of course, looking at the market value of the portfolio as at year-end 2011, it was severely affected by the economic turbulence and political uncertainty in Europe, and therefore just registered a gain of 3.2%, for a market value of $250,476.

Moving forward, the aim for 2012 is to at least maintain the capital injections (of around $50,000) as per 2010 and 2011, accelerating only if markets fall substantially, akin to the doomsday scenario of October 2008. From the lessons learnt from the last bear market, I have positioned myself to be always prepared for a major crisis with sufficient cash to take advantage of opportunities. At the same time, as an investor I have to continually keep a watchful eye on the performance of the businesses of the companies in which I own shares. Assuming I inject a decent amount into my portfolio, the cost by the end of 2012 should be around $300,000.

Realized Gains, Full-Year Dividends and Dividend Yield

From the above table, it can be seen that 2011 registered an overall realized gain of $5,600 from the divestment of Tat Hong and GRP. Recall that 2010 also saw a net realized gain of $9,400 but this was due to a larger gain offsetting a smaller loss (gains from China Fishery offsetting losses in FSL Trust); therefore I do consider this an “improvement” of sorts as both divestments resulted in gains, albeit much smaller in quantum as compared to last year. However, readers should note that both divestments this year have been classified as “investment mistakes”, and those who wish to know more details can visit the relevant posts under this category to read up.

As for scrip dividend, thus far only MTQ is offering this scheme among the six companies within my portfolio. For 2011, a total of 2,206 shares were received as a result of me choosing full scrip over cash dividend, and a further 1,000+ shares will be received by me on January 6, 2012 when MTQ’s interim dividend of 2 cents/share is credited to my CDP account in scrip. The scrip price determined for this round is 73 cents/share.

For the entire year of 2011, a total of $14,744 in dividends was received. Note that this does include special dividends from three companies – SIA Engineering (10 cents/share), Boustead (3 cents/share) and Kingsmen Creatives (0.5 cents/share); thus it should not be taken as an “indicative” year. If the special dividends were stripped out, total dividends would fall to $11,540. Based on a monthly average of $1,229, the blended yield is about 6.08%, slightly higher than the recently reported benchmark inflation rate of 5.7% for November 2011. If I assume all dividends revert back to base case (i.e. no change from 2011 for next year, just based on interim and final dividends), then yield may fall to somewhere around 5%+ of cost. Though this will be lower than inflation, it is still quite a respectable long-term yield as headline inflation is not expected to remain above 5% for an extended period of time (historically, it has hovered around 2-3% per annum).

The target for 2012 is to at least maintain the dividend yield, as it is expected that it would be a rougher and more uncertain year. Absolute dividends are expected to remain fairly constant (minus the special dividends), so cash flows should be relatively stable. Depending on whether additions can be made to the portfolio, it may help to bump up the dollar-value of dividends somewhat.

Benchmarking Against STI

The table above is a pretty new one in the sense that I had never before compared my monthly performance against the index before. Since 2011 I have been posting up my monthly XIRR performance against the index’s performance, and obtained a difference which represents whether I had outperformed the index (+) or underperformed it (-). A very interesting observation arose from the above table – for a value portfolio which I am maintaining, apparently the out-performance increases when the index is plunging, rather than rising. Notice that when the index had dipped below the 3,000 mark from August 2011 onwards due to the onset of the Europe Debt Crisis, that was when the portfolio had its best out-performance against the index. The second-widest margin of out-performance was in September 2011, when the portfolio registered a +11.6% gain over the STI, due to the share price resilience of companies such as Boustead, MTQ and Kingsmen Creatives. Amazingly, the largest gap thus far has been achieved at this point in time, with a +12% gain of my portfolio (-5%) over the index (-17%). I am not sure if this out-performance can be maintained in 2012.

One should also note that share price resilience is also a direct result of business resilience, meaning businesses which are adequately capitalized and enjoying steady business even amid hard times can qualify to be considered as “stable” and thus act as suitable investments through good times and bad. Companies which generate consistent free cash flows and which have a strong balance sheet will also see less share price volatility in general, except for the occasional desperate seller who will cause prices to move erratically due to the low liquidity. It is my intention to seek out more of such stable businesses which embody both growth and yield characteristics for my portfolio in future, and which are trading at undemanding valuations vis a vis their future prospects and cash flow generation capability.

Below please find my portfolio as well as corporate summaries for December 2011:-

1) Boustead Holdings Limited – There was no news from Boustead for December 2011. The interim dividend of 2 cent/share was received on December 16, 2011.

2) Suntec REIT – There was no news relating to Suntec REIT for December 2011.

3) MTQ Corporation Limited – There was a minor announcement from MTQ on December 15, 2011 about the liquidation of a subsidiary, MTQ Subsea Technology Pte Ltd, which has been dormant since 2008. Other than this, there was no news from MTQ for December 2011.

4) Kingsmen Creatives Holdings Limited – There was only a minor announcement on December 12, 2011 of a change in shareholder in Kingsmen Korea as a result of the issuance of 7,500 new shares to Mr. Daechul Lee as part of alignment of his interests with the Group’s.

5) SIA Engineering Company Limited – There was no news from SIA Engineering for December 2011.

6) VICOM Limited – There was no news from VICOM for December 2011.

Portfolio Review – December 2011

Realized gains have remained at $69,500 due to an absence of any dividends in December 2011.

For the month of December 2011, the portfolio has decreased by -5.0% (using XIRR in MS Excel to compute) against a -17.0% fall in the STI; thus my portfolio performance has outperformed the STI by +12 percentage points. This was a better performance compared to November 2011, when the portfolio out-performed the STI by +10.7%. Cost of investment has remained at S$242,600 and unrealized gains stood at +3.2% (Portfolio Market Value of S$250,500).

As mentioned previously, January 2012 shall be my last month of blogging, as the intention is to shut down the blog as my workload increases and I increasingly look to more time with my family and friends. I shall probably do a post reviewing and summarizing my investment journey these last 4.5 to 5 years in the middle of January, and my final post on this blog shall be my Jan 2012 portfolio review and summary. Be assured, however, that historical entries will still be preserved and accessible to all, and that this link will still remain active even if no new posts are made.

My final portfolio review (and post) will be on January 31, 2012 (Tuesday).

Boustead Singapore Limited – 1H FY 2012 Analysis Part 3

2011-12-26T13:26:00.000+08:00

Part 3 will be interesting, as I delve into Boustead’s leasehold property portfolio and also its dividend history. I guess I had already mentioned quite a bit about Boustead’s prospects based on its divisions in prior reviews and analyses, therefore I shall not dwell too much on the same facts again in case I start putting readers to sleep! Basically, the underlying thrust of the Group’s strategy is still the same, though of course they are shifting their focus to earn more recurring income from their real-estate portfolio rather than endure the lumpiness from their Water and Oil and Gas divisions. This will be a slow and ongoing process and I am willing to wait as “Rome was not Built In A Day” to use the popular phrase.

Boustead Leasehold Property Portfolio

As can be seen in the table above, Boustead currently has nine leasehold properties in its portfolio, and this is set to rise further next year if it manages to clinch more of such deals. Note that as at 1H FY 2012, six are already completed and thus should be contributing rental income to Boustead’s top and bottom line from 3Q 2012 onwards. Another fact is that their clients are all heavyweights and multi-nationals, therefore the risk of default or late payment is also significantly reduced. Most, if not all, of them are in the technology, aerospace or logistics industries, and attests to Boustead Projects’ reputation as a design specialist which can customize facilities to meet international clients’ needs. Though this may seem like a niche market, remember that there are still many companies which are eager to enter and set up base in Singapore, as we are a very business-friendly country (with tax rates at 17%). Recent news also mentioned Rolls Royce (one of the largest engine producers in the world) setting up shop here at Seletar Aerospace Park, and looking to hire 500 staff to work in its new production facility. With the Government thrust to develop more areas of Singapore and add in hotels, entertainment and industrial sectors, this trend looks set to continue into the foreseeable future. Some examples which immediately come to mind are the Kallang Riverside Project and Jurong Lake District Rejuvenation Project, both of which have been envisioned and are in the pipeline for development in the next five years.

The remaining three properties will be completed in 2012, with the latest being June 2012 (1Q FY 2013). Therefore, the financial impact of the entire portfolio will only be felt in late FY 2013, and this does not include possible additions to the portfolio during the first six months of 2012. The total square metres of the properties has exceeded 90,000, and it is Boustead’s aim to grow it to 200,000 to 300,000 sqm before the entire portfolio can be considered for sale to an industrial REIT. I had attempted to compute a blended rental income per square metre using information from CommerciaGuru dot com, but apparently different areas of the industrial park can command different rental rates, and the variance can be rather pronounced as it is also tied to the age of the building. Therefore, I have not been able to pin down a rate which is “reasonable” and which I can use to forecast rental income for each property. Rather than use an estimate which may be way off the mark, I will just leave it as it is and wait for the Group to state the amount of recurring income it receives from its properties, or perhaps I can drop an email to the IR for more clarifications.

Dividends

In the interest of brevity, I shall not discuss too much about dividends as I believe the above table already summarizes most of what I have to say regarding dividend history. Boustead supplements a lot of their recent dividends with special dividends, and FF Wong repeatedly makes it clear that these should be labelled “special” and thus one-off, and shareholders should not expect something of an SPH-type “special” dividend situation which seems to repeat every year (then why call it “special” in the first place??). One can notice that except for FY 2006 and FY 2007 (where there was a dividend in specie of Easycall shares and a booster final dividend respectively), dividends have trended up quite smoothly over the years.

Interestingly, dividend payments only started back in 2003 when the Group turned around under FF Wong’s leadership and overhaul. Previously, there was a lot of deadwood and the Group had many unrelated businesses which were dragging down the bottom line and consuming unnecessary resources (sounds somewhat similar to MTQ in this respect, though MTQ has since taken on a lot more leverage than Boustead). FF Wong streamlined all the businesses and divested the under-performing ones, and it was only in FY 2009 that Salcon turned around (there were too many legacy issues relating to it). Note that interim dividend payments commenced in FY 2005, and interim dividend has steadily climbed from just 0.5 cents/share in FY 2005 (split-adjusted) to 2 cents/share in FY 2012. Final dividend has been a little more erratic, with FY 2011 seeing a drop in final which was “replaced” by a very high special dividend of 3 cents/share.

However, from a total dividend per financial year perspective, it has been steadily rising except for a minor “blip” from FY 2008-2009 (drop of 1 cent/share). Therefore, I feel that shareholders can reasonably expect another 2 cents/share final dividend and also perhaps another special dividend to equal last year’s payout.

Another possible scenario (which I had mentioned that I will talk about during Part 1) is that Boustead may require more upfront capex investment into its three leasehold properties, as well as set aside additional cash for any planned upcoming projects, and so has less to pay out in the form of dividends for FY 2012. Therefore, dividend per share may fall to perhaps a total of 5.5 cents to 6 cents/share; but unless the cash is being earmarked for a major M&A, I feel that the payout should be quite similar to the previous year.

Conclusion

This analysis may be the last which I will post on my blog, for reasons which I will explain in a later post next month. Typing out and posting analyses on my blog is very stimulating for the mind, but unfortunately is also very time-consuming and tedious as I have to collate the necessary information in Excel sheets and also write out everything in a Word doc. Plus, I have to proofread every line for grammatical errors (I hate those) and punctuation errors. Considering the New Year is coming and I may be busier than ever, I may have to take a back seat on these detailed analyses. Anyway, I also realize that hardly anyone comments on them (unlike the more popular personal finance series), so I assume no one will miss them!

For Boustead, the Group may yet be on the cusp of something big, as long as FF Wong and his team can remain focused on the Group’s core competence and channel its resources into value-added activities. Though Boustead is sitting on a large cash hoard which is being eroded by inflation, it allows them to be ready to pounce on any opportunities which may be thrown up by the ongoing European crisis. Their well-managed Cash Management Program also means that at least some of the cash is earning higher rates of returns as provided by blue-chip corporate bonds, while an increasing amount of cash is also funnelled into their growing leasehold property portfolio. This will, in time, increase their ROE and allow for better returns. Considering the Group is already achieving admirable rates of return despite having a huge cash hoard and negligible leverage, I guess with proper Management and direction, this can only improve in future. I am happy to have been a shareholder of Boustead for the past five years, and if the business continues to remain resilient, I may remain a shareholder for very much longer.

Property Chilling Measures

2011-12-21T18:00:00.003+08:00

Readers would know that I seldom blog about property (there are only five posts on this in the last four years!), as I am generally not very good in this area and am still experiencing my steep (and extended) learning curve. There are so many aspects to consider when it comes to investment property that it would take many years to really understand how things work, including the witnessing of the entire bull-bear cycle which is far more drawn out as compared to a full stock market cycle. My last post on property in June 2011 centred mainly on expectations and the so-called “Perfect Storm” (record supply of land, falling demand and rising interest rates). Note that about 6 months since then, all these have yet to come to pass, which is why I feel the Government has suddenly introduced another set of harsh (some even say draconian) measures to curb speculative demand once again; with this latest set of measures targeting mainly foreigner demand. Let’s look at the various aspects which I talked about previously to see if they may still constitute the “Perfect Storm”.

Before I go on, the reason for the title is because the phrase “cooling measures” has been rather over-used, and I was just discussing this with a friend the other day on whether the measures are designed to chill and freeze, rather than merely cool. Of course, it remains to be seen if such measures would eventually be effective, but a peek into history and also a review of what experts and analysts are saying may shed some light on what may transpire and also give some insights as to how property may behave. Crystal-ball gazing is not my strong point – therefore readers will have to understand that this commentary is typed out based on my (rather limited) understanding of the property market and perhaps may even make me sound like a “newbie”, but please bear with me as I feel that expressing my views on the subject can enhance my overall learning experience and hopefully hasten the learning curve effects.

A Fifth Round of Chilling Measures

I guess most analysts and even the newspapers would have discussed the latest measures (announced on December 7, 2011 and implemented from December 8) almost to death, but the above table provides a good summary of the effects and is taken courtesy from a DBS Vickers analyst report. To summarize, foreigners and non-individuals (i.e. companies) need to pay an additional buyer’s stamp duty (known affectionately as ABSD) of 10% for all residential property; while for PRs and Singaporeans, they need to pay an additional 3% ABSD for their second property and third property onwards, respectively. Two interesting “exceptions” are offered – citizens from five nations which include America, Switzerland, Liechtenstein (a country located in Western Europe, bordered by Switzerland and Austria), Norway and Iceland would be treated as Singaporeans and would thus be able to avoid paying the 10% ABSD, while for corporations who bought and sold fully-developed properties (including collective sale properties) within 5 years from December 8 would be exempted from paying the 10% ABSD too.

It is immediately clear that the measures are targeted at foreign buyer of residential property, as the proportion of foreigners buying high-end property here has been increasing as more “hot” money has been flowing from countries like USA and China to seek more safe havens. Property curbs in Hong Kong (which has seen property prices fall to a six-month low) and China are also driving more and more wealthy individuals to channel their wealth into properties in Singapore, thus pushing up prices of private properties (and hence HDB resale flats as well). There is, however, a growing debate on whether the latest measures would be effective in bringing prices down, and some have criticized the measures as being too harsh, as the global economy is still reeling from the effects of the Euro Zone debt crisis and economic growth in Singapore is expected to be anaemic. My personal view is that prices may not moderate much, as foreigners may have deep enough pockets to withstand the 10% ABSD, and interest rates still remain at record lows.

Previous Cooling Measures

Looking at the above table (courtesy of OCBC Research), one can trace the history of the last four sets of cooling measures implemented by the Government. The first round can be seen as being relatively mild, with the Govt removing the IAS and the IOL, effectively ensuring that buyers must pay down the principal cum interest and not just servicing the interest alone. Sep 2009 was the first indication of an increase in supply as the Govt reinstated the 1H 2010 confirmed list of GLS sites.

Round Two, implemented just six months later, saw the first sign of some clamping down of speculative fervour, with a SSD implemented for flippers who turned a unit within a year, as well as lowering the LTV ration to 80% (this meant buyers had to cough up more cash – 20%). Another six months later, when prices still went up relentlessly, the Govt introduced SSD for properties sold within three years instead of just one year, while lowering LTV to 70% from 80%. They also raised the household income level for purchase of DBSS, which I think was a wise (though long overdue) move, as it meant more people could afford “public” housing rather than go for overly expensive private condominiums. HDB supply was further ramped up to 22,000 units for 2011, compared with “just” 16,000 units for 2010. Another shrewd move was to disallow HDB owners to concurrently own private property, in order to reduce speculation and “flipping”. When it seemed that all these measures were futile, a fourth round was introduced in Jan 2011, where the LTV was further reduced to just 60% for individuals with more than 1 housing loan, and 50% for corporations. Harsher SSD rates were also introduced and tiered as shown in the above table, but apparently these still did not work well enough as many of the buyers/speculators were cash-rich and remained unruffled by these four rounds of measures.

And so the Government implemented the fifth round, which consists of the ABSD.

Latest Measures on Increasing land Supply

The Government has also released, on December 7, 2011, the 1H 2012 GLS list of sites. On the list are new land sites for 7,020 housing units in the confirmed list and another 7,120 homes, 4,857 hotel rooms and 218 sq km of commercial space on the Reserve List. Although this supply is lower than the 2H 2011 planned new inventory, it is still a relatively high figure and analysts are saying that the market will soon be flooded with ample supply. It is actually arguable whether the Government is finally releasing sufficient land to absorb the huge influx of foreigners in recent years, as well as to cater to the numerous couples aspiring to get married and “own” their first flat. Assuming market prices do fall and people hold back from transacting, this means that there may be more vacant units left over from the recent glut of new private housing released by developers, which would snowball into an even larger looming supply in say two to three years time. Another possibility is that foreigners, spooked by the draconian measures and the economic uncertainty, may leave our shores and create a vacuum in terms of demand, which I feel is unlikely to occur.

Sentiment-Driven “Perfect Storm”

The Singapore Government (like its counterparts in China and Hong Kong) exerts significant control and influence over the property market, as can be seen in the last 2.5 years where five rounds of property curbs were introduced in rapid succession. Thus, investing in property companies which develop residential property makes for a difficult proposition as the industry is continually “rocked” by changes in regulation and laws, not unlike the notoriously tightly-regulated airline industry.

The question now is, of course, whether sentiment will play a bigger role in creating the perfect storm, rather than people actually having no cash to stump up (I tend to believe foreigners and locals are a wealthy bunch of people who will not let a simple ABSD stop them in their tracks). If people feel hesitant, or are certain that prices will drop, then it becomes a self-fulfilling prophecy and the vicious cycle of falling asset prices may ensue. When Khaw Boon Wan (Minister for National Development) first mentioned about a Perfect Storm when he took office after the May 2011 Elections, I was wondering if this would really come to pass. A quick check with some older colleagues who remember the dark days of 1996-1997 has led me to the conclusion that once prices fall, they will literally plunge. Crisis can hit us so quickly that volumes almost completely dry up, and knowing how illiquid the property market is (compared to equities), the bid-ask spread may also widen considerably and this is when you read about a lot of “fire-sale” in the newspapers. In short, many people will get severely burnt.

Conclusion – Prudence Wins the Day

I guess I run the risk (again) of sounding like a stuck record when I caution all readers to be prudent and conservative in their finances, and to ensure they have sufficient cash buffer should they choose to leverage to invest in property. Though interest rates may be hovering at record lows, no one knows how the current situation in Europe will pan out and assuming something severe occurs in the global arena which somehow shocks the system, it may lead to some sudden, unexpected and very drastic changes which may leave one with precious little time to react.

If one lives their life in a frugal manner and takes up only very basic (not excessive) debt which is necessary to service their live-in residence, then you would not have much to worry about. But for those who are juggling with three or more mortgages and using one property as collateral of multiple loans, perhaps you should take a step back and ask – even though this may seem safe right now, could it be just a fragile house of cards which may collapse at any moment?

Boustead Singapore Limited – 1H FY 2012 Analysis Part 2

2011-12-16T18:00:00.001+08:00

Part 2 of this three-part analysis will focus mainly on divisional analysis, as Boustead has four very distinct divisions which make it one of the harder conglomerates to put a value to. The interesting thing about Boustead which has somehow eluded me all these years (but which has somehow perplexed many an analyst) is that it has four disparate divisions which makes it a very difficult company to classify. On one hand, it is not an oil and gas company even though it has a strong energy-related engineering division and has contracts in many countries around the world for waste heat recovery and boiler systems. Neither is it purely a real estate development company though it has a large (and growing) portfolio of industrial leasehold properties and is considered a niche player in the biotech, logistics and aerospace industries. The best way to describe the company to someone (and mind you, many people have asked me!) is to say that it is a Company with a Pan-Asian focus which is in multiple industries, then quickly move on to explain each arm of Boustead before the listener has adequate time to react (and retort).

But before I become disarmingly irritating with my oft-repeated rendition of the interesting facets of Boustead and its myriad arms, let me assure the reader that there is a reason for the above. I shall end off Part 2 with reference to what was mentioned in the first section of this post, and use this to illustrate a very interesting fact about the Company which somehow continues to endear me to it (yes, someone will inadvertently remind me about the well-documented psychological bias – the endowment effect).

Segment and Divisional Revenue Analysis

Engineering Services as a whole saw a significant decrease in revenue for 1H 2012, down 53.5% to just $128.5 million from $276.2 million. This can be largely attributed to the drop in revenues in the real estate solutions division which saw a 73% year on year fall in revenue to $50.9 million (but 1H 2011’s numbers included the disposal of an industrial property worth $67.8 million). With Boustead’s focus being more on DB&L projects in order to build up their portfolio of recurring rental income, there has thus been less D&B contracts awarded. This, coupled with the slowdown in 1H 2012 also meant that there was less revenue to recognize for the division. However, my view is that Boustead’s Real Estate Division would serve as a buffer for the Group should the Euro Zone collapse, and also help them to generate steady and predictable cash flows during uncertain times. Since most (if not all) of their clients are blue-chip companies, there is also a lower risk of non-payment or default unless a major crisis occurs within the specific niche industries that each client is in.

Revenues for Energy-related engineering and water and wastewater engineering were slightly better for 2Q 2012, but nevertheless when compared on a half-year basis, the increase was not too impressive. For the former, the Group mentioned that more of the revenue will be recognized in future periods as many of the projects are in their initial stages of execution – therefore as a shareholder I should be expecting not just a higher revenue contribution year-on-year, but also hopefully better PBT margins (more on this later). For the latter division, though there was higher revenue recognition in 2Q and 1H, it failed to clinch additional contracts during the first half of the financial year. Somehow my feel is that the intensive competition of this industry and the thin margins are reasons why Boustead has to be very selective in bidding, and also to ensure it maintains its focus on high-value engineering services instead of degenerating into the model used by many China BOT companies (in which a huge capital outlay has to be expensed before cash flows start to stream in). That said, Salcon’s future at this point still looks uncertain as year after year sees more or less flat-lined revenues and PBT (last year saw a LBT because of the Libyan write-off). Sustaining the division may be possible over the long-term, but growing it seems tough and my view is that Boustead should still try their best to realized value from this division by selling it off! My worry is that too many resources, manpower and effort are plugged into the Division in order to sustain it, such that other divisions or areas are neglected or not given sufficient attention.

Geo-Spatial Technology seems to be the star performer – revenues grew 14.3% for 1H 2012 compared to a year ago, and the division is also generating healthy PBT margins and cash flows. Demand for software and professional services remains strong and is poised to grow over time, as Boustead focuses its business development efforts in Australia and South East Asia (e.g. Indonesia).

Divisional Margins Analysis

It’s pretty telling by looking at the table above just how each division has performed not just with respect to its PBT year-on-year, but also its PBT margins. Energy-Related Engineering disappointed by shaving off about 4.4 percentage points off its PBT margins to end at 7.3%, and registered a PBT of $4.6 million against $8.8 million a year ago (a steep 47.7% drop). The sad fact is that revenues had only fallen 17%, and the significant margin deterioration was not adequately explained by the Company as they chose to focus their commentary more on Geo-Spatial (the “star” performer). My view is that Management should also strive to be as candid as possible regarding ALL divisions and weak areas of the business, so that improvements can be devised to improve results.

Water and wastewater engineering (Salcon) has demonstrated another weak half-year, with a LBT of $0.1 million against a profit of $0.7 million a year ago. Not much was mentioned on why the division had incurred this loss even though there were no further write-offs from Libya, and the commentary simply mentioned that there was “steady progress” at its two major projects at Al Wathba in the UAE and Tuas Power Tembusu Multi-Utilities Complex in Singapore. PBT margin was already thin at 5.3% to begin with, and it would seem that pushing on, it would be a challenge to raise PBT margins higher, and SembCorp Industries and other larger companies make much stronger competitors and also have the financial muscle to outbid Boustead for water projects. Therefore, it may not make sense for Boustead to “knock its head against the wall” figuratively speaking to try to grow Salcon into a major player, and FF Wong has been trying to do so since FY 2002. I will continue to monitor this division but my heart feels heavy just talking about it, and I certainly hope Management has some ideas or strategies to turn things around.

For Real Estate Solutions, PBT plunged a very “impressive” 67.3%, but that was before adjusting for the sale of industrial leasehold property in 1H 2011. The sale last year actually depressed PBT margins such that they ended up at 18.7%; and for 1H 2012 the PBT margin had normalized and risen to a more decent 22.6%, with PBT at $11.5 million. There was slower recognition of revenue (and hence PBT) for the period in question, and shareholders should also recall Boustead’s increased focus on more DB&L projects which will provide future recurring income; thus in the short-term, revenues and cash flows would suffer a setback. Since it’s all in the name of “long-term shareholder value” (yes, I know it sounds horribly clichéd), I am willing to tolerate the short-term “lumpiness” in view of enjoying stable, steady and consistent future cash flows and profits.

Interestingly enough, the star performer (I think I must have used the word “star” at least three times, forgive me for that as I try to substitute for a better word) was Geo-Spatial Division, with revenues rising 14.3% and PBT rising 21.6% (implying costs and expenses had actually risen less than the rise in revenues). PBT margin is an impressive 25.6%, even higher than that of Real Estate Solutions Division, and it was also an improvement over the 24% registered a year ago. I did mention in my last analysis and review that this division was Boustead’s “cash cow” and it would show steady and moderate growth; plus cash flows were consistent as most, if not all, of their clients are large multi-national corporations or government agencies. With the recent contract with Earthmine announced in March 2011 making use of ESRI Singapore’s technology, and also with booming demand from resources and terrain planning coming from countries such as Indonesia, there is further potential for this division to grow further.

So as I close off this section of the analysis, I will refer back to my assertion that Boustead’s four divisions do have potential not just to weather the economic storm through “diversification”, but also creates very unique opportunities for the Group to take advantage of in the current turbulent climate. The two divisions which show potential and are performing above expectations (at least, in terms of contracts secured and near-term prospects) seem to be real estate and geo-spatial. Barring a complete collapse in confidence in the real estate industry in Singapore, Boustead’s real estate arm looks set to continue its momentum of contract wins, though the more recent announced wins have been mainly D&B, rather than DB&L. FF Wong is obviously trying to grow the leasehold portfolio (currently at 90,000 square metres, more on this in Part 3) in order to generate more predictable cash flows; and also to perhaps realize value should the portfolio be bought over eventually by a REIT.

The fact that Boustead has such varied arms makes it resilient to a downturn, as some sectors and industries tend to be more affected than others in an economic recession (example, banks or construction). Unless it is a protracted recession which covers ALL aspects of the economy (something akin to a second Great Depression), otherwise I believe Boustead should see resilience in its business model, and the huge cash stash should also act as a good buffer.

Part 3 will focus on something more interesting – Boustead’s industrial real estate portfolio, as well as its dividend history which I had not covered before in previous analyses. Watch out for that.

Personal Finance Part 26 – Wealth Cannot Last More Than 3 Generations

2011-12-11T12:00:00.001+08:00

The above title represents a very intriguing concept which has been known to the Chinese for millennium, and there is even a Chinese Idiom which states so “Fu Bu Guo San Dai”. Interestingly, while reading “Millionaire Teacher” written by Andrew Hallam (a new book written on investing and personal finance, written by middle-class millionaire teacher Andrew Hallam), I also discovered that he had written about the exact same phrase, though he did not elaborate too much about it. Basically, this teaches us that wealth earned by the first generation can seldom, if ever, last past three generations. The reason for this is so obvious in its simplicity that it is surprising that most adults fail to grasp it – money which is not “earned” tends to be squandered. How does this fit into personal finance? A lot can be learnt about how people behave under various circumstances, and I will illustrate my point using this phrase as a backup; to also show evidence of how parents should teach their own children about money. Granted, it is not easy to “break the cycle” and prove an age-old adage wrong, but there’s no harm in trying to inculcate the right values in the younger generation from an early age.

The First Generation – Wealth Building

The first generation would represent, in most cases, the generation which possessed the highest degree of entrepreneurial spirit, and who believed in hard work, sweat and effort. Most of these people came from a faraway land (e.g. China, India) and arrived in Singapore with hardly a penny to their name, and worked as coolies or labourers doing menial tasks. The hard life made many of them strive to break free of their “bondage” and many of them undertook risks to start businesses in order to achieve freedom from their manual labour. Of course, many of them failed and disappeared into oblivion, but those who survived thrived and grew their businesses and eventually became very rich as a result. However, their frugal habits which were cultivated from their days as hard labourers stayed with them, and because they understood the value of their hard work, sweat and tears, there was also an appreciation of the wealth they had painstakingly accumulated.

Another class of successful first-generation wealth-builders are those who subsisted on a fixed salary (i.e. salaried employees), but who were prudent in spending, saved and invested throughout their lives to accumulate a substantial nest egg. Although these people did not run businesses or make breakthrough products like the iPhone, they nevertheless also understood the value of a dollar earned because they put in considerable effort in their day job, and now have the financial means to enjoy their olden years without having to slog like a dog. The same theme can be picked up here as well – hard work, effort and appreciation of a dollar earned will go towards building long-lasting wealth. These are the people who worked hard to get where they are, who appreciate every last dollar they own; and will never let anything or anyone ruin their plans for a comfortable retirement.

Just for the record, these people usually consist of those who came from the 1900’s to the 1940’s, who had seen Singapore’s rise as an entrepot trade centre to an economic powerhouse, and who had grown along with the country as well. They were our forefathers (grandparents and great-grandparents) who slogged hard and lived in an environment where there was little financial security, unlike what the young are enjoying today.

The Second Generation – Wealth Maintenance

Along came the second generation, which consists mainly of people born in the 50’s and 60’s (the baby boomers). These were the direct descendants of the entrepreneurs and businessmen, and grew up during the years after the World Wars, and who also experienced Singapore’s transformation into an economic miracle. These are the folk who grew up witnessing how their parents slogged to become who are they are now (successful people), and they may also have chipped into help their parents out in the business. However, not being the founders themselves, they would not have the same kind of emotional attachment to grow the business as their parents did. This is not to say that they do not have the competence to manage and grow the business, but they may never attain the same level of passion for the business as their parents did. In fact, there have also been known cases of children who refused to carry on their parents’ trade, and who chose a different career path; thus the business empire had to be taken on by “outsiders”, who would not have the same kind of loyalty to the business as blood kin. Other more stark examples may include a skilled Char Kway Teow hawker whose son is much more educated and does not wish to carry on this “menial” job, but instead prefers to pick up a pen to do accounting or law (I have heard of such cases by speaking personally to older hawkers in Singapore – this is why there is less and less great Hawker Food!).

So assuming in cases where the parents had built up a huge business empire and created massive amounts of wealth, the baby boomers simply had to maintain it and ensure it did not flow down the toilet bowl. This was somewhat easy as they had a direct hand in managing the business (in some cases), while in other cases where they did not, they had witnessed first-hand what their fathers and mothers had been through, and thus understood the importance of ensuring the wealth was retained, and not squandered. This is the so-called second generation effect – they help to maintain the wealth which was built up by the first generation. So far so good. Now let’s come to the third generation – Generation X and Y.

The Third Generation – Wealth Depletion

The third generation, affectionately known as Generation X and Y (born in 1970s to 1980s; and 1990’s to 2000’s) are the most blessed generation. They were born when Singapore was stable (after having broken away from Malaysia) and was on solid economic footing, with a strong Government (PAP) and sturdy policies. There was political stability, economic security and financial stability as well. Most of us (yes, myself included) grew up in an environment where we did not have to struggle and go hungry, where education was widely available, and where material pleasures were readily available (with a new invention called the Credit Card, no doubt). Therefore, this generation has also been given the label “Strawberry Generation” – looks good on the outside, but cannot last when encountering adversity. Because of the inherent stability in our lives and the lack of a push factor to strive hard and achieve, the spirit of entrepreneurship has all but died out and many of us are relegated to salaried jobs earning a fixed income which keeps us happy and contented.

It is this generation which is responsible for poor financial habits and for squandering away the wealth built up and maintained by the preceding two generations. Most of Generation X and Y were relatively insulated from the day to day operations of the business, and add to that the fact that parents (the baby boomers) were also over-indulgent in wanting to ensure their children lived a comfortable life; so much so that they provided too much of a comfortable life for this generation. Without the need to strive hard, this generation thus lacked the necessary appreciation of money and how hard it is to earn it, and proceeded to spend lavishly and wantonly. An easy supply of money coming from two previous generations also fuels this habit and exacerbates the careless (and callous) attitude in which this generation frivolously fritters away the wealth built up over 50-60 years.

While it might be a bit of an exaggeration in terms of my description of how the current generation behaves (for of course, there are also shining examples of youths who grasped the concept of delayed gratification and appreciate the value of hard-earned dollars), there have been ample examples in the newspapers over the years (yes, I can find examples stretching from 2003 till now) which serve to demonstrate, anecdotally, how the current generation has a higher tendency than the previous two to spend excessively and without due consideration.

I have read reports of fathers who spend lavishly on their children, buying them anything from branded goods to cars to the latest gadgets. With such constant pampering, it is no fault of the child that they grow up to be completely spoilt adults who are used to getting their own way, whether or not they have the financial means for it. A life hooked on materialism and on borrowed money (credit cards and loans), while living paycheck to paycheck, seems to be what errant parents have set up for their kids.

Lessons Learnt

I guess one can already tell what the moral of this post is – how to inculcate the proper financial habits and value system within a generation who is unused to struggle and hard work. For all of us aspiring parents or those who are already parents of young toddlers, make sure they understand the value of money. There are actually many websites which give advice on how to educate children about money, and to ensure they treasure it and appreciate it from a young age. Now that we are already moving into the fourth generation (Generation Z they are called), it is extremely important to educate them well financially so that the wealth depletion and drainage stops before it gets worse.

Of course, those parents who are already financial wrecks themselves are hardly in a good position to impart prudent values to their children, but perhaps this post also serves as a wake-up call for those who may be exhibiting poor financial discipline. If your lifestyle is ostentatious and you have poor money habits, it is perhaps a good time to sit down and review your finances and to ask yourself if you need some proper financial education. Call it self-discovery and soul-searching, if you will.

For parents who may have teenage children, do yourself a favour and stop the pampering. The key is to be like Warren Buffett – he believes in giving his children just enough so that they can do anything they want, yet not an excessive amount such that they do not need to do anything at all (i.e. sit on your butt all day, watch television and spend money). And we are talking about one of the richest men on the planet! If parents consistently help their kids to pay off their student loans, purchase cars for them, buy branded items and gadgets for them whenever they request, then there is simply no incentive for the young adult to work hard for these items and to manage their financial life. So the only way to “teach” is to let them pay for everything on their own – this not only builds discipline and perseverance, but also teaches the value of delayed gratification, striving hard and saving for what you desire and plays down the materialistic instinct residing in us. Over the long-term, this will definitely do more good than harm.

Boustead Singapore Limited – 1H FY 2012 Analysis Part 1

2011-12-06T18:00:00.005+08:00

Boustead released their 1H FY 2012 results on November 14, 2011, and frankly it was not as disastrous as I had anticipated, considering there was an economic tsunami at our doorstep which would affect most companies. Though the numbers did not look spectacular, the Group put up a credible performance in general, with my only grouse (for the last few years, actually) being Water and Wastewater Division.

This analysis will be split into the usual three parts. Part 1 will touch on the financial statements, including income statement (briefly), Balance Sheet (more important) and Cash Flow Statement (the lifeblood of any company). Part 2 will focus on divisional analysis, and will break down the contributions by each division to Group revenue and PBT, and compute PBT margins as well. Part 3 will discuss Boustead’s industrial leasehold asset portfolio, dividends and also the plans and prospects moving forward, and how Boustead can navigate the stormy economic climate.

Financial Analysis – Profit and Loss Statement

On the Income Statement, there is nothing much to elaborate on as it was previously indicated that yearly results are more indicative, rather than quarterly. For 2Q 2012, revenues fell 30% year on year to $91 million due to slower recognition of revenue for real-estate projects due to Boustead’s focus on Design, Build and Lease (DB&L) projects, and the Energy-Related Engineering Division also saw slower recognition of revenue as contracts were in initial stages. These were the two main reasons for the drop in revenue, but it was more than offset by the 44% drop in COGS to $55.7 million, thus lifting gross profits by 14.4% to $35.3 million. For 1H 2012, the effect on gross profit was also stark (as can be seen from the table above); with revenues falling 43.7% but gross profit only falling 29.4%. Note that for 1H 2011, the results included a one-off sale of leasehold property which distorted the results. After adjusting for this, revenue would have fallen only 29% year on year for 1H 2012, instead of 43.7%.

An interesting point to note is that gross margins have, apparently, improved significantly. Gross margin for 2Q 2012 increased to 38.8% from 23.6% a year ago, and much of this improvement can be attributed to the Geo-Spatial Division (which we shall see later in Part 2, has a very high PBT margin as well). Also, several projects under the Real Estate Solutions Division garnered higher gross margins, thereby pulling up overall Group’s gross margin. For 1H 2012, gross margins were at a very healthy 37.4%, and hopefully Boustead can sustain this momentum for 2H 2012 as well in order to achieve better overall profitability.

Considering that net profit attributable to shareholders (for 2Q 2012) increased 12.7% while gross profit improved 14.4%, this shows good expense control. A glance at the Profit and Loss shows that selling and distribution and admin expenses both increased 15% respectively, in line with the increase in gross profits, with only a spike seen in finance costs as more debt was undertaken to finance Boustead’s leasehold portfolio under construction (more on this in Part 3). The same distortion can be seen for 1H 2012 due to the one-off sale of leasehold property, and after adjusting for this, profit attributable would have decreased a much smaller 5% instead of 56%.

Financial Analysis - Balance Sheet Review

Boustead’s Balance Sheet displays some changes since 6 months ago (March 31, 2011), and the focus now would be to comment on these changes and how they will impact the Group moving forward. For current assets, cash has fallen by about $17 million (more on this later), while trade receivables has seen a large drop of $30 million, offset by an increase in other receivables and prepayments of $9 million. The most significant increase, however, is that of investment properties under non-current assets – it had increased from $13.5 million to $41.4 million in just six months. Obviously, a lot of progress had been made on the construction of Boustead’s industrial leasehold properties and this was reflected in the increased capitalization as witnessed on the Balance Sheet. AFS investments also increased as part of Boustead’s Cash Management program, which involves the purchase of short-term blue-chip bonds with yields higher than bank fixed deposits.

Bank loans did not fluctuate much at all and remained relatively constant at $24 million, down slightly from $25 million six months ago. Current ratio was a healthy 1.69 as at Sep 30, 2011, against 1.95 in the previous period. ROE stood at 15.9% (annualized using 1H 2012 net profit attributable to shareholders), which is a little on the low side as a result of Boustead’s large cash hoard generating paltry returns.

Financial Analysis – Cash Flow Statement Review

Boustead’s cash flows have always been healthy, but for 1H 2011 OCF was lower than usual, at just $11.4 million. One year later, for 1H 2012, OCF hit $54.7 million, up nearly 3.8x, largely due to better collections from debtors and also an increase in Trade Payables. 1Q 2012 already saw an inflow of $34.4 million OCF, and 2Q 2012 has added another $20.2 million, and this shows that the core business is generating a lot of healthy cash flows, which are then used to invest in investment properties (and of course, with some left over for the payment of dividends). I will tie this in later with Boustead’s dividend history, and come up with a conclusion on whether I think dividends will be sustainable.

For investing activities, it should be noted that very little was spent on capex (in fact, just a mere $870,000 for 1H 2012). Most of the cash went into purchase of AFS and HFT investments, and I understand that this is part of Boustead’s strategy to reap higher returns on its cash hoard as it waits to deploy it into suitable acquisitions. A last check with the Company has revealed that this cash is most likely invested in high-grade bonds with short tenures, thus the yields are better than bank deposit rates though it may not exceed inflation rate of 5.5%. I guess what is more important is the protection of capital as even high-grade bonds may see instability in their pricing amidst the current turbulence.

Boustead’s stable of industrial leasehold properties is taking shape, as it spends $12.6 million in 1Q 2012 and another $15.6 million in 2Q 2012 for a total of $28.2 million for 1H 2012, and this shows up in the Balance Sheet as an increase in investment properties (by about $28 million as well). Part 3 will display Boustead’s portfolio of industrial leasehold properties, and I will also offer my comments on how I think Boustead will grow this portfolio and realize more value for shareholders in the long-run. From the table above, if we compute FCF the traditional way, then 1H 2012 would have seen a massive FCF inflow of $53.8 million. If we exclude the additions to leasehold property, then it would still have been a very healthy $27.7 million. Boustead has declared an interim dividend of 2 cents/share which amounts to about $10 million, and it can be seen from a glance that the $27.7 million FCF (net of leasehold property additions) is more than sufficient to support this payout. I will elaborate in Part 3 why I think Boustead did not pay out a higher interim dividend, using its dividend history as support.

Under Financing cash flows, most of the outflow was due to the payment of final cum special dividend (final dividend of 2 cents/share and special dividend of 3 cents/share for FY 2011), and about $1.5 million was spent in repaying some long-term bank loans. Cash balance remains healthy at $192.7 million, and with about $24.2 million in bank loans on its Balance Sheet, Boustead is currently carrying a net cash balance of some $168.5 million.

Part 2 of the analysis will delve into Boustead’s divisional performance, and I will have quite a few comments here based on my understanding of the Company, and whether I feel the Group can get through this difficult period relatively unscathed. This will be based on an analysis of each division’s contribution to Group Revenue and PBT, as well as the PBT margins by division.

November 2011 Portfolio Summary and Review

2011-11-30T17:22:00.000+08:00

November 2011 will go down as the month where the Euro crisis escalated in severity, as even Italy, Germany and France got into some form of trouble. With no ready solution in sight, it looks as though Mr. Market will remain pessimistic for the foreseeable future, which means it is a good environment indeed to consider the purchase of equities. In the USA, political wrangling also ensured that there was no ready fix to their burgeoning debt crisis, which is threatening day by day to spiral into something as huge and unmanageable as the Euro Crisis. To add fuel to the already raging fire, China has also announced a sharp and unexpected contraction in its purchasing index, which signals a sharp decline in manufacturing activity. With housing in decline as the Government there reins in runaway prices, the prospect of a hard landing has spooked investors worldwide and stoked the flames of panic.

With bad news hogging the headlines almost daily during the month, it’s no wonder markets have been anaemic, and share prices have been in decline. Those who remember the fateful events which led to the 2008-2009 bear market (myself included) can see some parallels, but then again every crisis is different in nature; but will ultimately lead to new measures to tackle it (through austerity, fiscal policies and monetary pain). My take is that the world will find a way out of its mess, but it will take time, effort and a lot of suffering before the wrongs can be righted. Even then, it’s more of a stumble through a muddy swamp rather than walking along a well-paved road.

As an investor, I keep track of the news but generally am dispassionate about it unless it creates good and enticing opportunities for investment. I continue to keep a close watch on the businesses of the companies within my portfolio, and for the month of November three of my companies released results, and these are summarized below. With corporate updates trickling to almost nothing as the calendar year begins to wind down, I can probably expect nothing much more from my stable of companies.

Interestingly, inflation remained high for the fifth month in a row, exceeding 5% (it was 5.5% for Oct 2011) due to the high cost of cars and rising property prices (what’s new eh?). Housing remained out of reach of most ordinary Singaporeans earning median incomes and though asset values kept increasing, there was no direct evidence of Singaporeans getting “wealthier”, unlike what was reported by MAS recently.

Below please find my portfolio as well as corporate summaries for November 2011:-

1) Boustead Holdings Limited – On November 1, 2011, Boustead announced that Boustead Projects, its 100%-owned subsidiary, had clinched a $57 million design and build contract with ST Electronics to construct an integrated manufacturing, technology and office facility. This will be completed in first half of calendar year 2013, and will boost Boustead’s order book to over $380 million. Also, on November 14, 2011, Boustead released their 1H 2012 results. Revenue for 2Q 2012 was down 30%, but gross profit was up 14% as COGS dropped by a larger 44%. Note though that since Boustead’s revenues are lumpy, such comparisons are not very meaningful and year to year comparisons make much more sense. Profit attributable to shareholders improved 13% to $9.1 million for 2Q 2012, and cash balances dipped slightly. I will be doing an analysis of Boustead’s 1H 2012 results in subsequent posts. An interim dividend of 2 cents/share was declared, similar to last year. The dividend is payable on December 16, 2011.

2) Suntec REIT – There was no news relating to Suntec REIT for November 2011. The dividend of 2.533 cents/share was received on November 29, 2011.

3) MTQ Corporation Limited – There was no news for MTQ for November 2011. The company went ex-dividend on November 16, 2011; and it was announced on November 21, 2011 that the scrip dividend issue price would be 73 cents/share. I have decided to choose scrip and therefore my portfolio has been updated with the market value of the additional shares which I will receive (on Jan 16, 2012); and this will be used to compute XIRR returns and compare against the index. I had previously written a detailed two-part analysis on MTQ’s 1H 2012 results, and will be looking towards April 2012 for the FY 2012 results.

4) Kingsmen Creatives Holdings Limited – Kingsmen released their 3Q 2011 results on November 9, 2011. Revenue for 3Q 2011 increased 27%, while net profit attributable to shareholders increased 76% to $4.45 million. For 9M 2011, revenue was flat but net profit increased by 9.4% to $10.3 million, and this was a pleasant surprise since 1H revenues were actually lagging year-on-year. A breakdown of revenues showed that all four divisions experienced strong growth year-on-year, and with 4Q usually being the busiest this bodes well for Kingsmen. The Company was awarded contracts of $254 million, which was higher than the $233 million (a 9% increase). Balance Sheet remained strong with $30.2 million of cash (net cash stood at $27.1 million); and 9M 2011 cash flows showed a FCF of $9.2 million. This should be more than sufficient to support a projected final dividend of 2 cents/share (assuming unchanged from FY 2010) as they would only need to pay out $3.8 million (based on 190 million issued shares net of treasury shares).

5) SIA Engineering Company Limited – On November 29, 2011, SIA Engineering announced that it had secured a 6-year TSP contract with Airbus to maintain SIA’s additional fleet of fifteen A330-300 aircraft being acquired from Airbus. SIAEC will provide a wide range of MRO checks, including transit and light maintenance checks, defect rectification, cabin maintenance, fleet management and heavy maintenance checks at SAIEC’s facilities in Singapore. I had also posted up a two-part analysis of SIA Engineering which explains its prospects moving forward. The counter has gone ex-dividend on November 11, 2011 and the dividend was received on November 29, 2011.

6) VICOM Limited – VICOM released their 3Q 2011 results on November 10, 2011. For 3Q 2011, revenue was up 5.6% while profit attributable to shareholders increased 11.6% to $6.2 million. For 9M 2011, revenues increased 7.2% to $67.6 million and net profit increased by 10.9% to $18.2 million. The Balance Sheet remains debt-free and cash balance stands at $46.3 million as at Sep 30, 2011. For cash flow, 9M 2011 saw very strong operating cash inflows of $19.6 million, while capex was only $9.5 million (note that this includes the spending on the new facility for SETSCO, if not capex will usually hover even lower at $2-3 million); therefore FCF of about $10.1 million was generated. The outlook for vehicle inspection is expected to remain “strong” for 4Q 2011 and 2012; while there will be sustained demand for non-vehicle test and inspection services. This is expected hold up VICOM’s revenue and earnings and hopefully we can see a 10% rise in net profit attributable to shareholders for FY 2011, and a correspondingly higher final dividend as well compared to last year’s 6.6 cents/share (note: a special dividend of 3.2 cents/share was also paid out for FY 2010).

Portfolio Review – November 2011

Realized gains have increased to $69,500 from $67,400 as a result of dividends from Suntec REIT, SIA Engineering and Boustead.

For the month of November 2011, the portfolio has decreased by -4.5% (using XIRR in MS Excel to compute) against a -15.3% fall in the STI; thus my portfolio performance has outperformed the STI by +10.8 percentage points. This was a better performance compared to October 2011, when the portfolio out-performed the STI by +6.5%, as there were several blue-chip components which announced worse-than-expected results (Noble Group comes to mind) and hence had their share prices beaten down (which dragged the index down). Cost of investment has increased from remained at $242,600 and unrealized gains stood at +3.8% (Portfolio Market Value of S$251,800).

December 2011, being the final month of the calendar year, should be somewhat dull with many companies’ staff clearing leave and going for holidays, hence I do not expect that there will be many significant corporate announcements or events.

I will be doing my usual monthly portfolio review on December 31, 2011 (Saturday), and there will also be a special year-end review of my performance, what I had learnt as well as a discussion on my strategies as we move into 2012.

MTQ – 1H FY 2012 Analysis Part 2

2011-11-26T10:00:00.000+08:00

Part 2 of this analysis will focus more on the qualitative aspects of MTQ – the sections which many analysts find tough to quantify, but which I feel is also extremely important for any analysis to be complete. Note though that these observations were made from a combination of interactions with Management, articles/interviews with The Edge Singapore and my own opinions and conclusions drawn out from the facts and data.

Oilfield Engineering – Bahrain Operations

As early as Jan 2010, MTQ had already announced their plans to expand into the Kingdom of Bahrain, and steps and processes had been put in place to gradually ease their way into the Middle Eastern country, from the purchase of equipment to the hiring of staff and the engagement of a main contractor to carry out construction of the Facility for their Phase I expansion. At the time, very good reasons were provided (which, I should add, are still relevant today) and it seemed all smooth-sailing with financing being locked in at good rates and building costs being at a low because of the low construction pipeline at the time. However, with any business, any plans for expansion into a new territory are always fraught with risks; and these came in the form of riots stemming from the “Arab Spring” movement in the Middle East which saw many countries having their leaders toppled. Some coups were peaceful (Tunisia) while others were savage and bloody (Libya), and for Bahrain it was somewhere in between with riots and deaths and destruction of property but nowhere on the scale of a civil war or anarchy.

The rapid unravelling of events took Management by surprise and as a result, electricity supply was hard to come by and was only restored in recent months; while many oil and gas principals and vendors had fled the country due to the instability. Thus, it was only recently in October 2011 that MTQ managed to get its certifications and specifications from API (American Institute of Petroleum) and thus commence business. So the entire 1H 2012 did not see any contributions from Bahrain, but instead took the full brunt of start-up losses from the depreciation of machinery and for staff salaries for new hires and training required to get them up to speed. 2H 2012 should see healthy contribution from Bahrain, though the level of business activity still remains a mystery as MTQ does have several competitors in the Middle East. It is indeed good news that Kuah Kok Kim sees good potential and healthy enquiries for MTQ’s services and product offerings, and the BP Deepwater Horizon disaster also had a positive impact on companies such as MTQ as this meant more stringent checks and frequent repairs required for equipment such as BOP (Blowout Preventers) used on oil rigs in order to prevent accidents of a similar nature and scale.

The new facility is 430,000 square feet and is more than twice the size of MTQ’s Singapore Facility at Pandan Loop. With oil production expecting to rise as a result of spending by UAE and Bahrain’s Government, MTQ can be assured of continued business in the medium-term. Assuming full capacity utilization at their current Singapore facility, and using simple proportion, we should expect MTQ’s Oilfield Engineering revenues to more than double once the Bahrain facility is chugging along at full utilization as well. As to whether gross margins can be maintained at the current high levels, that is open to question; but we have already witnessed some erosion of gross margins due to the introduction of PSL into the picture, though whether this will eventually sort itself out due to corporate integration and increased efficiencies is unknown at this point in time. Suffice to say that efforts are indeed underway to ensure smooth integration and to ensure good cross-selling opportunities. This should definitely come under close scrutiny when the 2H 2012 results are released.

Oilfield Engineering – PSL

There is a little overlap in terms of discussing PSL as I had already mentioned PSL in bits and pieces under the Bahrain section, but nevertheless I shall attempt to elaborate more here. MTQ announced the acquisition of 100% of PSL on July 6, 2011, and the final purchase consideration is US$21.9 million. Of this amount, US$13.51 million is financed by additional bank borrowings (which explains the sharp increase in the gearing ratio) while the remainder was funded by internal cash reserves.

The rationale for the acquisition was that PSL offered a complementary range of products and services which would enhance MTQ’s total offering to customers. PSL also had its own set of customers and acquiring the Company would mean that MTQ could broaden and expand its customer base, thus allowing for more opportunities for bundling of products/services and cross-selling. In addition, PSL also has a machining and fabrication business called PEMAC which will add to MTQ’s capabilities and expand the equipment range which MTQ can repair. Moreover, PSL also holds API certificates which will boost MTQ’s Oilfield Engineering capabilities. As mentioned previously in a blog post about the AGM, MTQ managed to acquite PSL because its parent wished to divest it as it was not forming a core part of the previous parent’s operations, which were mainly based in North America.

According to the article from The Edge Singapore, PSL contributed about $10 million to topline and this was only about two months of revenue and profit contribution, so the potential for higher revenues and earnings is very high. But PSL’s business has lower gross margins as compared to MTQ’s main oilfield engineering business but Mr. Kuah intends to improve them by streamlining its business and selling mud coolers to MTQ’s network of clients. As Bahrain takes off, he is also optimistic that PSL can contribute more and create greater value and synergy for the Group.

Engine Systems Division

Not much was mentioned about Engine Systems division, and I guess that is a blessing in disguise because in the prior financial year, there were already three acquisitions relating to this division which sought to expand their reach in Australia. Rather than chase after acquisitions which may drain cash and make the division look like a serial acquirer, it is better to slow down to integrate these acquisitions into the main business to ensure synergies and alignment of sales strategies, product lines and processes/procedures. It was mentioned that operating profits had increased for Engine Systems, but no detailed breakdown was given with regards to the operating margin; and I am also in the dark about how the three acquisitions are performing (i.e. loss-making, cash-flow positive?). However, it is gratifying to know that revenues are, at least, increasing, and the last communication I had with Mr. Dominic Siu at the AGM told me that the Group will be working to increase the margins for this division (known historically to be rather dismal).

Perhaps I can provide more updates on this division once the annual newsletter arrives from MTQ, but I can make no promises on this.

Investment in Neptune Marine Services (NMS)

MTQ had announced an investment of $12.93 million in NMS back on March 4, 2011 by purchasing 200 million shares in the Company (in a restructuring exercise) at A$0.05 per share. Over the course of 11 trading days, MTQ accumulated another 68.455 million shares in NMS, for a total stake of 268.455 million shares (about 15% of the Company), lowering their average cost from A$0.05 to A$0.0467 cents per share. Total cost of investment comes up to about A$12.5 million after the open-market purchases. As the time of writing, NMS traded at A$0.031 cents/share.

Clearly, NMS is intended to be a strategic, long-term investment for MTQ, as mentioned by CEO Mr. Kuah Boon Wee back during the AGM. The Company does subsea work and it has proprietary technology called NEPSYS which it can use to market itself not just in Australia but also South-East Asia where its focus will be. The Company has just released its Annual Report for the financial year ended June 30, 2011. In it, it outlines the corporate restructuring which had taken place and how it has taken efforts to not just de-gear the Balance Sheet, but to divest off unprofitable assets and divisions in order to beef up their cash reserves and to realign their corporate strategy for sustained growth. Interested readers may download their AR at http://www.neptunems.com.

More importantly, the Company has stated its strategy to grow the business along three paths:-

1) Organic growth and growth of service lines in established geographic regions

2) Integration of services and focus on creating awareness of the “Total Service Solutions” provided by Neptune

3) Developing strategic relationships with key partners

It will be interesting and informative to follow the progress and fortunes of the Company, as Mr. Kuah Boon Wee had also been elected as an independent director of NMS. Of course, this investment cannot be directly compared to MTQ’s previous successful investment in RCR Tomlinson, but I would assume that with his father’s wise counsel with regards to investments in potential turn-arounds, Kuah Boon Wee would have combined it with his own years of experience and made an informed decision. Since it would not be possible to assess the financial impact of this investment in the short-term, it would be better to check back again next year once NMS releases its 1H FY 2012 results in late February 2012.

Hot from the oven: NMS had just announced on November 16, 2011 that it had clinched a contract for the provision of geophysical and geotechnical surveys for the Equus Gas Fields Development Project, and that they had formed an alliance with Greatship Subsea Solutions Australia Pty Ltd to complete the project. The contract value is estimated at A$14.5 million and NMS’ share will be about A$7.35 million, and is expected to commence in late November 2011 and last for 75 days. So apparently, no. 3 on the list is already being rolled out as this is one of the strategic alliances which NMS hopes to hammer down to forge long-term partnerships in order to grow their recurrent revenue stream.

Conclusion

MTQ can rightly be classified as more of a growth company than a yield play, as it has aggressively leveraged itself to expand its business, not only beyond Singapore and into Bahrain, but also through acquisitions (PSL and NMS) which are supposed to be earnings and cash-flow accretive and which will add long-term value to shareholders. Father and son had both commented that MTQ had been too conservative in the past, and now a little leverage would be good to propel the Group to another level. Of course, risks are definitely present as the Group operates in the current environmental of economic uncertainty and turmoil; but with proper stewardship and good control of cash, the Group may yet sail out from the storm unscathed and emerge stronger.

SIA Engineering – 1H FY 2012 Analysis Part 2

2011-11-21T18:00:00.002+08:00

Part 2 of this analysis shall focus more on the operational and qualitative aspects of the Company, and will be shorter (thankfully!) than Part 1. I will touch briefly on operational performance, major events (for MRO and JVs) as well as talk a little about prospects for SIAEC in a new untapped consumer segment for airlines.

Operational Performance

Line maintenance saw a +4.4% increase in flights handled at Changi Airport, from 54,546 to 56,967 for the half-year. The good news is that four new contracts were signed with established companies such as UPS and DHL (logistics and freight forwarding companies), while three contracts were renewed (Jetstar Asia, Air China and Air Mauritius). The issue I have is that the presentation slides do not show if SIAEC actually lost any customers. If we assume that they are simply building on their base with four new contracts then it would seem like very good news as it would indicate that the Company is slowly but steadily expanding its market and broadening its customer base. Line maintenance revenues were flat at around $194.7 million for 1H 2012.

For aircraft and component services, slightly more “A” checks were done (228 versus 224) but this was offset by fewer “C” checks (54 versus 62) and a slight dip in “D” checks (from 10 to 8). As a result of the fewer checks, revenue for this division dipped by -5.8% to $270.5 million from $287.2 million. On the bright side though, SIAEC announced that they had signed on 11 new contracts, with airlines such as Gulf Air, Air India and Vietnam Airlines. It remains to be seen if SIAEC can sustain the momentum of these contracts wins into the next financial year and beyond, and it would be good if I could attend the AGM to clarify this point with Management.

Major Events and Updates

Apparently, one gripe of mine is that SIAEC did not bother to announce the less significant events which occurred during the half-year ended Sep 30, 2011, preferring instead to rely on a set of analyst presentation slides to appraise shareholders of what transpired. In terms of strategic customers, the SIA Cargo Services Agreement worth $358 million was announced back in June 2011. However, the Transaero Cabin reconfiguration of B777 aircraft in Sep 2011 was not, and neither was the Gulf Air Cabin reconfiguration as recently as Oct 2011. Without further information being provided on these two events, and taking the descriptions at face value, I would hypothesize that these two reconfigurations are being done for existing cum new customers and that this represents MRO work which was probably not significant enough in terms of contract value) to be formally announced through SGXNet.

It was the same situation for strategic partnerships, which I had mentioned before in my comprehensive analysis of purchase that SIAEC relied on such partnerships over the years to boost their profits and cash flows aside from their core MRO and Line Maintenance business. Safran’s JV facility was announced back in April 2011, and SIAEC owns a 49%-stake in this JV; and is the second JV between SAFRAN group and SIAEC. In May 2011, the Panasoci Avionics Corp JV took off and commenced operations at Changi Airport. Recall that this was SIAEC’’s 25th JV and they own a 42.5% stake in this set-up which provides MRO services for in-flight entertainment systems. Thus, these two JVs should boost the share of profits and cash flows once they come fully on-stream in the coming months.

The next two tie-ups were not announced on SGXNet. In June 2011, SIAEC signed a GTA with Aircelle for maintenance of nacelle and thrust reverser systems on A380, A330 and A340 aircraft. Quick research shows that Aircelle is actually a subsidiary of the SAFRAN Group, and is one the leading players in the global nacelle market (http://www.aircelle.com); with a staff strength of 3,000. It produces large and small nacelles, thrust reversers and aerostructures. See the announcement here. So it would seem that SIAEC is expanding their co-operative agreement with SAFRAN Group whom they have worked with on two JVs already, to include maintenance of nacelles as well. For info, a nacelle is a cover housing (separate from the fuselage) that holds engines, fuel, or equipment on an aircraft.

In Sep 2011, SIAEC signed a letter of intent (meaning they have not gone to the contractual agreement phase yet; this is similar to a Memorandum of Understanding in that it is not yet legally binding) with Messier-Bugatti-Dowty (another subsidiary of the SAFRAN Group) towards appointing SIAEC as an Authorized Service Centre (ARC) for carbon wheels and brakes. According to its website (http://www.safranmbd.com), Messier-Bugatti-Dowty (MBD) is the world leader in aircraft landing and braking systems and on-ground movement, partner to the world’s leading civil and military air-framers. Interestingly, on Sep 29, 2011, SIA had selected MBD to supply wheels and carbon brakes for its Airbus A350 XWB fleet. This may explain why SIAEC had signed an LOI with MBD for a potential setting up of an ARC.

For these two SAFRAN-related events, I guess they are still in the incubation phase and until a definitive agreement is concluded, there will be no official announcement from SIAEC. At least I feel relieved that the Company has been working hard the last few months to expand its reach, as the lack of corporate announcements and updates on SGXNet has caused me to wonder if the Company had started to rest too much on its laurels. However, there is still no news on whether SIAEC is continuing with its pursuit of Line Maintenance contracts; this after opening its sixth line maintenance JV with Vietnam’s Tan Son Nhat Airport back in November 2010.

Prospects – New Segment of Budget Long-Haul Carriers (Scoot)

With SIA ready to launch its budget long-haul carrier called Scoot, there may exist opportunities for SIAEC to capitalize on this trend to increase business. Flights will commence in mid-2012 and Scoot will operate four Boeing 777-200 planes purchased from SIA initially, with fares up to 40% cheaper than full-service carriers. Scoot plans to expand its fleet to about 14 aircraft by the middle of this decade (i.e. by 2015). Since SIAEC is already tied-up with SIA for their aircraft MRO work, this expansion would gradually bring in more business for SIAEC in terms of not just MRO work, but also possibly line maintenance and fleet management work.

But what I am looking at is not merely an extension of SIAEC’s services to cover one additional new airline. Assuming Scoot takes off in terms of passenger numbers and load factor, it will represent a new untapped consumer segment and prompt many other airlines to consider “spinning off” budget long-haul carriers in order to compete more effectively. There are still many routes out there which are popular but which may not be adequately served by existing airlines, so this new segment also allows for such routes to be explored by major players within the industry, thus opening up more opportunities not just for collaborations with airlines (for MRO, Line Maintenance and Fleet Management), but will also drum up additional business for SIAEC’s myriad JVs and associated companies to provide more products and services for a more stratified industry. It remains to be seen if all these will take off, but the next few years should bear testament to this growing trend (of cheaper long-haul travel) and hopefully spur more investments into this segment. I will write more about this once Scoot takes to the skies next year.

Evolving Industry, New Aircraft and Better Components

It is interesting to read up about the airline industry, as it is constantly evolving and the suppliers of parts and services to airlines constantly see the need to upgrade their engines, components and parts to ensure continuous improvement. Air travel is relatively new to mankind, being only about a century old, but already rapid advancements in technology have made flying extremely safe and reliable; and efficiency is also improvement by the day. With such advancements, SIAEC should have a ready stream of opportunities being presented to it in order to capitalize on business opportunities. Its reputation (hinging on SIA) and track record speak for itself, and though it faces a strong competitor in ST Aerospace, it has a much stronger financial footing and therefore can afford to be more aggressive in pursuing opportunities.

SIAEC had also mentioned in its press release that with its current slate of 25 JV and associates, it is well-poised to seize opportunities for new business through its expanded network of long-term relationships, and with major suppliers of components such as SAFRAN Group and Panasonic. This holds it in good stead to slowly but steadily expand its reach and to increase its stable of JVs and associates as it explores opportunities for working not only with existing strategic customers, but also to send out feelers to source for new partnerships.

The next few years should be interesting for SIAEC, as new aircraft such as Boeing’s Dreamliner come on board, and SIA flies its A380 aircraft and introduces its budget long-haul carrier Scoot.

MTQ – 1H FY 2012 Analysis Part 1

2011-11-16T18:00:00.008+08:00

MTQ released their 1H FY 2012 results on the morning of October 31, 2011, and it capped a long-awaited update from the Company after its recent spate of acquisitions and troubles in Bahrain. Suffice to say that I did wait with some trepidation for the results and had expected it to look very poor due to the high amount of leverage taken up not just for the expansion in Bahrain, but also for financing the deal for the acquisition of Premier Sea and Land (PSL). This analysis will, like SIAEC’s, also be divided into two parts for ease of reading.

Part 1 will dwell on the usual financial numbers and key ratios (which have sadly deteriorated), as well as discuss on cash flows and dividends; including financial effects of recent corporate developments. Note that since 1H results did not include a detailed segmental breakdown of revenues and operating profits/margins, information could only be gleaned from the press release and associated notes to the financial statements as found in Section 8 of the SGXNet announcement. I will try my best to make sense of the information provided and draw conclusions from thereon. Part 2 will talk about MTQ’s divisions (Oilfield and Engine), plans and prospects (including Bahrain and PSL), industry outlook and also provide some summary of the key initiatives the Company is planning, based on an interview with Chairman Mr. Kuah Kok Kim in the November 7 issue of The Edge Singapore.

Income Statement Analysis

From the financial numbers above, it can be immediately noted that there was a significant jump in revenues of 40% to $62.6 million for 1H 2012. This can be attributed to the acquisition of PSL which was first announced on July 6, 2011. Therefore, there would have been about two months of consolidation of PSL’s results into MTQ Group’s results, and the positive effects are already showing in top line, though not in the bottom line as yet. For MTQ’s next report for FY 2012 due by end-April 2012, there will be a full additional six months of revenue cum profit contribution from PSL, so it will provide a better indication of how well that division is performing and contributing to overall Group profitability.

It would seem from the performance review that PSL is considered a separate division by MTQ and is not part of the Oilfield Engineering division, as the results were stated separately. This is rather puzzling as my understanding was that PSL was supposed to be acquired in order to complement the current business of Oilfield and provide a boost to earnings and revenues from the introduction of a more complete suite of products for customers (refer to previous The Edge Singapore’s interview on acquisition of PSL). Anyhow, I had broken down the numbers in the table above in order to provide more clarity, and perhaps I will drop an email to the CFO to further clarify certain numbers (especially operating profits) which were not disclosed.

For the last half-year (1H 2011), Engine Systems overtook Oilfield Engineering’s share of revenues, taking up 52.3% against 47.7%. The gap has further widened in 1H 2012 as Engine Systems now takes up about 45% versus 40% for Oilfield Engineering. However, assuming we combine the revenue contribution from PSL into Oilfield Division, the % will then jump to 55%. Considering Bahrain has not even started contributing yet, it would seem that future revenue growth would focus more on the Oilfield Division compared to Engine Systems.

Looking at the numbers, it would appear that PSL’s contribution to the total revenue pie is rather significant, as it constitutes about 15% of the enlarged revenue base. Considering this represents barely two months of revenue (and profit) contribution, it would be interesting to observe what the numbers would be like when PSL is recognized on a full-year basis. Nevertheless, a good indication should be given at MTQ’s next results release for FY 2012 by end-April 2012. An interesting fact which was mentioned during the AGM by Mr. Kuah Boon Wee was that PSL was currently at the bottom of its cycle, as its earnings were bottoming out, and with the upturn in commodity prices and the still-booming oil and gas exploration industry, this will eventually bode well for PSL. The key, of course, is integration of PSL’s operations into MTQ’s such that there are synergies and better opportunities for cross-selling and bundling services/products to customers. More on this in Part 2.

Unfortunately as well, no information was given regarding the breakdown of operating profit or profit before tax of the various divisions, therefore it would be impossible to provide a detailed breakdown and analysis in this post. What I can merely do is to discuss some qualitative aspects of each division in Part 2 and summarize the efforts made since the last AGM to grow each division organically, and the fruits of those efforts in broad and general terms. When FY 2012 results are released, segmental information should be provided, and it will then be possible to give a more detailed and insightful breakdown.

Balance Sheet Review

Moving on the Balance Sheet, it can be noted that there have been significant changes since the last reporting date six months ago (as at March 31, 2011). This is due, in part, to the acquisition of PSL and the associated debt taken up as a result to fund the acquisition. One would note that fixed assets, goodwill, receivables and inventories have increased significantly, and can all be traced to not just the acquisition of PSL, but also the investment in the Bahrain facility. On a more dour note, cash and equivalents fell from $23.8 million to $15.7 million, and will be covered in greater detail in the next section.

Though current assets increased to $73.9 million, current liabilities doubled to $54.6 million, resulting in current ratio falling from 2.99 to just 1.35. If we factor in inventories and prepayments to compute the quick ratio, it looks even worse as the ratio plunges from 1.96 to 0.93, indicating lack of liquidity should inventory move too slowly. The main culprit for this is the increase in the debt load of the Group from $27 million six months ago (the Bahrain expansion Phase I had already accounted for this) to $$45 million (which includes about $19 million additional loans taken up for the acquisition of PSL). This additional debt load had pushed up gearing and net debt now stands at $30 million. Annualized ROE has also deteriorated to 11.5% against 14% a year back. Finance costs had increased five times to $505,000 for 1H 2012, and I would keep an eye out for finance costs in future periods as I do not think MTQ can reduce its debt burden so quickly.

The catch here is this – is MTQ decision to gear up a proper and correct one considering there are good opportunities for synergistic acquisitions and also good prospects for its Bahrain Facility? Given that the cost of debt is almost at an all-time low and their business model is a proven one with many years of track record, I guess I can give the Management the benefit of the doubt, for now. The key, I guess, is to keep a close eye on the numbers and to ask the right questions, because a growth company if not managed well can quickly sink into trouble, especially one which has geared up for an increased level of business activity which may not be readily forthcoming.

Cash Flows

The cash flow statement of MTQ is much more fluid and interesting as compared to SIAEC, though whether this represents a good thing or not is up for debate! Due to the numerous major corporate events during 1H 2012, there were also many movements in the statement which represent one-off items, and I will provide details on these and explain their impact (or lack thereof) in subsequent periods. As the Bahrain operations have yet to commence and pick up steam, please note that for this reporting period, operating cash flows portion may not be fully representative of the Group’s cash flow abilities.

There was a significant drop in operating cash inflows for 1H 2012 to $3.3 million, down 55% from $7.4 million a year ago. The main culprit for this is the increase in receivables and prepayments of about $7.2 million, probably due to the ramping up of activity in Bahrain and also due to the acquisition of PSL which saw the subsidiary’s Balance Sheet consolidated into MTQ Group. At face value, this large increase represents a worrying sign which should be monitored to review if it is merely a timing difference, or if it may represent problems in collection. Slightly higher income taxes were also paid (of $2 million) due to the non-deductible nature of some expenses. [Note: It is perhaps interesting to point out that for FY 2011, operating cash inflow came in at a very high and healthy $22.4 million, though this was subsequently offset by the high capital expenditure for the Bahrain expansion.]

Investing cash flows is where most of the “action” took place, and I am personally hoping that things will quieten down in this department soon. Actual capex was surprisingly low at just $5 million, and reflects the fact that most of the capex for Bahrain had already been incurred during 2H FY 2011. The main outflows, therefore, were two one-off items – that of the purchase of PSL costing $20.7 million (and likely to cost a little bit more due to the audit of the consolidated NTA position of PSL), as well as the purchase of more shares of Neptune Marine Services (NMS) costing $3.1 million. The result was a net outflow of $28.7 million. The good news (if it can considered that) is that negative FCF is just a small $1.7 million, and close monitoring must be made to ensure the operating cash flow impact is due to a timing difference (as previously stated).

For financing cash flows, not much is required by way of explanation as the previous section had already discussed the issue of MTQ’s gearing; therefore I am not surprised to see an inflow of $19.4 million being part of proceeds from bank borrowings. It is small comfort to me that the Chairman and CEO both chose scrip dividend to reduce the amount of cash outlay for payment of dividends to just $975,000. With such gearing, I would closely monitor their interest expense and cash outlay to make sure they are not over-stretched. Management is surprisingly sanguine over their prospects and do not seem unduly worried about their higher gearing and net debt position (I will provide justifications for this in Part 2, though I still maintain some reservations).

Dividends

There’s probably not much to say regarding dividends, and the first major surprise came the same time last year when MTQ doubled its interim dividend from 1c for 1H 2010 to 2c for 1H 2011. The catch, of course, was that there was an option for scrip for the 2c dividend, and the Chairman and CEO both chose scrip to reduce the cash outflow impact and smoothen out the cash flow statement. This has continued for the next two dividends as well (including the current 2c interim dividend). Knowing that the two top guys will be choosing scrip and knowing that they feel confident about the direction the Company is headed, I have also been choosing scrip on the last two occasions and will probably continue to opt for scrip this time round as well. It is a cheap and cost-effective way to increase my stake in the Company and also to compound my dividends.

Part 2 will focus more on the qualitative aspects for MTQ, and will include a discussion on Bahrain (details to be supplemented with an interview with Mr. Kuah Kok Kim with The Edge Singapore), oilfield engineering division, PSL, a brief mention on Engine Systems, and finally on NMS.

SIA Engineering – 1H FY 2012 Analysis Part 1

2011-11-11T18:00:00.010+08:00

SIA Engineering (SIAEC) released their 1H FY 2012 results on October 28, 2011; and following that on October 31, 2011, they released a set of presentation slides which were used to present to analysts at the analyst briefing. Since it has been a while since my original purchase of SIAEC, and subsequently I had also added to my initial position on two separate occasions, I thought it timely for me to do an analysis and review of the Company. I shall limit the analysis to the financials, cash flows, associates and joint ventures (JV), dividends as well as some of the qualitative aspects and growth prospects for the Company. This shall be divided into two parts for ease of reading.

Part 1 shall focus mainly on the financials and numbers including the year on year comparisons and nine-year history, cash flow categories and presence of free cash flow (FCF), share of profits and dividends from associates and JV; as well as dividend history. Part 2 shall be shorter and will touch briefly on SIAEC’s operational performance, recent activities and strategic tie-ups and partnerships.

Financial Analysis

From the above table, one can note that revenues have been generally flattish for the last 5 years, and costs and operating profits have also remained fairly constant. In fact, operating margin for 1H 2012 was the same at 12.5% compared to a year ago (1H 2011). The main bulk of the profits, which comes from share of profits from associate companies and JVs, also rose just marginally by 1% from $77 million to $77.7 million. Therefore, the only reason for the slight increase in net profit to $139.3 million was actually because of a tax writeback! On the bright side, flat profits and revenue may also signify resilience in the face of growing uncertainties in the global economy as well as aviation industry; with SIA reporting a 62% plunge in half-year profits due to higher fuel costs, perhaps it is mollifying to know that SIAEC can hold its own due to its business model (which does not have reliance on oil prices).

On a positive note, the Balance Sheet continues to remain solid with debt of just $2 million against a cash balance of $388.9 million. Working capital has dipped to $455.3 million from last year’s $504.9 million but is still high compared to the last five years. Current ratio has dipped from 3.10 to 2.58, mainly due to the payment of the special dividend of 10 cents/share, and this will bring its current ratio more in line with long-term averages of around 2 to 2.8. Interestingly, annualized ROE is higher at 23.3% for 1H 2012 as a result of a lower equity base, against 21.9% for 1H 2011. The dividend declared of 6 cents/share (unchanged from 1H 2011) was somewhat of a pleasant surprise – I had expected a cut to 5 cents/share due to lingering uncertainties in the economy and also a possibly depressed aviation industry outlook. The Company will have to cough up $66 million to pay out to shareholders in late November 2011, and this pay out will be reflected in the 3Q 2012 results.

Cash Flows and Cash Balance

Cash inflow did suffer during 1H 2012, compared to the same period last year. Net operating cash inflows plunged nearly 70% to just $20.7 million against $66.6 million a year ago, while investing inflows also dipped 6.5% to $40.2 million. Due to the payment of the large final cum special dividends, cash outflow from financing activities increased two-fold to $253.8 million. The result was a significant drop in cash of about $192 million, which followed a record-high cash balance as at March 31, 2011 of $581.4 million. Apparently, the practice is for SIAEC to pay out a special dividend when cash balances hit levels which are considered higher than normally required for working capital purposes. Capital expenditures dipped to just $15.3 million for 1H 2012, thus there was still some free-cash-flow (FCF) of $5.4 million, though this is pitifully low compared to the same period last year, when FCF stood at $40.1 million.

By observing the upcoming 3Q 2012 results, it will be possible to project if SIAEC will have sufficient cash generation ability to at least maintain its final dividend at 14 cents/share. Looking back at 3Q 2011, operating cash flow was very high at $77.7 million, investing cash flows was $39 million, while financing cash flows shows an outflow of $57.5 million (payment of interim dividend for 1H 2011). The net cash inflow turned out to be $53.2 million, which is decent. For 4Q 2011, operating cash flows were very strong at $80.5 million, investing cash flows were $39.5 million and financing cash flows showed an inflow of about $4 million. This adds up to about $124 million in additional cash for 4Q, and for two quarters alone the combined inflow was about $183.2 million. A final dividend of 14 cents would drain about $154 million in cash, and therefore it can be seen that the two quarters’ strong cash inflow could sustain this final dividend, with the special dividend being declared to reduce cash reserves which were considered in excess of working capital requirements. Hence, the next two quarters’ cash flows will be critical to be able to appraise the situation better; and qualitative data about the industry and corporate announcements from SIAEC should also be used to support any potential dividend payouts.

Associated Companies and Joint Ventures – Profits and Cash Flows

I have taken the liberty of re-listing the profits and cash flows from associated companies and joint ventures once again for SIAEC from FY 2000 till FY 2011. Although profits had undergone some fluctuations in the last five financial years, the cash flows from dividends received (parked under Investing Activities) seems to have gone from strength to strength. Notice that from FY 2009 to FY 2010 there was a big jump, presumably because of the increased JV activities and tie-ups which SIAEC had for MRO work and line maintenance. With the recovery of the economy back in FY 2010 due to the massive QE 1, cash flows jumped and hit a (then) record high. Following that was FY 2011’s $165.3 million cash inflow, and when viewed from this perspective, these two years could have been anomalous as the real problems with the economy had persisted and were simply masked behind the massive pumping of liquidity. Thus, if we normalize the trend for cash flows, FY 2012 could see a dip before the resumption of the upward trend.

If we just compare the year on year half-yearly profits and cash flows from associates and JVs, we can see that the total for profits remained largely flat, while for cash flows it had dipped about 15% to $62.8 million. This reinforces my point that cash flows may dip for this year, which may result in a lowering of final dividend from last year’s 16 cents/share. Though no specific reasons were provided for this dip, the fragile recovery and ongoing worries in the global economy would be sufficient reasons for the weaker performance of all of SIAEC’s associates and JVs. Profits here make up 50.1% of pre-tax profits, and I feel this will be poised to increase further in the coming years. More on that in Part 2.

Dividends

For dividends, I have decided to analyze the core dividends declared by SIAEC since listing, and therefore have a row which excludes the effects of special dividends (there have been three such instances over the last eleven financial years as can be seen from the table above). Core dividends have been picking up only from FY 2006 onwards, but an interesting point to note is that interim dividend has been on an increasing trend over the last eleven years, even though final dividend is more erratic. Interim dividend was just 1.5 cents/share back in FY 2000 but has increased over the years to 6 cents/share. Notice that as SIAEC expanded their JV and tie-ups with strategic partners, interim dividend declared has also steadily inched upwards, but in general it remains constant over at least two consecutive years before increasing.

For the final dividend, although it may appear rather erratic at first glance, do note that apart from FY 2008 which seemed like an anomaly, it has also risen slowly but steadily. If you look at core dividends, the trend seems to be an increase of 2 cents/share per financial year beginning from FY 2006, with FY 2008 being a “blip” as it should have been 14 cents/share (but was instead 6 cents more at 20 cents/share). Going by this logic, FY 2012 should see a total dividend of 22 cents/share, which implies that the upcoming final dividend would be 16 cents/share.

However, let me caution that this is just a rather simplistic extrapolation on my part, and what is more important to note are the actual operating results and cash flows from SIAEC’s core business and their numerous JVs and associated companies.

Part 2 will touch on operational aspects and some qualitative characteristics of the Company, as well as discuss future plans and how SIAEC intends to expand amid turbulence in the industry (no pun intended).

Personal Finance Part 25 – Holistic Tracking of Personal Finances

2011-11-06T12:00:00.016+08:00

When thinking about personal finance, a colleague once asked me if my wife and I keep track of our spending and our mortgage balance, as she was also keen to settle down with her husband soon and wanted to find out the proper way of managing finances. This made me do some soul-searching and think about how I was personally monitoring my financial life and what spreadsheets I had on me which helped me to achieve this. Thus, this post is about the different aspects of one’s finances which one should track in order to ensure most bases are covered and you do not receive a “nasty surprise”. Unsurprisingly, it is Singapore-focused and some aspects (such as CPF) may not be applicable to international readers. However, I do feel that it is comprehensive and would welcome further constructive ideas or suggestions from readers on how to improve further.

The need for detailed tracking and documentation

You may ask yourself – why is there a need for detailed tracking, documentation and monitoring of one’s financial status, and why must it be comprehensive? I am of the opinion that if one’s knowledge of their finances is comprehensive, then one gets a much better understanding of all aspects of one’s finances; and knowledge is power. Being aware of your cash reserves, CPF balances, outstanding mortgage loan and investment portfolio would give you peace of mind that you are in control and that you have a grasp of what is going on in your financial life. To do so requires meticulous tracking and the use of either a spreadsheet or a device for monitoring (for those who download apps on your smartphones). An additional advantage of being aware also means that you are able to react and not panic should there be an urgent situation or an emergency.

Cash and Bank Balances

This section is essentially the “lifeblood” of personal finance. It constitutes all bank balances in all bank accounts and shows the detailed cash movements made during the month. This is also the section where I do simple budgeting. At the start of each month, I would input all my fixed expenses into the spreadsheet as a negative number (i.e. all GIRO automated payments like credit card bills, phone bills, utilities, conservancy charges, maid levy and insurance). The ending balance, if negative, will reflect the fact that I did not retain sufficient funds in my savings account to fund the month’s expenses. Other budgeted expenses which are discretionary (e.g. birthday gifts, red packets for weddings or birthdays) will also be input. On the income side, salary will be keyed in according to the timing of receipt as well as other miscellaneous income like rental and dividends. At this point in time I should emphasize – the timing of the cash flows is important if you are running a tight budget as most of the time salary comes in at the end of the month but expenses are ongoing. Thus, one can just run your mouse down to see if at any point during the month you dip into a negative balance. If so, then you should transfer some money from your opportunity fund to cover the gap temporarily.

In case I forgot to mention, I essentially have three “main” bank accounts. One is for operational expenses (day to day expenses) which includes food (meals), recharging of my EZ Link card, paying my bills and general entertainment. Another is a joint account with my wife which is usually quite static as it is reserved simply for common expenses like conservancy charges and utilities. The third is my emergency cum opportunity fund where I park my cash earning 0.8% per annum for quick deployment in case of investment opportunities. By having clear segregation, one can ensure one does not inadvertently “dip” into the opportunity fund to pay for indulgences and impulse purchases.

My personal practice is to transfer 50% of my take-home salary the moment it is credited in my bank account. This is essentially the practice of “paying yourself first” and I have been doing so for the past four years or so. One suggestion I can make here is to make payments through Internet Banking as much as possible as it will save on cheques and is much more efficient. My utilities and conservancy are on GIRO, while I pay my credit card bill and phone bill through Internet Banking. For cheques, I use those from CIMB as they are free of charge (POSB charges for the cheques).

For information, I am using POSB/DBS for my spending account, UOB for my joint account and CIMB for my opportunity/emergency account.

CPF and Housing Loan Balances

Another important balance to track is that of your CPF. Everyone knows this is a uniquely Singaporean forced savings account, which can only be partially withdrawn at age 55 (and even then, only if it’s above the ever-changing minimum sum!). Along with the CPF balance, I thought I would also mention the housing loan balance since I placed both on the same spreadsheet (but on different tabs).

Essentially, most people would use their CPF OA account to pay for the instalments on their housing loan; therefore it is important to keep track of the OA account to know how much “buffer” you have in case you lose your job or get a pay cut. Ideally, there should be a +ve amount being added to the OA every month, meaning the servicing of the loan drains less than the amount of contribution. But with housing prices rising relentlessly, this is becoming more and more of an impossibility as the contribution is capped at $5,000; therefore many couples may have to dip into their cash savings to top up their instalment (this would probably apply to those who plan to purchase a very expensive 5-room DBSS apartment costing in excess of $700,000).

It is also important to track one’s Medisave contributions and balance, to ensure one has sufficient buffer for medical emergencies and also for H&S insurance (the basic Medishield package can be purchased using Medisave funds). The current Medisave contribution ceiling is $41,000, after which additional contributions will be routed to the Special Account.

As the housing loan is an amortizing loan, it is important to build a spreadsheet which can at least project your instalment up to six months to a year in advance. My loan is an HDB one and thus the rate stays constant at 2.6% per annum, but for those who took up a variable-rate loan package where the rate is pegged to SIBOR or SOR, they may wish to input the effects of a sharp rate increase to simulate an increase in interest expense and review if they are able to stomach the increase without undue financial distress. Tracking the loan is also useful to simulate different scenarios of pay rises, pay cuts, retrenchments etc to see the effects on the ability to service the instalments, and then cross-check it to the CPF OA account to determine if sufficient buffer is in place to weather a crisis. The buffer is built up usually through bonuses (but which are subject to the revised cap of $79,333 for 2011) and one good way to reduce the loan amount is to make lump sum repayments. However, if you have a very cheap loan (<2%), then it may be more worthwhile to invest the money or just leave it in the CPF OA account (the first $20,000 earns 3.5% per annum risk-free). For myself, as my HDB loan amount as of this writing stands at about $75,000, I cannot refinance it at a lower rate through a bank and so it makes it worthwhile for me to pay it down through lump-sum repayments as far as possible, in order to clear the balance more quickly and be debt-free.

Investment Monitoring (Market Values and Dividends)

Investments are an important aspect of one’s finances as they will determine the amount of passive income which comes in every month, throughout the year. By “investments”, I am referring to mainly equities or bonds which pay a predictable dividend or coupon at specific times of the year. Tracking market values is actually secondary if you intend to be a buyer of long-term values, and if you intend to simply sit tight and enjoy the growth of the companies within your portfolio over the course of years. I find it useful to maintain a spreadsheet which tracks my total cost and market value at the end of the month or a certain period, to ensure that I adhere to my aim of capital preservation, and also to be able to monitor my additions to the portfolio over time as I accumulate funds.

I use separate sheets for purchases, tracking of daily market prices and index levels, as well as portfolio values and dividends. Suffice to say that my spreadsheet is pretty massive and complex and is all inter-linked so that I can have easy access to information regarding my portfolio and dividends at any instance. Dividends are recorded by calendar year and receipt dates are clearly input once a dividend is declared, so that I can, at the same time, update my cash spreadsheet for the exact receipt date and amount based on my shareholdings. At this point, you can probably tell how one spreadsheet is linked to another, as the effects of one may result in changes to another. Rather than link up all this via formulae (which can go horribly wrong if cell references change or sheets are inserted/deleted), I usually input the amounts manually. One needs to have discipline and patience to track these numbers but over time you will get used to it, and probably even enjoy it!

Insurance Portfolio and Details

The fourth and very important aspect of tracking is one’s insurance portfolio. Insurance is a necessity for everyone (in my opinion) as it will buffer you in times of emergencies and helps you to avoid large expenses. I have my wife’s and my policies summarized on one spreadsheet, with separate tabs for mine and hers. The spreadsheet should contain details of type of policy, insurer’s name and contact details of insurance agent (financial planner), payment amount (whether monthly or annual, mode of payment and date if GIRO-deducted), coverage amount, and other salient details like whether it is pegged to inflation or is a reducing balance (for reducing term loans for example). Essentially, the summary should be able to tell you at a glance what your total coverage is for various types of conditions like death, disability, TPD and accidents. Most important of all is the H&S policy (I consider this a compulsory policy for everyone) as the premiums are very low compared to the amount you need to fork out for just one hospital stay. I would strongly suggest paying a higher premium for private hospital stays in A class wards. When my daughter was hospitalized mid this year I easily earned back nearly 10 years of premiums!

An insurance portfolio should be balanced with Term policies, H&S, endowment (should you choose one – I did not as I intend to invest the money on my daughter’s behalf for her future education) and disability income. You should try to cover most aspects of your life which may cause financial difficulties if something happens to you. Remember also to include details of your beneficiaries – as one ages this will change as your parents may pass on or you may have more children.

Credit Card Balances

This is actually optional but I had included it as I know many people out there have multiple credit cards, thus it would be helpful if one could summarize each card’s expenses in an easy-to-read spreadsheet, along with amounts and due dates. One has to be very disciplined about this and update the spreadsheet as soon as a transaction is completed which involves a credit card being swiped. Readers may argue that the banks will send credit card statements so why track this manually? The problem is that so many statements with different formats and due dates can result in considerable confusion, and I have read of blogs where the bloggers have lost track of one or two statements and ended up having to pay not just late charges but also the accrued interest of 24% on outstanding balances past due date. One then has to go through the hassle of asking for a waiver. For myself, I only have one credit card and hence I do not practise keying in every transaction – I mentally am able to tally up the amounts I spend every month and will control my spending once it hits my pain threshold!

Net Worth Summary

This is by far my most important spreadsheet as it summarizes all the other aforementioned spreadsheets and consolidates and collates the information together. In essence, the net worth spreadsheet will incorporate all your cash balances in all bank accounts, surrender values of all insurance policies, market (monthly closing) value of all investments plus any other funds from other sources; this will yield a number which will represent your total assets.

Beside my total assets column is another column which measures the increase or decrease in the value of total assets month-on-month. Ideally, this number should be always increasing, assuming that you save much more than you spend! However, due to the volatile nature of equities and also bonds, the figure may thus fluctuate according to economic cycles, but the general trend should be upwards over the course of say 3-4 years (this is usually a long enough period of time to experience a full bear/bull cycle and hence will smooth out all fluctuations for market values). Do not be unduly distressed if total assets take a sharp plunge due to Mr. Market’s mood swings – just focus on increasing your cash holdings every month and to plough some money into solid, well-managed companies, and over time the value of your total assets can only increase.

As proof that this can occur with disciplined savings and investing, in October 2005 (6 years ago) my total assets was just $41,000. As at end-October 2011, the total assets amount has touched $320,000 (this also includes my daughter’s Government CDA-Extra account with OCBC Bank). That is nearly an 8-fold increase over 6 years and it could not have been accomplished without perseverance, sacrifice and a well-established investment philosophy (coupled with a little luck on the side too admittedly).

Finally, another column will show my HDB loan balance decreasing as the months go by, and thereby I can compute my net worth which is total assets minus all loans (in this case, I only have one mortgage loan). This figure has also hit an all-time high recently of around $245,000. Assuming my monthly expenses are about $3,000 a month, I would be able to sustain myself for about 81 months without additional income. One should think of wealth in terms of how long one’s net worth can sustain oneself if both spouses stop work. This is how I have been measuring myself for the last couple of years. Another method of measurement is to monitor my total dividends over the course of one calendar year to compute my average monthly passive income (currently, it stands at about $1,100 per month). If this eventually exceeds my monthly expenses, then in theory I would then have achieved financial freedom and can choose not to work. [Note: I did not include the market value of my primary residence in my net worth computation because to realize this value would imply that I would have to sleep at the void deck of my HDB block.]

Conclusion

As can be seen above, it takes some time to prepare and psyche oneself to monitor so many aspects of one’s finances, but start slow and steady and soon you would enjoy the process of being in control of your finances. I have shared many personal details of myself which most people will not even share with their spouse, so I hope that this post will help people to organize their finances more effectively; as well as serve as inspiration for those who are just starting out in their career and wish to build up sizeable savings and investments as a prelude to retirement planning.

Although I must admit I am still a long way off from my target of half a million dollars by the end of next year, and passive income of $3,000 per month; nevertheless I feel I am progressing well on my journey and shall endeavour to carry on climbing towards the summit!

October 2011 Portfolio Summary and Review

2011-10-31T18:45:00.007+08:00

October 2011 was somewhat weird, considering the negative sentiment which pervaded stock markets and the economy from August to September 2011 seems to have somewhat dissipated. In fact, in an embarrassing turn of events, the local market has rocketed up more than 10% after I wrote my piece on “My Second Bear Market”, and is a testament to how difficult it is to gauge and predict short-term market movements with accuracy. Apparently, that post is now irrelevant, but I assure that the lessons learnt are still applicable and the fact that I am able to say that my financial position has improved should at least be of some comfort to me. I am also proud to admit that I have absolutely and completely no skill or special foresight in predicting market movements, so for readers who have somehow stumbled upon this blog looking for something akin to the Holy Grail, please do look elsewhere (for info: there is a never-ending flow of market “gurus” who continually try to predict every twist and turn of the stock markets).

To cut a long story short, out of the six companies within my portfolio, three had released their results as of this writing, while the other three will release them in November 2011. I have provided summaries of the results and dividends declared (if any), but detailed analysis will only be conducted subsequent to this portfolio review as I would need time to digest and reflect on not just the numbers, but also the qualitative aspects of what was written in the announcements.

Below please find my portfolio as well as corporate summaries for October 2011:-

1) Boustead Holdings Limited – On October 12, 2011, Boustead announced that Boustead Projects, its 100%-owned subsidiary, had clinched 2 contracts. One was a S$19 million contract to design and build an integrated manufacturing and R&D centre for Greenpac Asia (S) Pte Ltd located at Tukang Innovation Park in Singapore. The Facility will occupy 18,000 square metres and be completed in 4Q 2012. The second contract is a small one – a S$2 million contract to design and build a 1,800 square metre extension to an existing facility owned by Golden Spring Export Pte Ltd at Changi International LogisPark. With these two contracts, Boustead’s order book stands at S$320 million. I had just written a two-part post on Boustead’s EGM highlights, so I will not be elaborating too much on the Company until they release their 1H FY 2012 results on November 14, 2011 (Monday).

2) Suntec REIT – Suntec REIT released its 3Q 2011 results on October 25, 2011. A dividend of 2.533 cents/share was declared and this will be payable on November 29, 2011. As I do not have a significant stake in this REIT as a proportion of my portfolio, I shall not go into details on the press release and presentation slides, and readers can go to SGXNet to download the necessary information. In another announcement on October 27, 2011, Suntec REIT announced that it had divested its entire stake in Chijmes (which it purchased for $128 million in 2005) to Pre 8 Investments Pte Ltd for a sum of $177 million, and will recognize a gain of $49 million. This was 23% above valuation, and the proceeds will be deployed within the Fund and be used to either value enhance (whatever that means) or pay down debt.

On October 31, 2011, Suntec REIT announced a massive asset enhancement plan called “Remaking Suntec City”. ARA Asset Management will spend $410 million on the plan (which will commence in mid-2012), with $230 million slated for remaking Suntec City mall, and $180 for remaking Suntec City Convention Centre. On completion in 2015, Suntec REIT is expected to have about 1 million square feet of net lettable area. Net property income is expected to increase by 33% of $23 million, and proceeds from the sale of Chijmes will be used to mitigate the temporary dip in DPU while renovations are taking place.

3) MTQ Corporation Limited – On October 11, 2011, MTQ announced the completion of their acquisition of Premier Land and Sea (PSL). Based on the audit of PSL as at June 30, 2011, the NTA of PSL was US$17.1 million, including cash balances of US$2.6 million. As this value exceeds the minimum NTA guaranteed by the vendor, MTQ paid the vendor an additional US$2.6 million, bringing the total consideration to US$21.9 million. There was no news or information on PSL’s financial results as at June 30, 2011, and the NTA per share after the acquisition has now been amended to 72.52 cents/share. MTQ also released their 1H FY 2012 results on the morning of October 31, 2011. Revenue was up 40%, largely due to the acquisition of PSL and organic growth in Engine Systems Division, but gross profit was up just 27% due to lower gross margins as a result of sales mix. Staff costs and other operating expenses were also significantly higher due to start-up losses at Bahrain (which has yet to contribute meaningful revenues for the Group), up 33% and 47% respectively. Finance costs were also predictably higher at $505K as the Group geared up for both their Bahrain expansion and PSL acquisition. The Balance Sheet has weakened compared to the previous reporting date, and Cash Flows are also weaker due to more outflows for acquisition of shares and subsidiary. I shall be doing a comprehensive 1H FY 2012 analysis and review of MTQ in my upcoming posts. An interim cash/scrip dividend of 2 cents/share was declared, unchanged from last financial year.

4) Kingsmen Creatives Holdings Limited – On October 21, 2011, Kingsmen announced the incorporation of a wholly-owned subsidiary in Shenzhen, China. The authorized share capital of this company is RMB 500,000 and its business scope will include designing and producing architectural interiors for commercial and retail properties, pavilions, museums and theme parks. Uniqlo has also announced that it plans to increase its number of outlets from five to 20 within the next three years. Its regional headquarters will be set up in Singapore and they are one of Kingsmen’s clients, so this bodes well for Kingsmen’s Interiors Division.

5) SIA Engineering Company Limited – SIA Engineering released its 1H FY 2012 results on October 28, 2011. Revenue for 1H 2012 decreased 2.7%, while net profit attributable to shareholders increased 15% to $139.3 milllionm partly due to a tax write-back of $3.1 million. As expected, there was no debt carried on the Balance Sheet, and glancing over to the Cash Flow Statement, I note that for 1H FY 2012, there was operating cash inflow of just S$20.7 million, due to an outflow of $24.3 million for 2Q 2012, while investing cash inflows came in at S$40.2 million, therefore free cash flows totalled S$60.9 million. This was lower than 1H FY 2011’s total FCF of S$109.6 million. However, SIAEC managed to maintain their interim dividend at 6 cent/share, similar to the previous year. This will be paid out on November 29, 2011.

6) VICOM Limited – There was no news from VICOM for October 2011. VICOM’s 3Q 2011 results will be released on November 10, 2011.

Portfolio Review – October 2011

Realized gains have remained at S$67.4K in the absence of dividends received for this month (no counter going ex-dividend).

With the addition of more shares of Boustead, my portfolio cost has increased to another new high of $242,600 as at October 31, 2011. Sadly and most unfortunately, the recent upsurge in share prices and valuations has scuttled my attempt to accumulate more shares in companies, and therefore the cash which was awaiting deployment would have to sit around a while longer.

For the month of October 2011, the portfolio has decreased by -4% (using XIRR in MS Excel to compute) against a -10.5% fall in the STI; thus my portfolio performance has outperformed the STI by +6.5 percentage points. This was a worse performance compared to September 2011, when the portfolio out-performed the STI by +11.6%, but it is to be expected as a value portfolio would find it very tough to beat the index during periods of bullishness and pervasive optimism. Cost of investment has increased from S$238.7K to S$242.6K and unrealized gains stand at +5.2% (Portfolio Market Value of S$255,100).

November 2011 should be a very interesting month with many companies reporting their 3Q results. I will be expecting results from Boustead, Kingsmen and VICOM, and the receipt of dividends from Suntec REIT and SIA Engineering.

My next portfolio review will be on November 30, 2011 (Wednesday).

Boustead – FY 2011 EGM Highlights Part 2

2011-10-26T14:00:00.002+08:00

Here is Part 2 of the highlights from Boustead’s recent EGM held on October 13, 2011 at Starhub Green.

On Energy-Related Engineering and Water and Wastewater Engineering Divisions

I was rather concerned about how the state of the world economy had affected oil prices, to the extent that they had hit one-year lows recently. When I asked about how this would impact the energy-related engineering division, the reply was that oil and gas will always be an integral part of the requirements for the economy; and the Middle Eastern countries would continue to chug along producing this key commodity for major markets. Boustead’s upstream and downstream divisions are still receiving healthy enquiries, and there were many smaller contracts which were concluded which would not be announced due to their size. Another factor was the secrecy required for contract announcements for this division – some of Boustead’s clients have stringent requirements regarding disclosure since these may be sensitive. It was good for me to know though, that BIH still had healthy enquiries and that the waste-to-energy division was also doing fine. However, it was mentioned that margins may be impacted due to the presence of aggressive bidding by Korean EPC contractors (a point which was brought up already during the AGM).

Regarding water and wastewater (Salcon), I also asked about the apparent lack of contract announcements lately. It seems that Salcon itself is busy at work with its current projects, including the S$25 million demineralization plant contract which was clinched together with Boustead Projects. I expressed concern over Salcon’s performance and how it may drag down the Group as they had reported a LBT (Loss Before Tax) instead of a PBT (Profit Before Tax) last year. However, I was reminded that the reason for the LBT was due to the write-downs for Libya, otherwise the division would have registered a PBT of about S$3 million. My worry was more for the relative instability of the division to generate a consistent PBT, what with legacy issues dogging the division since FY 2002 all the way till FY 2009 when they managed to break-even after restructuring, to the relatively tough competition and tight margins the division faced when bidding for contracts. My view was that the division should be divested if it continues to be a drag on the Group’s performance, and that I will be watching the 1H 2012 announcement closely to review the performance of this beleaguered division.

On Geo-Spatial Division

Geo-spatial division was a consistent performer and I did not have a lot of worries about this division as long as it could grow top and bottom line by 10%, organically. After the recent 2010 acquisition of MapData Pty Ltd, it saw a boost in ESRI’s earnings and Mapdata was considered a synergistic acquisition which really helped to enhance and boost ESRI’s service offerings. Management mentioned that they are always looking out for possible M&A, but since geo-spatial already has a 40% global market share, it will remain a good performer within Boustead and for myself, I knew that it was Boustead’s “Cash Cow” which not many analysts are aware of. It would be interesting to observe how this division performs in the upcoming 1H 2012 announcement as well.

On HanKore

Boustead owns 2% of Hankore Environmental right now (formerly Bio-Treat) and they had invested S$4 million into the company, purchasing 100 million shares at 4 cents/share. A shareholder did ask if Boustead intended to increase their stake in the company, and how HanKore could add value to Boustead.

On Share Buy-Backs

Boustead had re-purchased shares over six market days amounting to $391,000 for 475,000 shares. Treasury shares now stand at 12.492 million and the remaining issued share capital net of treasury shares is 503.25 million. At the last done market price of 81.5 cents, this values the entire Group at $410 million – more will be said on this later. One explanation given for the share buy-back was to support the share price; but my impression of a share buy-back was that the Group was unable to utilize its cash hoard to generate better returns of say 10% and above, which explained the rationale for re-purchasing it at a price which would yield about 4.5% (most of the repurchases were made around 83.5 to 85 cents). I did communicate my discomfort at this but apparently it was one of the ways of deploying cash which the Group had, and since I do have faith in Mr. FF Wong and the Management, I will also not dispute this practice. The key, however, is for me to eventually see the cash stash being put to good use rather than being continually spent on share buy-backs.

On retaining Good Talent

Another under-stated reason for the implementation of the Restricted Share Plan 2011 (which took 18 months to conceive and refine, incidentally) was to retain suitably good talent to enable Boustead to excel and do well for the future. Boustead wanted to retain a talent pool of capable and competent human resource but FF Wong complained that MNCs would poach talent from Boustead as they are considered an industry leader (Boustead Projects was at the forefront of such recognition). He cited an example of one project manager who was offered 2.5 times his salary to join an MNC, and lamented on how tough it was to retain good talent to be able to drive the business to greater heights. Hence, the introduction of the Plan would also tie into improving executive compensation in order to ensure employees who excel would feel adequately rewarded and not be persuaded to join a competitor.

On the value of the Boustead Group

When asked about the value of the industrial leasehold properties within Boustead’s stable, FF Wong gave a candid assessment, stating a market value of about S$160 million. After netting off the associated loans relating to these properties, one would still end up with about S$120 million worth of cash. Add this to the current S$200 million net cash and you would end up with a net cash balance of close to S$320 million, which is close to almost 80% of the current market capitalization of $410 million (above) purely in cash. FF Wong joked that this meant that you are getting essentially the rest of Boustead’s business almost free of charge! FF Wong went on to mention that the value of the name “Boustead” itself would be worth about S$50 million should he attempt to sell it, as they had already built up a very recognizable brand name within the industry.

When quizzed about Boustead Berhad having a higher asset value (the Malaysian arm of Boustead which Boustead Singapore had broken away from years ago), FF Wong replied that Boustead Berhad had the benefit of owning much more capital-intensive assets such as plantations which therefore increased their Net Asset Value. However, Boustead Singapore has achieved much more by remaining asset-light and focusing on retaining good human resources, and they had built up the Company by using this successful approach which was no mean feat.

My thoughts on Boustead

The purpose of my visit to Boustead was not purely to get an update on the operations and business conditions of the Group (though that was an integral part of it), but also to gain some comfort as to the plans and strategic director which the Group was taking over the next year or two. With economic conditions being so volatile and uncertainty reigning, there were other shareholders who also voiced concern over how Boustead would navigate the choppy waters and emerge unscathed.

From this meeting, I have obtained comfort that the Group has in place a rudimentary succession plan (still ongoing, no doubt, but it’s work-in-progress) and that they are also motivated to put their cash to good use. Management is keeping an eye out for good M&A opportunities now that the Eurozone is giving so many problems, and FF Wong is quietly confident that they would be able to finally put the cash hoard to good use. Boustead have a team of professionals who are adept at conducting due diligence on potential M&A targets, and I am sure that with FF Wong’s stringent requirements, Boustead would be able to select a suitable M&A target which would add value to the Group.

Conclusion

With the update being given to me and my own understanding of how the Group has done thus far, I do have the confidence that they can weather the upcoming storm. The numbers and facts also do give me the notion that the Group is undervalued from the point of view not just of the value of its leasehold property assets, but in terms of its core business, prospects and Management quality. Simply put, for a S$60 million net profit company to trade at a market cap of about S$410 million implies a PER of just below 7x, which is valuing the core business very cheaply indeed if you net off the cash hoard which the Group has.

I shall keep my eyes peeled for the next set of results for Boustead (1H FY 2012) due by mid-November 2011.

How To Think About Yield

2011-10-22T12:00:00.001+08:00

After my previous post on how to think about valuations, this can be considered a “follow-up” post on how to think about yield. Oftentimes, I read about comments in forums or the newspapers which mention how attractive some yields are for certain companies, REITs or business trusts. I also hear of friends, peers and colleagues talking excitedly about high yields and how easy it would be to beat the dismal 0.05% interest rate which DBS is giving on its savings accounts. But what most people may fail to realize or consider is that higher yield is usually accompanied by higher risk – both in terms of the business model of the underlying company/trust and the sustainability of the yield. In other instances, computation of yields is also not conservative as most people make use of past yields to justify purchase decisions by implicitly assuming that yields will carry on being high without adequate consideration for the future. These actions have dangerous implications on one’s portfolio as they may lull an investor into a false sense of security, as he would rely on high yield as a “cushion” or buffer for his investment and expect that he would be able to weather a downturn. The reality is much starker – during economic recessions a myriad of factors may lead to yields being slashed and capital values declining, and that will lead to a double whammy when it comes to an investor trying to beat inflation and also preserve his original investment value.

High Yield from Business Model

There are many instances of high yields to be found in the current stock market environment, with many REITs and Business Trusts advertising yields of 8% to >10%. This in inherently tied to the business model of the underlying assets and the investor has to be astute and take a very keen look at the said business model to ensure that the yield is able to sustain. While many REITs can boast high yields, one should also observe that most are highly leveraged and this could be an issue if a credit crunch of severe downturn hits. To add to this, the risks of a property downturn (leading to a fall in rental rates once rents are due for renewal) could also hit the revenues of many REITs. Yet another factor is the increase in borrowing costs for REITs once their loans are due for roll-over. Perhaps an investor can learn some lessons from the previous credit crunch of 2008-2009 to know that high yields from such securitization of assets is not always guaranteed, and that a fall in capital values of the underlying assets (due to revaluation, no doubt) could also have a devastating effect on the yields being provided by said assets. Not to mention, of course, that capital losses could also offset many years of future yield, as in the case of Babcock and Brown Structured Finance Fund (BBSFF).

High Yield Sustainability from Business Operations

Assuming a steady state business which is of a going concern and which does not involve depreciating assets with finite lives (as in the case of business trusts which hold assets with a finite concession like K-Green Trust), high yield should be viewed from the perspective of ongoing business operations and whether it can be sustained as such. To explain this further (I apologize if it sounds rather lengthy and dry), one should focus on the free-cash-flow generation history of the Company and its consistency to determine if the business can withstand downturns and recessions and still be able to pay out a decent dividend, thus forming the “core” part of the expected yield. As businesses grow and mature over time, they will build up a larger customer base and also forge stronger customer relationships, thus a large part of the revenues and orders may be sustained even if there is a major downturn, unless the Company has an illusory moat or one which cannot be maintained. An ideal business is, of course, one which is able to increase dividend payout ratio as profits trend upward over time, and this demonstrates the classic case of the company with excellent economics and an almost unassailable moat.

In reality, however, most companies do suffer from dips in their earnings, and consequently their cash flows. Hence, in order to portray a realistic picture of the yield from a Company, one should do a 10-year analysis and pick the worst 2-3 years and observe the cash flows during those years. If the Company is still able to generate free cash flows during periods of great economic distress and upheaval, and the business has not suffered long-term and permanent deterioration or setbacks; and if the Company has still maintained its dividend policy throughout that period, then there is a good chance of getting a fairly decent yield which is sustainable. Using this dividend as a benchmark, compute the expected yield based on extremely bearish and pessimistic conditions, and see if it still manages 2-3%. If so, then the Company can be said to be resilient and worth collecting as it may either have superior economic characteristics (e.g. strong, stable moat and repeat customers) or require very little additional capital to function efficiently. Either condition would make the Company suitable for consideration in a value investment portfolio.

Computation of Yield – Pitfalls and Perils

The most common mistake I notice when I speak to investors regarding yield is that they always tend to use last year’s dividend payout as a basis for computing expected yield. This not only assumes that history would always repeat itself, but also makes the mistake of ignoring economic cycles and their (probable) detrimental impact on the business. The perils of computing yield based on historical payouts is that as the business cycle moves, the fortunes of the Company may fluctuate as well. A Company may have good years and bad years, or it could also be a one-off disposal/divestment of an asset or a business division which saw a large inflow of cash and hence the declaration of a special dividend. So investors must be cautious and conservative in their calculation and remove all effects of special dividends, no matter how consistent they seem to be. One example which immediately comes to mind is that of bellweather stock SPH. In its latest FY 2011 results, it declared a final dividend of 9 cents/share and a special dividend of 8 cents/share. In the prior year, there was a final dividend of also 9 cents/share and a special dividend of 11 cents/share. Even though SPH has been paying a special dividend since FY 2002, I feel that an investor still cannot take it for granted that it is a given that this trend will continue, unless he assesses that the business is stable/growing and NOT declining. To be very conservative, one should simply take the interim + final dividend as the total dividend and divide it by the last done share price to compute the expected yield.

Another example in my own stable of companies is Boustead, which had also paid out special dividends in the last two financial years. For FY 2010 (ended March 31, 2010), it paid out a special dividend of 1.5 cents/share while for FY 2011, it paid out a special dividend of 3 cents/share. But core dividend for full-year remains at 4 cents/share for FY 2011 (2 cents interim, 2 cents final) and thus yield should be computed based on this, and not the full 7 cents/share. If special dividend is counted in, it would distort the yield.

Another pitfall often seen is that investors tend to over-estimate company performance and project increasing dividends over the years, even if there is no objective or reasonable basis for doing so. In other words, investors may purchase a Company with the assumption that the yield can either sustain or improve, which may be a fallacious assumption. Margin of safety (for yield) may end up being illusory if the Company suddenly cuts its dividend or announces huge capex to replace old machinery/assets. Business conditions may also force a company to scale back on dividends and divert more cash to fund working capital requirements.

The Illusory Yield "Cushion"

I would say that one of the more dangerous assumptions one can have when investing in companies is to assume that yield can act as a “cushion” should capital values plummet. When speaking to different people, I get the sense that those who invest in assets with high yields are basically assuming that the high yield can somehow compensate for any losses in capital values due to either asset deterioration or a declining market value. While it is true to a certain extent that high yields (high being defined by myself as anything exceeding 7%) can offer some measure of protection against a temporary decline in market prices, it cannot hope to offer a long-term “buffer” against declining business or a major shake-up relating to the underlying asset.

A good and rather recent example would relate to the shipping trusts back in 2008-2009. Yields of >8% were touted back then for FSL Trust, with stable, locked-in charters and a 100%-payout policy (which was to prove not just unsustainable on hindsight, but overly aggressive as well). However, when the underlying asset value (of the ships) began to plunge, many hitherto unknown clauses were triggered (such as loan convenant ratios) and the Trust suffered major hiccups and setbacks. Suffice to say that the touted high yield was unsustainable and the share price drop was massive in order to reflect the new realities after the shipping crash. The permanent and irreversible drop in share price more than offset any quarterly dividends received, and is a prime example of how unprepared one can be for such events and how yield can eventually prove to be both illusory and unsustainable.

Seeking Comfortable, Sustainable Yields

After going through the experience (and heartache) of abruptly plummeting yields, I believe it is better to focus instead on obtaining yields which are lower than the often-touted 8-12%. Good businesses which are generating decent cash flows and maintaining or growing their market share should theoretically be paying about 5-6% yield, with the exception of major market depressing moods which temporarily cause stock prices to plunge (and hence yields to rise sharply).Sustainability should be the focus of an investor seeking yield, rather than going for eye-poppingly “high” yields which can usually be associated with higher risks. Some of these risks may not be readily apparent as the Company or REIT/Trust may not have undergone a baptism of fire and emerged unscathed, thus investors (most with short memories) may not be aware of the potential perils of investing in such securities.

While I do admit there are occasional good deals in which companies can sustain an inordinately high yield, my experience thus far has been one of scepticism and caution. Most companies may seem to pay out high historical yields but the all-important question would be whether these are sustainable moving forward. If not, as an investor I would rather stick to a company with a lower yield (but still higher than inflation) which I feel would be consistent and sustainable over time.

Conclusion

The issue of yields is as thorny as my previous post on valuations, because after all, nothing in the stock market is cast in stone. One has to continually review and analyze the facts on a case-by-case basis and form their own conclusions based on objective data, instead if relying on “preset formulae” when making investment decisions. The best investors have always used a mix of personal experience, business knowledge and theoretical foundations (plus throw in emotional resilience and control) in order to earn consistent returns for themselves without losing money (capital preservation), thus holding true to the mantra of value investing as espoused by Benjamin Graham. Any aspiring value investor out there (including myself) would be doing himself a favour to follow their footsteps and to seek continuous improvement in their methods, techniques and processes.

Boustead – FY 2011 EGM Highlights Part 1

2011-10-17T18:00:00.006+08:00

October 13, 2011 was the date for Boustead’s EGM, and I took time off to attend this meeting. There was not much in way of resolutions for discussion in this post, but the reason for taking the time to go down and visit the Company was to learn more about how the business was doing, how the Company would cope in the current economic climate, its plans and strategies for growth and also to clarify various aspects of the business since the AGM which was held on July 22, 2011. As can be seen in the photo above, the meeting was held once again at Boustead’s headquarters at Starhub Green located at Ubi Avenue 1. The photo below shows a close-up view of Starhub Green. Fortunately it was a bright and sunny day and I had no problems navigating my way through to Starhub Green from the main road after alighting from a bus near ITE.

General Observations

The EGM was held on a Thursday afternoon at 3:30 p.m., so there were markedly less people attending this time as compared to the AGM. I recall that the AGM saw about 60 to 80 people turning up, and the boardroom was pretty packed with people as the chairs were arranged literally side by side with little room to manoeuvre, and this was made worse by two rows of tables on which the buffet food was placed. Fortunately, for this EGM the crowd was smaller at about 30 people or so, mostly made up of retirees. There were a number of younger folk who were seated across the BOD and who kept the EGM session abuzz even after the formal business of the meeting was concluded by asking pertinent questions about the business – more on that later.

On Restricted Share Plan 2011

Some shareholders had asked for clarifications regarding the merits of the proposed restricted share plan (the “Plan”) to be implemented and vetoed at the current EGM. Note that this new share plan is supposed to replace the old scheme of ESOP (Employee Share Option Plan) which had been in force for the past 10 years and which recently expired in August 2011. One shareholder had suggested that the plan would be flawed because share options may be issued at a time when the share price of Boustead was significantly under-valued with respect to its intrinsic value, and thus the scheme would unfairly favour these employees by giving them a lower strike price. Once the share price rose, they would then be in the money and would cash out and enjoy a significant “bonus”.

The newly appointed independent director Mr. John Lim served to correct the misconceptions surrounding the Plan. First of all, the BOD was still in discussion as to who specifically would qualify for these shares as they had to be key personnel (e.g. head of divisions, CEOs of various companies within the Group who had a say in planning, optimizing resources and strategizing). Secondly, there were stretch targets (which served as KPIs) which had to be positive and be over and above what was expected of the employee or director. Some examples of these targets were ROE, return on assets and Economic Value Added; and they are measured over a period of time so as to ensure consistency and that the performance was not a once-off “fluke” shot. Thirdly, there was also a “vesting period” clause for the Plan, such that the employee had to ensure that he stayed for number of years with the Group in order to enjoy the full vesting of the shares. Should he leave the employment of the Group at any juncture, there is a retention formula which would be activated to compute how many shares he has to return back to the Company as Treasury Shares. Fourthly, the shares which are awarded cannot be traded in the open market and can only be held by the employee for dividends. Thus, there is an incentive for the employee to enhance the value of the Group through metrics such as higher ROE and net margins in order to increase the intrinsic value (and by extension, the market price) of the shares, such that he would be eventually be able to sell them for a tidy profit should he eventually decides to leave the employment of the Group.

Two groups of people would be considered for this Restricted Share Plan 2011 – directors (both executive and non-executive, with the exception of Mr. FF Wong), and the associates of the controlling shareholder (namely Mr. FF Wong’s sons Mr. Wong Yu Long and Mr. Wong Yu Wei). To eliminate possibilities of favouritism, all share awards would be transparent and announced during every AGM (with reasons for award, amount of shares awarded etc). Independent shareholders (those with no vested interest in the award) can then vote during the AGM on whether or not to reward the said employees/directors with said shares. The whole process is meant to be meritocratic and transparent and will align the interests of the awardees with those of shareholders for the long-term prosperity of the Group.

On the Economy, M&A and Cash Deployment

Mr. FF Wong went on at length about his views on the current economic climate. He feels that the current solutions being proposed by the European Union are simply delayed tactics, and not a cure-all solution to the problems plaguing the Euro-Zone. He believes the problems will drag on for quite a while and the economy will remain in the doldrums for the medium-term, with probable contagion effects spreading to Asia and the world in general. This fact, coupled with the troubles still ongoing in USA and the seemingly hard landing and high inflation experienced in China, would throw up opportunities to acquire assets and companies on the cheap. Thus, Boustead is looking out for potential M&A which would enhance the ROE of the Group; as the Group is now sitting on a net cash balance of S$200 million which is generating a measly return of just 0.5% to 0.6% (as verified by Director Mr. Tong Weng Leong).

He also stated that during the last crisis of 2008-2009, the surprising thing was that no banks had pulled the plug on any businesses in Singapore in terms of the loans which were extended to these businesses, as a co-ordinated effort by major central banks around the world injected massive liquidity into the economic system and provided the oiling necessary to restart business activity which had previously been halted through fear and trepidation. Mr. Wong was admittedly surprised that the crisis, though deep, had failed to throw up any bargains for Boustead to capitalize on. For the current crisis though, he believes that it may finally create opportunities for Boustead to deploy their cash hoard, and this is the purpose of him keeping such a large cash stash; in readiness for such juicy opportunities which only present themselves during periods of economic distress.

Note too that Boustead maintains a cash management program utilizing about S$20 million to purchase short-term high-grade corporate bonds yielding about 6% per annum. However, due to prudence and liquidity issues, no more than $20 million can be deployed for such purposes.

On Libya and making mistakes

The situation in Libya has somewhat stabilized but intermittent and sporadic fighting is still going on, without a clear and forceful resolution to the conflict. One shareholder did query the Management on its decision to enter Libya (a similar question was asked during the last AGM) and wondered if Boustead had adequate risk management procedures in place. Mr. Wong (and Mr. John Lim) replied that risk management was very much a part of Boustead’s culture, and the returns from undertaking the projects were carefully calculated before the Group went into Al Marj to construct the Township and municipal wastewater plant. However, the events in the Middle East and the subsequent unrest which spread from Egypt to Yemen, Bahrain and Libya were unexpected and even the CIA could have not predicted that events would turn out as they did. Boustead has worked in Libya for years and for countries ruled by “strongmen” it would imply that they were more politically stable – but alas this was not to be.

The previous Libyan government under Colonel Gaddhafi still owes Boustead about $50 million, and full provisions have been made for all assets and equipment except for two corporate guarantees, of which injunctions had been sought and successfully granted under the clause of “Force Majeure”. Boustead will do their utmost best to try to recover whatever they can from Libya, but until then the amounts would have to remain written off and I guess shareholders should also not expect too much.

A related point which another shareholder brought up was that of the Big Box project which Boustead had abandoned with TT international some time ago. Apparently, until now there was no one willing to partner with TT to inject funds into the Big Box project, and Mr. Wong laughed and stated that this showed that their decision was right to pull out of the project, on hindsight. So asked shareholders not to just judge Boustead’s track record of making mistakes solely on the Libyan crisis, but also to note other instances where the correct decision had been made.

On Boustead Projects, and Design, Build and Lease plus turnkey projects

Regarding Boustead Projects, another shareholder noted that for the last three months, most of the contracts secured were those of design and build, with contract amounts being small to medium (in the S$15 to S$20 million range). The pertinent question is whether Boustead was still continuing talks and discussions to grow their leasehold asset portfolio, which was perceived to be much more important as it would build up a recurrent stable of income for the Group as opposed to short-term “lumpy” contract deals. Also, as FF Wong pointed out, the order book which stands at S$320 million today only includes design and build deals, and does not include the design, build and lease (DB&L) projects. The thing about DB&L projects is that they do not show up immediately in the bottom line (P&L), but will be capitalized as an asset on the Balance Sheet; and cash flows will only come in once the property is completed and leased out to the client.

The superiority of this model, however, is that Boustead actually owns the asset and is able to sell it to a REIT if need be, thus unlocking value for shareholders and realizing potential capital gains. With more and more REITs proliferating the market in recent times, FF Wong mentioned that these provided ample liquidity for Boustead to sell off its industrial leasehold assets if need be, and most of them would enjoy a significant premium to cost. In the interim, the Group would continue to benefit from recurring revenues and cash flows from the long-term lease of these properties to the client/tenant. With Design and Build projects, the Group did not own the property and thus would not be able to unlock further value from them once they are completed.

Boustead also has one turnkey project with SDV Logistics in which a separate subsidiary was incorporated in order to own the asset (property) in question. The revenue would be recognized on a deferred income basis based on completed contracts recognition in FY 2013, and the sale of the asset would thus be classified as a disposal of a subsidiary (within the Group) and subsequent gain on disposal, rather than as project/contract income recognized within Boustead Projects division.

This concludes Part 1 of the EGM highlights. It was originally supposed to be just one single post but somehow or other when I started typing out my thoughts it became rather lengthy and drawn-out; therefore I decided to split it into two separate posts so as to note bore readers. I am still endeavouring to write more succinctly and to be able to incorporate more information using less words, but occasionally I will get carried away with too much to say and end up writing a huge chunk.

Part 2 will focus on the divions of Boustead and some comments I received regarding them, and also detail some of my thoughts on Boustead’s dividend policy, share buy-backs and cash deployment. Finally, I will share what FF Wong mentioned on the value of the Boustead Group and how this has implications on my investment in Boustead.

My Second Bear Market

2011-10-12T19:00:00.010+08:00

As I write this post* to chronicle my continuing investment journey, the STI has just entered bear market territory, having fallen >20% from its peak close of 3,279.70 back on Jan 6, 2011. The reasons are obvious by now – Greece on the verge of a default which would send the whole Eurozone into a tailspin, and massive debt loads held by countries such as Portugal, Spain and Ireland. The crux of the issue is that a default would trigger bank runs all through Greece, and lead to a systematic collapse of confidence in the banking system throughout Europe. Ripples of these will then spread across the globe and drag the whole world into yet another global financial crisis, possibly eclipsing the previous one in 2008-2009.

*This post was written on October 4, 2011. At the time of publishing, the STI has still managed to avoid a bear market scenario with 4 successive days of rises.

Essentially, I realized that the roots of each crisis are pretty similar. While the 2008-2009 GFC was caused by sub-prime mortgages going bad in the USA and a collapse in confidence in banking giants Bear Stearnes and Lehman Brothers, this time the cause of the crisis is also due to excessive debt; and it belongs to a country not just a company. Thus, the solution may not be as apparent as it seems, and there may be no easy solution to this crisis of confidence. Therefore, as investors, we should prepare for a long and possibly arduous journey undertaken by the powers that may be to restore confidence and avert total economic collapse.

In the meantime, I thought I would do a quick comparison between my status during the previous bear market, and the current one; and highlight the changes between now and then and how I have grown and matured as an investor. I will also be providing some convenient numbers and statistics to be used as comparisons.

1. Portfolio Size – From my historical records (which I have kept religiously to remind myself of the previous downturn and bear market), my portfolio cost was $126,000 as at Oct 31, 2008 (during the period when the market plunged sharply) and STI closed at 1,794.20. Before the sharp plunge occurred, I was steadily accumulating shares up till the months of July through September 2008 (my portfolio cost increased from $80,000 to $125,000). As of Oct 31, 2008, the market value of my portfolio was $64,000 for a nearly 50% loss.

Fast forward to today, my portfolio size has grown to a cost base of $242,000 (inclusive of my recent purchase of Boustead on October 4, 2011), which is almost double of what it was during the dark days of Oct 2008. In fact, doing a same-level comparison when STI was hovering around 2,500 level back during September 22, 2008, my portfolio cost then was just $109,000.

Another important difference was that I only had a realized gain “buffer” of $9,500 as at Oct 31, 2008, while my current realized gains buffer stands at $67,400, which is nearly 7x the quantum three years ago. This indicates that at least it would be a lot tougher to experience a net combined loss (i.e. unrealized loss offsetting realized gains) as compared to the situation three years back.

Another interesting “fact” – my portfolio first went into the red back on Sep 11, 2008 when STI hit 2,541.15. As at the time of this writing (Oct 4, 2011), STI is hovering at 2,531.02 and my portfolio is up by +2.1%, so apparently my current portfolio is only marginally better than my previous one in terms of share price performance (but this is just for academic interest, of course).

2. Knowledge Base (of companies and how markets work) – Compared to 2008, my knowledge base with respect to companies and how they work has improve dramatically. Though I have to admit that I still have a long way to go to understand the fine inner workings of the operations of companies within certain industries, nevertheless I feel that I had gain much more in-depth knowledge as compared to three years ago. In addition, after observing a full bull-bear cycle in the stock markets, I also have a better understanding on how markets work and the sentiments and psychology which drive it; and these are all key to forming a more informed judgement on when and how to invest. Suffice to say the last three years have been “educational” – there is no better teacher than experience itself, and the months of ruminating over companies, their fundamentals, inner workings and plans/prospects have certainly equipped me with more maturity and also endowed me with a richer understanding of being a part-owner.

3. Investment Mistakes – During the transition from the previous bear market to the current downturn, I had the fortune (or some may call it “misfortune”) to make numerous mistakes, all of which have been meticulously documented along the way. Scattered across the pages of my blog were the mistakes committed for Ezra, Swiber, China Fishery and Tat Hong, just to name a few. These mistakes have since made me a much wiser investor and taught me what to look out for when it comes to assessing a potential investment, and I am thus thankful that I have made these mistakes and not suffered debilitating losses as a result.

4. Keener understanding and better awareness of behavioural finance – A key aspect which was missing from my knowledge base during the last bear market were the important concepts relating to the field of behavioural finance. I now enter this downturn and bear market armed with greater knowledge of the psychological biases which most investors (including myself) are afflicted with, including but not limited to expectation theory, loss aversion, over-confidence, over-reaction bias, confirmation bias, endowment effect, anchoring bias and other little tricks of the mind which are continually experienced by our brains (and detailed in a very good book by Jason Zweig called “Your Money and Your Brain”). But note that being armed with the knowledge is only the first step, the second is to conquer your innermost demons and be able to stand stoic in the face of great fear and unreasonable panic. As mentioned by Benjamin Graham, it requires great fortitude and confidence for an investor to trust in his own objective research and to ignore the madness of crowds. Certainly, I hope that with this knowledge into biases which investors are prone to make, I can avoid more of the pitfalls and perils which bedevil investors in general.

5. Portfolio Composition – A quick comparison between my portfolio composition back in Oct 2008 and now reveals many glaring differences. Back then, I entered the bear market owning companies such as Ezra, Swiber and China Fishery, companies which had significant amounts of debt in their Balance Sheets and which did not generate FCF. Their capex requirements were also very high and this meant raising funds continually from either bonds/banks (debt) or the market (secondary offerings and/or dual listings). Currently, the companies in my portfolio consist of companies which have strong free-cash-flows and balance sheets with either low debt or no debt (with the exception of MTQ). The only company which is the same in both my portfolios then and now is Boustead (not counting Suntec REIT as it is a REIT). I guess you can say that in essence, I had almost completely switched out of my weaker portfolio into my current stronger one, and the cash flows and dividend history should be able to sustain me should this bear market turn out to be protracted.

6. HDB Mortgage Loan Quantum – This may seem like a minor point, but the balance of my HDB mortgage loan does also have a psychological impact on my psyche and affect my moods and behaviour as I sit through a bear market. As a comparison, I entered the Oct 2008 bear market with a balance mortgage loan of $135,000. As at the date of this posting, the outstanding loan amount has been reduced to $75,000, for a reduction of $60,000 principal over three years. This fact, coupled with the knowledge that my portfolio size has grown significantly over the years (along with the quantum of realized gain acting as a “cushion”), has made me more relaxed and less prone to behaving like a nervous wreck. I am still on target to clear off the loan in the next 5 years by the time I hit age 40.

I would say that this second bear market is indeed going to be even more insightful for me, as I will be able to further refine my value investing techniques and my understanding of companies. As to whether I will be able to weather the storm successfully, my answer will probably be the same as when I encountered my first bear market – I do not know for sure. But what I do know is that I will continue to stick to my core principles of sound investment and continue to manage my affairs and personal finances prudently and conservatively.

How To Think About Valuations

2011-10-06T18:30:00.001+08:00

At this juncture, and after all the thinking, mulling and silent contemplation on the trains and buses, I thought it timely for me to write down my thoughts on valuations and how I approach this slippery topic. With stock markets around the world going into a violent tailspin in the last 8 weeks, perhaps it is also a good time to revisit this topic and to deliberate on exactly how one should think about valuations. The reason for this is that valuations do not exist in a vacuum (unlike what analysts would love for you to believe) and are constantly in flux, changing as often as business conditions change (which is, to say, virtually all the time). Pinning down an exact valuation and projecting it into the future is always difficult, but during volatile and turbulent times this becomes even more of an impossibility. So how should an investor navigate the frigid waters of corporate valuations to find some semblance of dry land? Can he firmly root his feet on the dry sand or will he quickly find out that he is standing, instead, on quicksand?

Valuation as a function of historical corporate profitability (business model approach)

Companies which have been operating for many years (or decades) and which have a track record of steady and growing profitability and stable cash flows should see valuations which are somewhat high as compared to companies which are just starting out and have yet to find their niche. From this standpoint, valuations should be assessed based on a company’s business model and how efficiently it can continue to generate profits and cash flows through good times and bad. As such, recognized blue chips tend to trade at higher valuations even during recessionary periods because of their ability to generate consistent profits throughout all economic cycles, but this has not always been shown to be true.

A conservative and prudent investor should thus assess each company on its own merit, and dissect its business model to see if it is able to function as efficiently through all business cycles. History may not always be able to foretell the future, and there have been numerous cases of companies which had succumbed to new technologies or advances which completed changed the industry landscape and eroded their (seemingly) impenetrable competitive advantage.

Hence, after a review of the business and its underlying prospects and characteristics, one should make a rational assessment of whether it deserves to be accorded high valuations (for a superior and adaptable business model which has a long-lasting impact and can shield the company from the vagaries of the economy), or whether it should be given lower valuations for possible risks (whether perceived or real). This is possibly the most difficult aspect of investing.

Valuation based on economic cycles

Coupled with the above, one should also account for valuations with respect to the stage of the economic cycle. Since the stock market normally precedes the real economy by about six to nine months, it is therefore no easy feat to assign valuations to companies based on economic cycles; but one can use a very rough approximation to cushion for possible error (the proverbial margin of safety so to speak). So let me give a simple illustration:-

As the economy expands and grows, all companies benefit from increased demand for their goods and services, and accordingly these companies will grow, hire staff, expand and earn higher profits and generate better cash flows for their shareholders. Valuations at this stage are thus moderate to high as expectations of growth will rest on a wave of optimism for the future. An investor thus has to temper his expectations of growth in this regard in order not to get carried away on the sea of optimism and hope. Conversely, when the economy is faltering and sputtering and there is trouble left and right (as is the case currently), then valuations would accordingly be much lower as it is expected that companies would suffer from a drop in demand and hence earn lower profits and cash flows. Valuations will therefore be correspondingly lower, and this is something the investor has to accept as part of the economic cycle.

The idea, of course, is to effectively marry the two aspects I mentioned – economic cycles and business characteristics, to be able to determine an approximate level of valuation which is acceptable to the conservative investor. For some companies go into decline, their valuations hit a trough, but they never are able to pick themselves back up and resume their previous growth trajectory. Other companies may prove more resilient and spring back from adversity; thus this underscores the importance of not just financial analysis but also business analysis from a quantitative and qualitative perspective. There is no right or wrong answer, and the investor has to take it upon himself to search for a level of valuation which he feels gives good value and provides adequate justification for his purchase of shares. [Yield does come into the picture, which I will elaborate more on in a separate post.]

Valuation Metrics – Price-Earnings and Price-To-Book

A rather pertinent question one may ask is what kind of valuation metric one should use to determine if valuations are indeed fair, demanding or bargain. The two most common ones which I use and which I feel are relevant to investment decisions are the price-earnings (PE) and Price to Book (PB). PE is essentially how much premium one pays for the earnings of a company, and is the most commonly used metric to gauge valuation. PE can be rather deceiving as it may not apply to all types of companies (e.g. property companies and companies with “lumpy” revenues). Other times, a one-off event may also distort PE and may something look cheap when it is actually expensive. PE should not be used in isolation to weigh valuation but should be used in conjunction with other metrics like ratios as well as yield (also factoring in, of course, the qualitative characteristics of the Company in question).

PB is usually only applicable in cases when earnings are either not stabilized, or when the company has a strong asset base with low earnings. Book value is, very simply, the liquidation value of a company, minus any fire-sale conditions which may result in a haircut discount given to fixed assets and marketable securities. I note that PB is generally used by analysts during protracted bear markets as earnings cannot be reliably predicted during such periods of economic turbulence.

An important note which I have to emphasize (sometimes repeatedly) is that these valuation metrics should not be used in isolation to determine if a company is “cheap”. There are a myriad factors to consider and PE and PB are just two of them. Life (and investing) is certainly much more complex than that!

Relative (Peer-to-Peer) Valuations

One final method I can think of offhand is using peer to peer valuations as a quick rough and dirty method of determining if a Company may be cheap or expensive. Of course, this method is rather rudimentary and requires a lot more in-depth research and refinement, but by itself it should at least offer the investor a glimpse into whether a Company is lagging or leading its competition.

The use of competitors within the same industry ensures that an “apple to apple” comparison can be made. However, one risk of using this apparently simple method is that the industry as a whole may be in decline, thus everything would seem “cheap”. Thus, the conclusion cannot be made using peer valuation in isolation, but should be used in conjunction with Porter’s Five Forces analysis and industry analysis.

Conclusion - how to think about valuations

To conclude, valuations are a rather tricky business as there is no hard and fast rule as to what constitutes cheap or expensive valuations. It depends a lot on not just the economic cycle but also the operating characteristics of the Company in question. During periods of recession and economic slowdown, investors should get used to lower valuations in general, as Mr. Market is feeling pessimistic and is unable to forecast a bright future with much certainty. Investors would then adjust their expectations for future growth accordingly and demand their requisite margin of safety.

Conversely, during periods of economic prosperity (during a boom), valuations will be correspondingly higher; and it is up to the prudent and wary investor to be sceptical of such high valuations and to ensure he is emotionally unaffected by the euphoria and optimism. Of course, this is all easier said than done, but it’s good to have the theoretical foundation as a starting point.

September 2011 Portfolio Summary and Review

2011-09-30T18:37:00.000+08:00

September 2011 reminded me of the September back in 2008, when the troubles brewing from the sub-prime crisis boiled over and turned into a major headache for developed economies in the world. The problems seem to be a repeat of the past, but it is merely the players in the pantomime which have changed – instead of USA sub-prime mortgages turning sour we now have European sovereign debt going bad, and whole economies such as Spain, Greece and Italy threatening to go belly up. So if one were to extrapolate on the situation into October, could the same blow-up occur similar to the sub-prime crisis back in 2008 which would cause valuations to fall off a cliff? This would be the golden opportunity for an investor to accumulate shares of companies which he has been eyeing for some time.

What has me puzzled is the amount of time and attention devoted to the word “volatility”, and how it has literally frazzled the nerves of even the most seasoned veterans from the numerous columns being penned in market commentaries. Many investment newsletters have also advocated the wisdom of “staying on the sidelines” to wait till “more clarity emerges” before committing money to equity investments. My view is that uncertainty will always be a part of the investment landscape, and this is something which investors have to deal with; and it will form part of one’s investment philosophy. So an investor should not be scared off by volatility and uncertainty, but instead make use of it to gain an edge in investing intelligently and prudently. Volatility does not equate to risk and uncertainty would open up opportunities for the astute investor, provided he does his homework and understands his investments.

As expected, September is traditionally not a month for news flow, and the companies within my portfolio have been their usual quiet self, which suits me just fine. There was only one dividend received from Kingsmen during the month, and I would not be receiving any dividends for October, which is traditionally also a “dry” month.

Below please find my portfolio as well as corporate summaries for September 2011:-

1) Boustead Holdings Limited – Interestingly, there were two contract announcements made by Boustead during the month of September 2011, and both were from the Real-Estate Solutions Division under Boustead Projects. On September 7, 2011, Boustead Projects announced that they had been awarded a S$11 million contract to build an Asia Pacific Regional Data Centre for a Fortune 100 healthcare corporation (the specific company was not named). This was their fourth industrial real estate contract secured since the beginning of FY 2012 which commenced April 1, 2011. With this contract, their order book has grown to $282 million. Then on September 15, 2011, Boustead Projects announced the award of an S$18 million contract from Shinko Plantech to design and build a Y&C chocolate processing factory (sounds yummy!). This fifth contract takes Boustead’s order book past the S$300 million mark as at end-September 2011. Note that these two contracts are design and build ones and thus there will be no recurring revenue or cash flow generated once the contracts are completed. Just to recap: Boustead’s current portfolio of Design, Build and Lease properties take up about 90,000 sq metres, and it is my hope that this can increase to 200,000 sq metres or more by 2013.

Separately, the Company also announced on September 28, 2011 that it was holding an EGM on October 14, 2011 (Thursday) at 3:30 p.m. to appoint Mr. John Lim as director (he was inadvertently left out during the AGM, apologies were given), and to vote on a Boustead Restricted Share Plan 2011 to replace the Employee Share Scheme. Depending on whether I am available, I may make it down for this EGM to enquire more about how the business is faring.

In addition, Boustead has initiated a series of share buy-backs beginning September 22, 2011 and continuing till today. A total of 410,000 shares were purchased over five trading days, and Boustead spent about $340,000 buying back the shares (average price of 83 cents/share). Total treasury shares as at September 30, 2011 stand at 12,427,000 shares.

2) Suntec REIT – There was no news from Suntec REIT for the month of September 2011.

3) MTQ Corporation Limited – There was no news from the Company during September 2011, except for the announcement of the issuance of scrip shares on September 19, 2011. I received my allotment of the final dividend of 2 cents/share entirely in scrip.

4) Kingsmen Creatives Holdings Limited – There was no news from Kingsmen during September 2011. There was, however, a news article announcing the opening of the new H&M store in Orchard Road, and how it was thronged by people queuing to enter on the first day of operations. Kingsmen was the company in charge of doing the fit-out for H&M, as well as the soon to be open Ambercrombie & Fitch store at Knightsbridge. The interim dividend of 1.5 cents/share was received on September 22, 2011.

5) SIA Engineering Company Limited – There was also no news from SIA Engineering for the month of September 2011, making it two consecutive months without any newsflow from the Company. I have, however, been reading up on the global aviation industry and how it may impact SIA Engineering to get an idea of the prospects of the Company should there be a sharp recession, and on its potential ability to continue paying its dividends. I believe this should form part of the ongoing “homework” which an investor must undertake.

6) VICOM Limited – There was no news from VICOM for September 2011.

Portfolio Review – September 2011

Realized gains have increased to S$67.4K due to dividends received from Kingsmen Creatives. A total of $2.2K was received in dividends for the month of September 2011.

For the month of September 2011, the portfolio has decreased by -4.5% (using XIRR in MS Excel to compute) against a -16.1% fall in the STI; thus my portfolio performance has outperformed the STI by +11.6 percentage points. This was an improved performance compared to August 2011, when the portfolio out-performed the STI by +7.1%, but I do not expect to be able to keep this up for long and the “gap” should close sooner rather than later on this seemingly good performance. Cost of investment has remained at S$238.7K and unrealized gains stand at +4.7% (Portfolio Market Value of S$249,900).

October 2011 is poised to be another slow and uneventful month as the companies in my portfolio will not be releasing results, with the possible exception of Suntec REIT (3Q 2011 results) and SIA Engineering (1H FY 2012 results). For SIA Engineering, I am keeping my fingers crossed for the same interim dividend as per 1H FY 2011 of 6 cents/share.

In the meantime, as can be seen from my portfolio review, I am busy accumulating cash for my opportunity fund in case Mr. Market throws up more opportunities for me to purchase companies at attractive valuations. At the same time, I am continuing my own personal “education” in terms of investing – re-reading Benjamin Graham’s “The Intelligent Investor” to dig up more gems regarding equity and (possibly) bond investing, and reinforcing my notions of investor psychology by browsing through other useful tomes on this subject. It is always good to refresh our understanding of how proper investing should be conducted and how we should conduct ourselves as investors, with steely determination and steadfast fortitude.

My next portfolio review will be on October 31, 2011 (Monday).

Personal Finance Part 24 – What Does Money Mean To You?

2011-09-23T18:30:00.000+08:00

In the quest for financial freedom, I wonder how many of us have stopped to ask ourselves the above questions – what actually does money mean to us and what does it symbolize? What I mean is – how should one go about thinking about money and how it can enhance your life? After all, money acts as a medium of exchange for goods and services and is not a means to an end in itself. The problem is that many people like to worship money as a God, and would willingly prostrate themselves in front of the God of Fortune (and Chance) just to scrape a little more money.

Living a Life of Abundance

To many of those I see around me, money is a way of living a “full” life – one of abundance and filled with material goods and possessions. Money can buy you many items and having more of it means you can essentially have more control over what you purchase. A poor person may be forced to shop at NTUC for the best discounts and value for money products while a middle-class family may be able to shop at Jasons or Cold Storage. Money, viewed at from this angle, gives us more flexibility and choices in life and enables us to experience more of life, as compared to a person living hand to mouth. Thus, the pursuit of wealth and money in this case is to ensure one can live life to the fullest and enjoy all that life can offer.

For me, I certainly endorse this aspect of money as I believe that one should ensure one’s life and family can live comfortably, and be able to afford the little luxuries in life. While being frugal is important, there comes a point where excessive frugality (some may call it “miserliness”) makes one unhappy and restless; accumulating money for money’s sake defeats the purpose of living a life, because ultimately we cannot take the money with us when we die, and therefore some of it must be used to enhance our quality of life. The key is in moderation – it is no point depriving yourself of simple pleasures like a good movie, a nice meal or a relaxing spa session just to save a few extra dollars. As long as you have budgeted properly, loosen the purse strings and spend on the little things, while keeping the big picture (wealth accumulation) in mind.

Splurging and Flaunting Wealth

There are others who take money to extremes, and display ostentatious spending behaviour in order to portray a certain image of themselves to others. To them, money is meant for showing off and they therefore splurge on expensive designer and branded goods and “bling” (the term for material possessions which are more of Wants than Needs). As a result, money to them is simply used for flaunting and acts as an ego booster, rather than as a source of security.

People who splurge needlessly and flaunt their wealth in visible ways (designer goods, fancy cars) do not appreciate the value of money. Money should act as security and be a testament to the hard work which one puts in – spending without regard is like throwing caution to the wind and engaging in extremely risky activity without a suitable safety net (likened to bungee jumping without a safety cord). In Chinese lingo, it is the classic case of punching your face till it swells so that you resemble a fat (prosperous) person.

Freedom from Worry

I guess for me personally, having enough wealth would cause me to be free from worry, and it represents a freedom in itself. In Singapore, most people worry about money because they may be enslaved by their mortgages or car loans; but if one is debt free and better still, financially free, one can enjoy a freedom which many others have yet to taste. Charlie Munger once mentioned that he wanted to become rich not because he wanted wealth to flaunt – it was because he desired the independence which financial freedom brings; and that was something he desperately craved. I share his sentiments on this – money to me represents freedom and being lifted from the bondage which debt brings. Right now even with five years left on my HDB mortgage loan, I still feel invisible chains dragging me down; perhaps I am too old-fashioned and conservative but to me debt is something which can choke the life out of someone, though others may encourage the careful use of leverage to multiply returns.

Helping the Needy

One altruistic aspect of being rich also means I will have more time and means to do charity. Money means being able to help people and to make a difference to their lives, and to me this is really the most profound thing which we can do – help another fellow human being. I had always harboured a secret desire to help those less fortunate than me – but sad to say I have been procrastinating when it comes to doing more for them. Though I do donate to donation tins and support fund-raising efforts for the poor and sick, I always feel that I could do more to ease the suffering of the less fortunate. So if you are reading this and you are an extremely wealthy individual, please spare a thought for those who are mired in less appealing circumstances and donate generously to help their cause.

Conclusion

I have listed out some aspects of money which I think relate to people around me. So the important question to readers is – what does money mean to you? Perhaps you can provide further insights or refute some of my points by using the comments box.

The Annual General Meeting (AGM) Part 2

2011-09-16T18:00:00.001+08:00

Part 2 of the AGM series will shed some light on the AGM itself, decorum to observe and who to approach. Please note that this is all narrated from a personal perspective, as I have been attending AGM for quite a few years now and have, over time, picked up some cues on who to approach and what to ask from experience. None of this is cast in stone, however, and therefore readers are free to modify any of the suggestions below to suit their own personal preferences.

For information, the experiences detailed below are a result of the compilation and culmination of attendances at the following AGM/EGMs: Ezra, MIIF, Swiber, Tat Hong, China Fishery, FSL Trust, Boustead, Kingsmen Creatives, MTQ and Suntec REIT. Since almost all AGMs are held on working days, be prepared to take leave in order to attend (unless you are a retiree with time to kill).

Mechanics of AGMs

An AGM is usually held at a hotel function room or if the Company is keen on saving money, then it will be held at the Company’s premises (for info: Boustead and Kingsmen AGMs are held at premises, while MTQ and SIA Engineering hold theirs at a hotel). You should bring along your identity card as well as a copy of the Annual Report and any documents which came along with it, as well as a pen and your prepared list of questions and notes. At the counter area, register your name with the staff and they will hand you a sticker (colour varies) to paste on your clothing. Some AGMs will hand you a poll slip stating the resolution to be voted on, and this will state your name, IC number and the number of shares held in the Company. These poll slips will be used for tallying in cases where voting is done by poll instead of a show of hands.

Assuming you are early, there will usually be time to find a good seat and to interact and mingle informally with Management (and other shareholders). The section below will focus on the proper behaviour and decorum to be observed at such meetings, in order to create a good impression and be able to gather the information required to make an informed assessment of the Company and its prospects.

The CEO will be in charge of reading through each resolution and asking for a proposer and seconder (a basic formality). There will usually be a pause before asking for a show of hands, as the BOD and Management would allow questions to be asked before putting the resolution to a vote. Once all questions have been posed and answered satisfactorily (and this includes both formal and informal questions), the resolution will be put to the vote. Unless there are violent objections, most resolutions will be passed without much fanfare.

Decorum, Etiquette and Behaviour

I can’t stress more on the importance of proper behaviour at the AGM proper. After all, it is a corporate meeting and therefore one is expected to at least dress presentably and behave in a civil and cordial manner. For myself, I treat the AGM as a business meeting and therefore I will usually dress up in corporate wear, with long/short-sleeve shirt, long pants and socks/shoes. I have seen retirees who are dressed much more casually, but no one comes in a singlet and sandles (obviously). Dressing well also gives a good impression to Management that you are a serious investor and assuming you approach them with the right attitude and armed with the requisite knowledge, you may leave a deep impression on them. There are reasons for this which I shall go into shortly.

In term of decorum, it is only polite to ensure one does not interrupt the proper proceedings of the meeting, and to save most of the questions till after the meeting proper (to be taken “offline” as it commonly referred to). When invited to formally ask questions (usually by standing in front of a microphone), one should be civil and polite when posing the question. I have personally witnessed cases where shareholders get agitated over some perceived grievance and decide to air their frustrations through the microphone for all to hear. Management may take quite a while to placate the incensed individual and normally, when one is caught up in that frame of mind, nothing useful ends up being discussed and everyone’s time is wasted. Indecorous behaviour is normally tolerated as the BOD and Management strive to be professional, but there have been cases where sarcasm is thinly veiled and where Management has been known to admonish the shareholder (so that they feel some measure of chagrin or mortification, hopefully).

My style is often a non-confrontational one – I will arm myself with the questions and approach Management after the meeting proper by asking if they are free for a discussion. They are usually quite pleased to engage shareholders, though what they say and proclaim is usually coloured by personal bias and unbridled optimism (most of them own part of the company, and are therefore loathe to admit anything bad about it). The personnel of importance to approach include the Chairman, CEO, CFO and any divisional heads; all others can only give a rather one-sided view of things which may not be useful; and they may literally rattle on and not give you the chance to extricate yourself from the idle chatter.

For accounting and finance –related matters (e.g. sales, revenues, margins, loans, debt, gearing and ROE), approach the CFO or the Finance Director. For strategy-related matters, industry prospects and plans for the future, it is better to speak directly to the CEO and/or Chairman. For the record, I have personally spoken to Benedict Soh (CEO) of Kingsmen Creatives, FF Wong of Boustead (Chairman and CEO) and Mr. Kuah Boon Wee (CEO) and Mr. Dominic Siu (CFO) of MTQ. For other matters pertaining to the Annual Report or other news-related queries, it will be useful to approach the IR contact, but make sure they are internal personnel and not staff from an IR company. Some examples would be Keith Chu from Boustead and Andrew Cheng of Kingsmen Creatives who are the designated IR spokesperson from their respective companies.

There are also no hard and fast rules as to how to approach each person. Generally, a smile and a warm handshake (coupled with an introduction) would suffice. The next section will discuss on how to ask the right questions (and also how to avoid potentially embarrassing ones) and to dig out the required information in order to make your personal trip worthwhile.

Fact-Finding and Questioning

An AGM is to be viewed as a fact-finding “mission” for the enterprising investor, and if one is well-prepared with a list of questions (see Part 1) and equipped with the requisite knowledge of the Company (e.g. divisions, margins, plans and other pertinent details), it will make the discussion much easier and more casual. If not, it can sometimes resemble an interrogation session whereby shareholders will ask inane and inappropriate questions and make Management wince and grimace. I have yet to see the BOD or CEO recoil in horror, but the way some shareholders ask questions (combative tone, threatening demeanour) makes me feel quite a measure of pity for the one being questioned.

It is usually good to start off with some casual and general remarks or questions before one digs deeper. Leading questions and statements could include commenting on the company’s excellent performance before delving into an aspect which requires attention, or to congratulate the CEO for a good financial year before questioning him on his plans and strategies. As part of human relations, it is important to blunt any impact of difficult questions and try to wrap your tongue around the question to make it sound more palatable. A good example might be querying the Management on why debts have increased by so much in the Balance Sheet. Instead of asking the question point-blank (which may elicit a defensive response), it may be better to para-phrase it to sound something like – I understand debt has gone up significantly, but was this for a planned acquisition or was it already part of Management’s budget? Phrasing a question to sound politically-correct may make it seem like you are being superficial, but unless you are on friendly terms with the Management, it is better not to put them on guard; for this may also frustrate further attempts at digging out important nuggets of information.

Also avoid asking loaded questions which “corner” the person and leave him with little room or choice to manoeuvre or reply. Examples of loaded questions would be “Do you think the company can only do better this year?” - this essentially forces a response in the positive, for no Management would like to paint the company in a bad light. Ask open-ended questions instead of those requiring a “Yes” or “No” absolute reply.

Another irksome area is that of vague questions. Some questions are so general that Management is given room to answer almost anything. There is the problem of not being focused enough to be able to obtain the answers you seek, and this wastes time and effort. Try to support each question with some facts of your own or numbers; this will give the impression that you know your stuff and Management will feel less inclined to hoodwink you. You could perhaps say – I heard that the oil and gas industry is poised to dip into the doldrums, what is your take on this? Or on a question on margins, you could say – I noted from my analysis that operating margins for XX division were only XX% compared to YY% a year ago, may I know the reason for this and what is Management doing to address this? Being focused and drilling into details also forces Management to ruminate and think on the problem in order to give you their best answer (though some answers may be spur of the moment types intended to cover their ignorance of the situation!).

The last area I must talk about is that of silly questions. These probably take the cake in terms of being not just irritating but also a complete waste of time. I can, offhand, quote two of the most common silly questions I have heard at almost every AGM/EGM. One of them is the classic “dividend” question – Will the BOD be paying higher dividends next year? I mean, hey, no one can even forecast their results in the next quarter, much less a year later! The second most irritating question would be – Why is the share price so low? Can Management do something about this? Obviously, the hapless shareholder should know better than to burden Management with something as trivial as the share price when he should be focusing his energy and effort on understanding the business better! These questions almost invariably draw a polite (sometimes forced) smile and the standard reply that it is not Management’s duty to track the share price and there is nothing they can do to manipulate it, other than (of course) running the business well and growing it. It’s about time that shareholders realize - if the business does well, the share price will naturally follow.

Conclusion

An AGM is a very rich source of information for investors and therefore, I feel it is a must for all investors to attend. After all, it is only once a year that you get the chance to rub shoulders with senior Management and the Board of Directors and also get to question them on various corporate actions and strategies. By sizing them up in person, an investor can also pick up subtle cues from their body language which may signal a lack of confidence, or at the opposite end of the spectrum, hubris. Face to face interaction is important as Management is less able to hide behind the computer screen to type away on a prepared email response, and they will be far less dismissive as compared to talking over the phone (where they may also be reading from a script). One can literally test how Management and the BOD react to “awkward” questions and accusations and to see how they (stoutly) defend themselves, or if they have a proper and reasonable response to a pointed question.

Part 3 will focus on the aftermath of the AGM – how one should organize their notes and thoughts, the impression which they take home after meeting the Management and BOD face to face, as well as the essential follow-up which must be done as part of the on-going due diligence as an enterprising investor.

Boustead – FY 2011 AGM Highlights

2011-09-11T12:00:00.000+08:00

I attended Boustead’s AGM on July 29, 2011 held at the Company’s headquarters at Starhub Green. It was to be my fifth consecutive AGM for Boustead, and it was indeed amazing to realize how the Company had evolved over the years, since my very first attendance at the FY 2006 AGM. At the time, it was held on 6th floor of Boustead House and the Company was much smaller and less established. Now, the meeting was held at the second level of the new Starhub Green which Boustead Projects helped to construct, and the venue was a large and very beautiful-looking conference room. Since I was there very early (I like to be early for my AGMs as this means more chances to rub shoulders with key management executives in order to ask some questions before other shareholders arrive), I took some nice photos of the place. This would have been impossible later on as this year’s AGM was packed literally to the brim, with about double the number of attendees as compared to FY 2010’s AGM. More on that later.

General Comments on the AGM

Most of the AGM was, again, characterized by FF Wong (CEO and Chairman) giving his views on various aspects of the business, updating everyone on Libya and handling questions posed by shareholders and analysts on topics of interest. In his usual candid and casual way, he endeared himself to the crowd by being affable and approachable, coupled with a sense of humour to boot. His easy-going manner is definitely welcome as compared to some CEOs I had met who were a little too serious and uptight as they probably felt pressured to conform to market expectations of being a listed company, or possibly they were being “harassed” about why the Company was not doing better than it should be.

During the AGM, he was peppered with questions regarding each division of the business, which I shall elaborate on in the separate sections below. Some shareholders also bombarded him at length about the troubles in Libya, which caused him slight agitation as the questions were persistent and somehow one could detect a hint of blame behind the tone of the questioner, which put the CEO on the defensive. I will discuss my thoughts and opinions on the Libyan issue in a separate section as well.

The overall mood was one of satisfaction that the Company was well-managed even with the Libyan “blip”. Of course, the special dividend of 3 cents/share helped to sweeten the mood, even as shareholders deliberated on how the $200 million net cash on the Balance Sheet was to be utilized (incidentally, FF Wong did mention that this balance had ballooned to $228 million as at July 29, 2011).

Energy-Related Engineering Division

Boustead International Heaters (BIH) deals with detailed engineering processes and has a presence in many countries such as London and Malaysia. FF Wong said that BIH is in a niche industry and only has about four competitors. Their net margins are about 10%-13% and are under pressure currently due to competition, but volume has grown steadily since the recession ended. By comparison, Herte of France (which is one of the competitors of BIH) has only net margins of 3%.

For Boustead Maxitherm, an area of growth which Management is looking at is Green Energy. Boustead will be moving towards this direction in the years to come as it represents good potential. For power plants, the outlook is becoming more positive and buoyant and countries such as Indonesia require a lot of such plants to generate power to outlying areas. The country is too large to have a national grid in place, thus small power plants are required to cater to small pockets of the population; and this development represents good opportunities for Boustead Maxitherm to grow over the mid-term.

Water and Wastewater Engineering Division

Salcon will continue its focus on the niche water treatment industry and pitch itself for such projects. Even though it is up against global giants, it has still managed to clinch several high-profile contracts from reputable clients and has built up a respectable portfolio. Without the Libyan write-off, FY 2011 would have been another profitable year for the division.

Real-Estate Solutions Division

This division is easily Boustead’s largest revenue contributor and also its cash cow (aside from Geo-Spatial, of course). In Boustead’s AR, it was stated in the Chairman’s Statement that the aim was to build up an industrial leasehold property portfolio of 200,000 to 300,000 sqm. When I queried Management more on this, the reply was that this was the critical mass required for them to sell the entire portfolio to a REIT, thus unlocking value for shareholders. The rental revenue to be derived from Boustead’s current industrial leasehold property portfolio cannot be ascertained as it depends a lot on the type of building and the zoning (which affects the rental rates). As of this writing, the Design, Build and Lease portfolio has grown to about 90,000 sqm.

It is Boustead’s aim to grow their Design and Build portfolio as well, even though these contracts are sporadic and “lumpy”, in addition to focusing on their DB&L projects. It used to be the case where Boustead could sell at least one industrial leasehold property every financial year, but the problem with this strategy was that even though it brought in a lot of excess cash, it also meant that the Group would have to deduct one recurring income source. Boustead’s business model has to shift to one where the recurring income and cash flows from maintaining such a portfolio outstrip the benefits of selling the properties to clients for lump sum cash inflows. To do so, I reckon that Boustead’s other divisions have to ensure that they are all cash-flow positive and that the cash inflows more than cover the outflows to be made for progress payments to be made to contractors during construction of these leasehold properties. Once this “steady state” is reached, Boustead Projects can focus more of its attention on growing its leasehold portfolio, with the occasional Design and Build contract thrown in for good measure.

Geo-Spatial Division

Not much was discussed about this division as it is a pretty stable one with good and steady growth. FF Wong mentioned that in Australia, their market share was 85% while in Singapore it was 50%, with most of the clients being government agencies (hence, there exists a very low bad debt probability). There was already a good discussion on this during the recent audiocast, therefore I have nothing more to add.

Investments

With regards to Boustead’s most recent investment in HanKore (previously known as “Bio-Treat”), FF Wong mentioned that extensive and exhaustive due diligence was done on the Company prior to the investment. To recap, Boustead invested $4 million in HanKore by purchasing 100 million shares at 4 cents/share. HanKore has a complex group structure and the recent rights issue and fund raising meant that more parties were roped in to help the troubled company. It was mentioned that cash flow was poor for BOT projects (which is why Boustead themselves do not utilize the BOT business model) but prospects were good.

Recent reports on HanKore have been largely optimistic that the Company has put its troubled past behind it and would be able to generate healthy cash flows and profits. It remains to be seen, however, if this comes to pass. Boustead’s Management is not terribly excited about HanKore’s near-term prospects, and my feel is that they intend for this to be a medium-term investment.

Cash Management

Boustead’s cash management program allocated $50 million for the purchase of corporate bonds, and it was mentioned that $12 million was invested, out of which $1 million of profits were made (yield of about 8.25%). This ongoing program helps to ensure that the cash is properly invested in products which are not too risky, yet are able to generate a return higher than inflation. Instead of letting the cash sit idle, it will be put to good use while Boustead waits for a suitable M&A opportunity.

As at July 29, 2011, Boustead’s net cash balance amounted to $228 million. After the payment of the final plus special dividends, this will dip to “only” $200 million. FF Wong mentioned that holding so much cash has its advantages as well, as it allows flexibility for Boustead and also attracts more suitors who are eager for Boustead to assess their business to see if it can be bought over. Therefore, this opens Boustead up to more opportunities as compared to if it did not have its large cash reserve. Holding so much cash also improves Boustead’s reputation as a well-managed company and boosts its standing in the corporate world.

Boustead will continue to keep its eye out for potential M&A opportunities to utilize its burgeoning cash hoard. With the Europe crisis flaring up again and a crisis of confidence engulfing the Euro Zone, perhaps this may throw up juicy opportunities for Boustead to consider. However, since its focus is mainly Asian (and Asia has yet to experience a crisis as severe as the AFC in 1997), it may not be able to find attractive investment opportunities around SEA and may have to venture to Europe or USA. Whatever the case, shareholders like myself will have to keep the faith that the CEO knows what he is doing.

Conclusion

The above summarizes the main points gathered from my attendance at the FY 2011 AGM. The buffet spread was quite marvellous this time round (with lobster salad, crayfish and other high-quality food), but the experience was marred by a very cramped corridor which everyone had to literally squeeze through to get to the food. This meant a delicate balancing act when it came to shuttling food back and forth, and drinks were particularly tricky. It did not help that the conference room also felt cluttered with many chairs blocking the way. One of the shareholders requested that an auditorium be booked for next year’s AGM, and the Management said they would look into that request as they had not expected such a good turnout and were similarly caught by surprise.

I shall be providing another update on Boustead when it releases its 1H FY 2012 results some time in November 2011.

Averaging Up or Down?

2011-09-06T18:30:00.001+08:00

I guess the question above would be particularly applicable to value investors, as they often know and understand their own companies best over a period of time and thus are often faced with the question of whether to purchase more shares in these same companies. An investor would be confronted with the simple question of whether he should average up (i.e. purchase shares at a higher price compared to his original purchase) or average down (purchasing at a lower price than his original purchase in order to reduce his overall average cost per share). Let’s analyze both situations to see what insights can be gleaned as to the actions to be taken, and also the ramifications and consequences of each action.

Averaging Down

I guess this would be viewed as a simple decision – to purchase more shares in a company in order to reduce the cost of your holdings. Note that this can usually only be done in a major correction or in a protracted bear market, as the value investor would have usually purchased his shares with a requisite margin of safety to begin with. This means that it will be unlikely and improbable (but not impossible) for the share price to fall below his purchase price and remain there for a long enough period for him to accumulate comfortably. Even if this does happen, the investor must not only be nimble enough to be able to capture the opportunity to buy more shares in his favourite company, but must also control his emotions of fear and panic when market valuations plunge. The logic of buying more when prices fall may be sound, but in reality it can be difficult and uncomfortable to go against the crowd as human nature dictates that we feel more at ease following the direction of the herd. Hence, a seemingly simple action such as averaging down comes with a lot of emotional hang-ups, and as an investor who has done this before, I can only say that one must have both conviction and fortitude. In short, one must do the necessary research and be convinced in one’s own analysis to be able to carry out the transaction; and along with it also comes the ability to withstand short-term market price swings without batting an eyelid.

Another danger of averaging down comes in the form of the Value Trap. As one reader recently commented on my post on divestment of GRP, the one big mistake which all value investors face is the seemingly attractive low PER and valuations offered by a company which hides the true extent of its unsuitability. An investor must carefully assess the future prospects of the business, and convince himself that the business is able to at least sustain its cash flow generation to be able to pay out steady dividends, or that it is growing slowly but steadily. There is a fine line to be drawn between a company in a declining industry which is floundering, and one which is in a mature industry with little growth potential; but the difference can be of paramount importance in determining the returns to be obtained over the long-term.

It all boils down to an investor performing a conscious evaluation of a business’ potential to continue to generate profits and cash, in order to justify his averaging down strategy. A business is not always more attractive just because it has lower valuations, and vice versa; as everyone knows that conditions in the business world are never so simple. Hence, it involves a detailed assessment of valuations in relation to profit and FCF-generation capability. I am the first to admit that this is far from easy, therefore the decision to average down should not be taken lightly and should be a matter of grave importance – significant judgement is required to ensure that one’s investment does not spiral down into the depths of a black hole or chasm.

Averaging Up

Averaging up, I feel, is a lot trickier than averaging down. Perhaps a reader might attribute it to a matter of perception, as it never seems to make sense to purchase something at a higher price (and by extended definition higher valuations) compared to one’s original purchase price. At this juncture, perhaps, I should clarify a few mis-conceptions about the process of averaging up which even I was prone to make prior to writing about this topic. These mis-conceptions do not just include those of valuation, but also involve psychological biases under the umbrella of behavioural finance.

When one thinks of averaging up, one immediately thinks of violating the basic principle of investing, which is to purchase at a more affordable valuation as compared to a higher valuation as provided by Mr. Market. But things are not always as simple as they seem – a business is dynamic in nature and is always changing, therefore valuations and prospects do not stay constant either. The difficulty is in determining what constitutes a margin of safety in purchasing at a higher price as the business may have improved or deteriorated since your previous purchase. The hard work involved is to assess and ascertain once again if the business is worth purchasing in its current form, by incorporating all new information, news flow and corporate actions and events since your last purchase.

To give a recent example of mine, I had averaged up on purchase of Boustead after an absence of 2.5 years. Essentially, I had to make another assessment of the Company based on the recent corporate newsflow, as well as reading the Annual Report FY 2011 thoroughly and by talking to and questioning the Management during the recent AGM in July 2011. This evaluation has to be conducted to ensure that at the current price level and valuation, Boustead would still make a decent and compelling investment. Once the assessment was done and the conclusion was made, I then proceeded to execute my order to accumulate more at a market price of 85 Singapore cents, and this was blogged about some time back in late-August 2011.

The behavioural bias involved in averaging up is anchoring bias, which means that one tends to use their historical purchase price as a mental “anchor”, and anything which is higher in PRICE tends to look more expensive in relation to your purchase price. However, this is a wrong attitude to have as your previous purchase price is considered history and should not be relevant to your current decision. In fact, one should behave as if one is considered the stock for purchase without owning any in the first place, as it is irrelevant to one’s purchase decision to always mentally anchor oneself to a historical purchase price.

Conclusion

From the above, it can be deduced that whether one decides to average down or up, the common theme in both cases is to do a rational and objective assessment of the business to see if it continues to be investment-worthy. It is never an easy and clear-cut decision and one has to be prepared for losses in case things do not pan out as planned; but we should take such lessons stoically and continue to learn from them. As investors it is impossible to avoid mistakes, but we should always aim to make small financial mistakes and to reap big financial rewards, which in the long-run would translate into an increase in financial assets and would bring one ever closer to the dream of financial independence.

August 2011 Portfolio Summary and Review

2011-08-31T18:30:00.018+08:00

August 2011 was by far the most interesting month thus far, not just for the stock market but also in terms of economic news, upheavals and other alarming news. As I am much busier these days with family and work, I shall not comment too much on news events which I am sure most readers can peruse through in the daily newspapers. Instead, I will focus more on the companies within my portfolio and the portfolio itself.

In a previous post, I had written about my portfolio changes already, so I will be not be repeating it again my portfolio section but will merely detail the usual gains and losses, as well as dividends received. The refund for my daughter’s hospitalization has arrived, thankfully, and the money has been encashed and is ready to be deployed. Dividends have also been very healthy for August, with money flowing in from SIAEC, Boustead, Suntec REIT as well as newly-acquired VICOM.

Below please find my portfolio as well as corporate summaries for August 2011:-

1) Boustead Holdings Limited – On August 10, 2011, Boustead announced that its Energy-Related Engineering Division had secured $22 million worth of contracts from the oil and gas industries globally. These involve the design, process engineering and construction of key large-scale process systems and waste heat recovery units for downstream oil refineries and gas processing plants in Australia, Canada and the United Kingdom. On August 12, 2011, Boustead Projects announced a Design & Build Contract worth $42.45 million for Kerry Logistics to build a logistics facility at the Tampines LogisPark in Singapore. The Facility will have gross floor area of 34,500 square metres and is expected to be completed in 4Q 2012. Also, on August 12, 2011, Boustead released its 1Q FY 2012 results. Revenue was down 53% while net profit attributable to shareholders plunged 73%. The reason for this was that 1Q 2011 saw the sale of a leasehold property of $67.8 million. Adjusting for this, revenue and net profit would have decreased a smaller 27% and 18% respectively. The key reason for this was the slower recognition of revenue on contracts which had only been secured in 4Q 2011. Otherwise, the Balance Sheet remained strong with net cash balance of about $200 million and FCF amounted to $34 million for just 1Q 2012.

The final dividend of 2 cents/share and special dividend of 3 cents/share was received on August 19, 2011. On August 19, 2011, I had increased in stake in Boustead after an absence of about 2.5 years, raising my average cost to 62.3 cents/share.

2) Suntec REIT – On August 12, 2011, Suntec REIT announced that the REIT had entered into a share sale agreement with several parties to acquire 51% of the issued share capital of Harmony Partners Limited (HPL). HPL owns an 80% indirect stake in Suntec Singapore International Convention & Exhibition Centre (Suntec Singapore). This acquisition will raise Suntec REIT’s stake in Suntec Singapore from 20% to 60.8%. The purchase consideration is $114.75 million and will be funded by bank borrowings; and this will form part of the asset enhancement plans which Suntec REIT has.

The dividend of 2.532 cents/share was received on August 29, 2011.

3) MTQ Corporation Limited – There was no announcement from MTQ for August 2011, other than to fix the issue price of the new scrip shares at 82 cents/share. I have chosen scrip to be received on September 16, 2011.

4) Kingsmen Creatives Holdings Limited – Kingsmen released their 1H 2011 results on August 11, 2011. Revenue fell 15% to $93.6 million in the absence of mega-projects like the Shanghai Expo pavilions during the same period last year, while net profit also dipped 15% due to a comparatively weaker performance by the Museums and Exhibitions Division. Gross margin, however, improved to 29.7% for 1H 2011 against 27% for 1H 2010. Interiors continued to perform well with revenue increasing 6% for 1H 2011 against 1H 2010, while revenue also increased by 47.6% and 27.7% for Research & Design and IMC divisions respectively. Cash flow was healthy for 1H 2011, with Kingsmen generating $4.6 million of OCF and spending $1.4 million on purchase of PPE, resulting in FCF of $3.2 million. Though this is far below what was generated in 1H 2010, Benedict Soh is confident that business will pick up in 2H 2011. An interim dividend of 1.5 cents/share was declared (similar to 2010) and will amount to about $2.84 million (i.e. it can be sustained by the FCF generated). If I have time, I will discuss more on Kingsmen but after my 5-part comprehensive analysis, I decided to take a break for a while.

5) SIA Engineering Company Limited – There was no news from SIA Engineering during the month of August 2011. The final dividend of 14 cents/share and special dividend of 10 cents/share were received on August 11, 2011. I raised my stake in SIA Engineering on the same day, bringing down my average cost to $3.97 from $4.064.

6) VICOM Limited – VICOM released no news for August 2011, except to report its 1H 2011 results. Revenue for 1H 2011 increased by 8% to $44.7 million, while net profit attributable to shareholders increased 10.5% to $12 million. This represents a net profit margin of about 26.8%. The Balance Sheet remained solid with no debt and OCF amounted to $9.8 million, while capex was $7.65 million due to the construction of the new facility for Setsco at Teban Gardens. FCF thus amounted to $1.15 million for 1H 2011. Capex under “normal” circumstances would only amount to about $1.3 million (using 1H 2010 as a guide), and thus FCF would have been much more at $8.7 million last year. An interim dividend of 6.9 cents/share was declared and paid on August 31, 2011, up from last year’s interim dividend of 6.3 cents/share.

Portfolio Review – August 2011

Realized gains have increased to S$65.2K due to Boustead and VICOM going ex-dividend this month. A total of $5.5K was received in dividends for the month of August 2011.

For the month of August 2011, the portfolio has decreased by -2.5% (using XIRR in MS Excel to compute) against a -9.6% fall in the STI; thus my portfolio performance has outperformed the STI by +7.1 percentage points. This was a much better performance compared to July 2011, when the portfolio out-performed the STI by just +0.5%. Cost of investment has increased from S$219K to S$238.7K and unrealized gains stand at +7.8% (Portfolio Market Value of S$257,200).

September 2011 is anticipated to be a slow and boring month with no results released by any companies within my portfolio. Analysis of existing results shall carry on, as well as reading up more on value investing and companies.

My next portfolio review will be on September 30, 2011 (Friday).

MTQ – FY 2011 AGM Highlights Part 2

2011-08-26T19:00:00.006+08:00

Part 2 of the MTQ AGM Highlights will touch on Neptune Marine Services, Oilfield Engineering’s recent acquisition of PSL and PEMAC, as well as elaborate on Engine Systems Division.

Neptune Marine Services (NMS)

Naturally, quite a few pointed questions were asked about the recent NMS acquisition, as the Group had pumped in a substantial sum of money into this investment. MTQ was even buying up more shares from the open market recently in order to reduce their cost of investment further from A$0.05 to A$0.0467; but the recent market turmoil has actually pushed down NMS’ share price to as low as A$0.026. No questions were asked during the AGM proper but it was after the meeting that one or two shareholders (myself included) approached Mr. Kuah Boon Wee (KBW) to find out more about NMS.

One shareholder’s concern was that NMS was a micro-cap stock (below 10 AUD cents) and therefore it would be very difficult for valuations to rise and hence the share price would stay depressed for extended periods of time. KBW acknowledged this but maintained that the reason for MTQ investing in NMS was that the restructuring left them with a very clean Balance Sheet and that the divestments meant that cash would be raised and the business model would be very much more streamlined as compared to previously (before the rights issue). KBW was also questioned on how experienced the new CEO Mr. Robin King was in managing such a company, and the reply was that he was sufficiently competent. Another query was – why would MTQ invest in NMS unless synergies were to be obtained, and do the businesses of MTQ and NMS overlap in any way? KBW’s reply was that NMS’ business was subsea, and MTQ was also dealing with subsea business as it was repairing equipment relating to subsea operations; hence there was overlap and both companies are essentially serving the same industry.

My concern was that NMS would take significant time to turn around as the divestments did not ensure that the core business would be profitable and cash-flow positive. KBW mentioned that the current financial year ended June 30, 2011 would look terrible due to the rights issue and significant write-offs, while the next financial year ended June 30, 2012 would look similarly disastrous because of the various other divestments of non-core assets and streamlining of the business. I took that to mean that the business of NMS would only “stabilize” in the financial year ended June 30, 2013; and this also implied that MTQ would take a long-term stance on NMS in that they had the patience to sit through the restructuring to ensure their investment bore fruit. Note also that in the interim, NMS would not be paying a dividend at all, thus unlike Hai Leck, MTQ would not enjoy any yield at all for their waiting.

It will be interesting to continue to monitor the business of NMS and their periodic announcements on ASX to follow the progress of the restructuring, and to see if they eventually bear fruit. Thus far, Mr. Market has been less than kind to NMS and has accorded it a very low valuation; time will tell if Mr. Market was right, or if he had been overly pessimistic.

Oilfield Engineering Division – Acquisition of PSL and PEMAC

Besides the issue of Bahrain, the other major talking point about Oilfield Engineering was the recent announcement of Premier Sea and Land (PSL) and its workshop division called PEMAC. I broached this topic with KBW as well and he mentioned that it was acquired cheaply at about 4.7x PER and 1.29x P/B (I provided him with the numbers which he agreed with). He also mentioned that the business was cyclical in the sense that last year’s earnings for PSL of US$4.1 million was considered one of its “lowest” points, with other years registering much higher net profit. Therefore, it would make it look as if MTQ had capitalized on this temporary blip to acquire this company cheaply.

When quizzed by another shareholder on why the parent would want to divest PSL when it was profitable and had an unleveraged Balance Sheet, the reply was that the parent was a US-based company with operations and revenue derived from North America; while PSL was the only Asian arm with most of its revenue derived from South-East Asia. Hence, there was a mis-match and the parent considered divesting it to focus more on its core regions. KBW also mentioned that MTQ had been aware of PSL for a long time as a competitor and was simply waiting for a good and ripe opportunity to come along to acquire the Company; thus killing two birds with one stone – integrating PSL’s business and product range with MTQ’s, and also eliminating (i.e. buying out) the competition!

I was also asking the CFO about PSL’s half-year performance ended June 30, 2011 (it had a December 31 year-end), but he declined to give exact figures; only saying that it was “better than budgeted”. I guess there was a certain amount of sensitivity in revealing such numbers as PSL is not a listed company; therefore there is no onus for disclosure of such information. As long as PSL is doing well, I have no worries about not knowing the exact numbers; in fact all I wish is that Management know how to integrate it well with MTQ’s core Oilfield Engineering Division and in time to come, produce positive synergies and tangible benefits for the Division.

Engine Systems Division – Acquisitions and Margins

The final aspect to ask about was the Engine Systems Division, which was rather neglected during the course of the meeting as no one was particularly interested to ask about it. Most attention was (of course) directed at Bahrain, PSL and even NMS and I guess most shareholders assumed that Engine Systems Division would just “chug” along like a well-oiled engine (no pun intended). My concern was whether the division’s margins were improving and the CFO assured me that they were working on this. My important question to them was whether the division generated positive cash flows and the reply was in the affirmative.

I also expressed concern that one of the recent acquisitions (three of them as detailed in the AR FY 2011) was loss-making, while the other two were acquired too close to the end of the financial year for any positive impact to be seen. The CFO took a different tack when answering this question – he mentioned that for Engine Systems, scale and coverage were very important. In fact, MTQES was the only Company in Australia which had nation-wide coverage in terms of branch locations; and the acquisitions had helped to make this a reality. With this enlarged coverage, MTQES would be more effective in engaging customers all over Australia, and I took it to mean that this would be positive for the Division over the medium-term (and that the effects would not be immediately apparent).

I had to admit that Engine Systems had come quite a long way since I looked at it three years ago, and even though margins were still thin, they had improved quite a bit since then and I believe it can be attributed to the Management Team’s focus on the Bosch partnership, expanding its range of products such as turbochargers, as well as extending its reach so that it could more effectively serve its customers. These measures take time to show results and therefore, I am willing to be a bystander and observe this Division further before making more conclusions.

This concludes my AGM highlights for MTQ, and I will probably not blog about MTQ for quite a while until it releases its 1H FY 2012 results in late October 2012. Meanwhile, the issue price for the scrip dividend has been announced at 82 cents/share, and my decision would be to take up 100% scrip as I believe in the growth prospects for MTQ.

Note: For a good write-up on MTQ’s AGM, please also refer to this article by Next Insight.

Portfolio Changes - Divestment of GRP and Addition of VICOM, SIAEC & Boustead

2011-08-22T18:00:00.006+08:00

It’s been a while since I made some major changes to my portfolio, but this month seems to be a good month for it as Mr. Market went through a rather wild mood swing due to the historic downgrading of US Debt, which caused markets worldwide to tumble sharply and valuations to become more attractive. This event, coupled with debt problems in Europe and runaway inflation in China, served to unnerve the world and caused many bouts of forced selling and margin calls. The result, of course, was that the STI fell about 13% in 7 straight days of blood-letting, and this opened up very good opportunities for me to purchase shares. But before I go on about the additions, I have to declare my divestment of GRP and also the underlying rationale for it. Fortunately for me, the timing of the divestment was just right for me to pick up some shares of VICOM, which does vehicle inspection and testing in Singapore; as well as to average down on my cost for SIA Engineering. At the same time, I also bought some more Boustead to add to my current holdings. In the sections below, I shall elaborate on the reasons for the divestment and addition, and also give a brief account on the addition of SIA Engineering. All portfolio changes will be reflected in my month-end portfolio review, though I will provide some details within this post itself of the movement in cost, and also any dividend effects.

Divestment of GRP – Reasons and Rationale

I guess of all the companies within my portfolio, the one which was the most stagnant and which had a declining business had to be GRP. The original rationale for purchase was to enjoy a yield of 10% due to GRP’s large cash hoard and also its ability to generate free cash flows (FCF) due to the presence of rental income derived from its Bukit Batok industrial property. However, do note that the rental income from its property had ceased with effect from May 2010 following the expiry of the lease agreement in April 2010, thus 1H FY 2011 (ended December 31, 2010) did not include the effects of this rental income. As a result of the absence of this item, net profit fell 47% year on year. This was not the only thorn in GRP’s side – gross profit margin had also declined from 35.9% to 31.9% due to more intensive competition in its divisions. Though administrative expenses had fallen 23.8%, the more worrying factor was the erosion of gross margins, which was witnessed in Tat Hong and which also portended a slow but painful decline in its core business.

However, the above was not the only reason for the divestment. In the May 2, 2011 issue of The Edge Singapore, director Han Hai Kwang was quoted as being on the lookout for “synergistic” acquisitions to halt sliding profits, as GRP’s core business divisions suffered from competition and saw its profits eroding. Its PVC business in China, in particular, was suffering as a result of intense competition and the business itself was a commodity one in which GRP itself had no firm competitive edge. It would seem that throughout the years in which I was vested in GRP, Han had been continually looking out for such M&A but without much success, and this resulted in the cash building up into a hoard of about 9.5 cents/share. No special dividend was declared though, as I believe the Company saw that their business was vulnerable and therefore they wished to retain more cash for working capital.

What was more alarming, however, was that GRP’s operational cash flows for 1H FY 2011 had dropped to just $559,000, while capex was $95,000, resulting in FCF of just $464,000. The current dividend of 1 cent/share every half year amounts to $1.4 million, and this represents a shortfall of $1 million. Note that while rental income was still flowing, and using 1H FY 2010 as a comparison, FCF amounted to $$2.24 million, which would have been sufficient to pay out a dividend of $1.4 million and still retain roughly $800,000 for working capital. Looking at GRP’s balance sheet as at December 31, 2010, cash stood at $13.3 million and if they were to carry on with their current dividend policy, the cash would be depleted within 6.5 years ($2 million deficit per financial year), and that is not even counting in working capital requirements. Hence, my conclusion was that the current dividend policy was unsustainable (at 10% yield), and thus the original rationale for purchase was now invalidated; thus requiring an action to divest.

Another related point which I should mention was GRP’s announcement, on July 13, 2011, that it would be disposing of 63.5% of GRP (China) Pte Ltd, its uPVC business, for a cash consideration of $1.92 million; and will also, at the same time, book in a gain on disposal of $313,327. The reason for the disposal was the cash burn and losses suffered by this division for three consecutive years. On the surface, it looked like a good decision; but I have to question why Management took so long on their decision to divest, and also whether there are underlying unspoken reasons for wanting to divest for cash. One possibility (uncorroborated, no doubt) which crossed my mind was that the Company was foreseeing declining business and needed the money for additional working capital; and that they would also concurrently lower their full-year dividend from FY 2012 onwards (I am still expecting a final dividend of 1 cent/share for 2H FY 2011; as of this writing, GRP’s FY 2011 results ended June 30, 2011 have still not been released).

On August 3, 2011, I sold off my entire shareholding in GRP at 20.5 cents/share, realizing a capital gain of 2.5%. If I factor in dividends of $4,000 received since I first purchased GRP on October 28, 2009, then the total net gain on GRP rises to 22% (net of brokerage). Using XIRR on Excel, I have computed that the annualized return on investment amounts to 13.5% per annum.

Purchase of VICOM

The proceeds from the divestment of GRP were then used to purchase VICOM at an average cost of $3.40833 on August 8, 2011. VICOM is a company listed on SGX (68.19% owned by Comfort Delgro) which is involved in vehicle testing and inspection services (for all cars in Singapore). Revenue for this division hit $25.5 million (a 10.7% increase) for FY 2010 (it has a December 31 year-end) and 438,454 vehicles were inspected during the financial year. This division has seven testing centres spread out over Singapore, and include Sin Ming (lease just renewed for another 30 years), Changi, Bukit Batok, Yishun, Kaki Bukit, Pioneer and Ang Mo Kio. As of June 30, 2011 (based on 1H 2011 results), the Vehicle Inspection Business took up 30.5% of revenues, and had operating margin of 35.7%.

VICOM also has a wholly-owned company called Setsco Services Pte Ltd (Setsco) which provides non-vehicle testing and inspection. This includes construction material testing, certifications, calibration, training, inspection and consultancy. It has its headquarters at Changi but VICOM is in the midst of building a new four-storey building at Teban Gardens due to be completed by 3Q 2011. Revenue for this division hit a new high of $51.4 million (a 7.6% increase) for FY 2010. The division also has operations in Selangor (Malaysia) and Ho Chi Minh City in Vietnam. In FY 2010, Sestco formed a JV in UAE with Dubai-based Ali Omran Al Owais Investment Company to form a 49%-owned associated company called Setsco Middle East Laboratory LLC. This remained dormant for FY 2010, registering a loss for the year. As at 1H 2011, there was still no share of profit from this associated company, which implies that operations had yet to fully commence. For 1H 2011, the proportion of revenue from Setsco was 61.6%, and operating margin stood at a respectable 20%. The remainder of the revenue came from leasing and other related businesses.

I had already stated at the end of m SIA Engineering’s five-part analysis of purchase that I will not be doing a very detailed analysis of purchase for new purchases subsequent to SIA Engineering, thus I will be very brief on the reasons I purchased VICOM. VICOM has a captive market in its vehicle inspection business, as all cars in Singapore have to be periodically inspected as part of compulsory requirements to own a vehicle. As COE prices remain high (as of this writing a Cat A COE costs $49,000 while a Cat B one costs $65,000), fewer people will scrap their cars and thus will hold on to them longer, requiring more inspections. VICOM also has a clean Balance Sheet with no debt, and generates strong FCF every year. In its recent 1H 2011 results, VICOM declared an interim dividend of 6.9 cents/share, up from 6.3 cents/share a year ago. Assuming final dividend remains unchanged at 6.9 cents/share as per last year, total dividend for FY 2011 would be 13.8 cents/share, translating into a yield of 4% at my purchase price. Incidentally, I did not buy VICOM very cheaply; it was priced at about 12.2x PER and about 3x P/B; but this is to be expected since the business model is sturdy and it generates consistent and predictable FCF every year. A total of about $20,000 was spent purchasing shares of VICOM.

Addition of SIA Engineering

As Mr. Market was feeling particularly panicky in those seven days of decline, I decided to deploy more cash (about $10,000) to purchase SIA Engineering, and managed to average down on my initial purchase by buying at $3.51 on August 11, 2011. A quick analysis of SIAEC’s cash generation ability showed that since listing in 2000, it has only dropped its dividend once (in ten years) from FY 2008 to FY 2009 (20 cents/share to 16 cents/share), not counting special dividends. Even if we assume a drastic cut in dividend of 40% from 20 cents/share to 12 cents/share due to another global economic meltdown (crisis), that still represents a yield of 3.4% at my purchase price. With cash flows from associated companies and JVs remaining strong, I would expect SIAEC to at least maintain their dividend policy as they should have baseline cash balance of $400M after paying their recent final + special dividends.

As a result of the averaging down, average cost for SIAEC has fallen from the previous $4.064 to $3.97, and this will be reflected in my next portfolio review.

Addition of Boustead

Even more cash was deployed to purchase more shares in Boustead, at a price of 85 cents. The Company is sitting on a cash hoard of about $39.75 cents/share and has been paying consistent, increasing dividends over the last five years. This effectively values the rest of its business at a mere 5x PER ex-cash, and considering it is a global mid-cap company this “conglomerate discount” was not justified. It has a strong balance sheet with negligible debt (mostly, it is used to finance their real-estate portfolio) and generate very strong FCF every financial year. The strength of its business lies in Geo-Spatial and Real-Estate Solutions Divisions. For the former, it has a PBT margin of around 22-23% and is cash-flow positive, with Government agencies forming the bulk of their customer base (hence, bad debt probability is very low), while for the latter, Boustead is steadily building up its Design, Build and Lease portfolio to just above 90,000 sq metres currently. This is reflected under “Investment Properties” in the Balance Sheet, and the recurring income and cash flows will provide a stable base against the turbulence experienced these couple of weeks in Europe’s and America’s economies.

At my current purchase price, projected yield based on 4 cents/share is about 4.7%; and my average cost has increased from 55.8 cents to 62.2 cents.

Summary

The above transactions had the net effect of increasing my cost base from $220,000 to $238,700, as $20,000 was divested from GRP and re-deployed into VICOM, $10,000 was spent acquiring shares of SIAEC and another $8,600 to acquire shares in Boustead. This represents another new high for my cost, and I shall endeavour to continue to put more money to work if Mr. Market continues to offer me opportunities.

MTQ – FY 2011 AGM Highlights Part 1

2011-08-17T19:00:00.002+08:00

I attended MTQ’s AGM held on July 22, 2011 at 10:00 a.m. at Carlton Hotel conference room (new wing). This was my second time attending MTQ AGM since I became a shareholder in late 2009, and last year’s AGM was also held at Carlton Hotel. The difference was the location within the hotel, as the old wing had a cosier environment as compared to the conference rooms in the new wing. One of the directors had complained that it was as noisy as a “fish market” as there were many teenagers and youngsters running around along the corridors.

As I was one of the earliest to arrive, I managed to take a photo of the AGM while there was no one seated (see pic above). We were given an attendance slip stating out IC number and number of shares held, and there were not many shareholders attending the AGM this time although the number of shareholders had increased significantly (overheard this from one of the directors). This could probably be attributed to the Company’s rather aggressive corporate actions throughout FY 2011, which included three acquisitions for Engine Systems Division, a significant investment into an Australian-listed company called Neptune Marine Services; as well as the recently announced major acquisition of PSL and Pemac.

I shall sub-divide this AGM update into two separate parts as putting it all down in one post would be too lengthy, but I will not specifically state the questions that I had asked during the AGM. Since many of my questions did not receive direct responses (I merely deduced the replies from speaking and chatting with Management and steering them towards providing some clarity on various issues), I shall simply narrate the gist of what was mentioned and pass my own judgement accordingly. Also note that there are no hard and fast rules for getting answers at an AGM, even if you ask a direct question during the meeting proper, as Management are likely to want to take it “offline” (more on this in my AGM Part 2 coming up).

Summary of Bahrain Situation – Mr. Kuah Kok Kim

Mr. Kuah gave all shareholders an update on the situation in Bahrain before reading out the resolutions proper. After all, with the news and rumours swirling around Bahrain in the past few months, one cannot blame shareholders like myself for feeling jittery and concerned. He started off by saying that the situation in Bahrain had somewhat stabilized, and that the initial reports of death and destruction had been greatly exaggerated by the media. Of course, he did acknowledge that there were deaths and rioting, but maintained that these occurred mainly on major highways and in larger shopping malls. As the new facility was located in an industrial park far away from the troubles, there was no immediate danger to lives or property and business carried on as usual.

MTQ was, however, affected in the sense that everything got delayed and slowed down a lot due to the riots and trouble. Originally, the first 80% of the construction cum commissioning of the facility went on smoothly without a hitch. The final 20%, however, ran into delays due to the problems surfacing in the Middle East. Though everything has been resolved as of the date of the AGM, the two main delays came from the starting up of power at site (despite submission of applications to the Government, power was only turned on in July 2011), as well as the certifications required from the American Petroleum Institute (API) as many of MTQ’s principals and customers had been driven out of MTQ in the interim due to the violence, and were slow to return to the country.

In the meantime, MTQ focused on in-house training and therefore managed to limit the amount of start-up losses due to the delays; however on this point I feel that Management is trying to cushion the blow as there will be significant start-up losses due to the operational delay of the facility. The Bahrain facility will experience cash burn and unless things get up to speed soon, this may severely impact 1H FY 2012 financials.

A shareholder did ask Management on when break-even can be achieved for Bahrain, and the reply was “not too long”, which basically isn’t telling you much. What this means is simply that Management “expects” the new facility to be up and running soon and thus generating income, but the time frame for this would be uncertain as business reality is also uncertain! In fact, some positive news actually came out of this whole Middle Eastern debacle, in that Bahrain had stepped up their oil and gas exploration activities (this was an unexpected positive development which Management had not anticipated); by drilling more new wells and reworking old wells.

In addition, Saudi Arabia has also been pouring money into Bahrain in order to prop up its economy, due to the large proportion of Sunnis within Bahrain (Saudi Arabia is predominantly Sunni). US$10 billion has been pumped into Bahrain with the help of the Gulf Cooperation Council (GCC). These actions demonstrate that MTQ’s investment in Bahrain was sound, and that their many years of research had paid off as they were buffered from the worst effects of these adverse events.

On another note, Chairman Kuah also mentioned that transfer of duties from himself to Kuah Boon Wee the CEO was essentially complete, and that the new CEO has managed to cope with market demands as a result of the Deepwater Horizon disaster.

Cash and Debt Levels

My main concern with MTQ’s cash balances was that they seemed to be spending quite a lot of it, even as they were gearing up their Balance Sheet for their Bahrain expansion. With their purchase of 68,455,000 additional shares in NMS for about $3.34 million, as well as the $7.24 million cash outlay for the acquisition of PSL and Pemac, it seems that cash is being spent at a pretty alarming rate! Assuming a scrip dividend conversion rate of 45% of shareholders (as was the case for MTQ’s 2 cent/share interim dividend declared back in October 2010), another $950,000 will be paid out. Coupled with the additional $6.3 million capital commitments as disclosed in their Annual Report FY 2010/2011, this means a total outlay of about $17.8 million, out of their cash and bank balances of about $23.8 million as at March 31, 2011. Borrowings stood at $27.3 million as at March 31, 2011 as a result of borrowings to construct their new facility in Bahrain, including hiring new workers, shipping over new machinery and obtaining required certifications to commence business activities. Additional borrowings for Premier would come up to $16.9 million for a one-year loan, and total borrowings would go up to as high as $44.2 million by September 30, 2011.

From the above description, it is worrying to me whether MTQ can maintain a healthy cash balance and have sufficient cash flows for working capital and operational activities. When I quizzed Management on this, the following pointers were mentioned:-

1) MTQ has been generating healthy positive operating cash flow all these years, and the addition of Bahrain will contribute to this cash flow, but of course only after the initial start-up losses and cash burn have been overcome (through some time).

2) Interest rates on new loans now are at historic lows, and MTQ’s Term Loan 6 is denominated in USD which is, at the moment, depreciating against the SGD (which means each instalment payment will become cheaper for MTQ).

3) There is an intention to push some of the debt onto Premier’s books as Premier’s Balance Sheet is un-geared.

4) MTQ’s Engine Systems and Oilfield Engineering are both cash-flow positive, and Premier is also cash flow positive as well as profitable; hence there is not much worry that the finance costs cannot be sustained.

So, the above points do somewhat support Management’s assertion that cash levels would be sustained and that debt levels, though high, are still manageable. However, it would be extremely prudent for me as an enterprising investor (by Graham’s definition) to closely scrutinize the next set of financials for MTQ coming out for September 30, 2011 (1H FY 2012) to review if things are going as planned, or if something is drastically wrong.

Thus concludes Part 1 of the AGM highlights. Watch out for Part 2 soon which talks about NMS, acquisition of PSL and PEMAC as well as the Engine Systems Division.

Kingsmen Creatives – FY 2010 Comprehensive Analysis Part 5

2011-08-11T17:00:00.002+08:00

Part 5 of my comprehensive analysis is long overdue, it seems. My apologies for truncating my comprehensive analysis so abruptly, but somehow I get the feeling no one really missed Part 5? Haha. Or perhaps no one even remembered that there was supposed to be a Part 5! Anyhow, there still remained some points which I had yet to address in the first four sections of this analysis, and over the months nothing much has occurred to change my perception of the Company or have a different opinion on its business model and modus operandi. Hence, I shall push on with the final part of this analysis, which includes some qualitative aspects, prospects and plans as well as other pertinent issues.

Qualitative Aspects – Management Quality

Management, which includes the founders Benedict Soh and Simon Ong, have had 35 years of experience in running the Company, and have built it literally from scratch to the scale it is now. They thus have intimate knowledge of how to run Kingsmen and also a very in-depth understanding of the industry in which Kingsmen operates – that of MICE and also the Interior Fit-Out and marketing segments. These two guys also used to design and therefore they know how to look out for good talent and to hire such talent in order for Kingsmen to grow further. Much emphasis is placed on retaining quality designers and suitable talents for taking the Group to the next step, and the communication which I received at the recent AGM was that Management is committed to staff welfare and making the staff feel at home and that they are part of one big family.
This will definitely heighten staff morale, and the interesting designs of the office environment also make it a more lively and engaging workplace.

Prospects and Plans – Formula One and USS

There has been news that the current Formula One Grand Prix, of which Kingsmen has signed a five-year contract to build the spectator stands since 2008, may continue its run for another three years or more if the Government gives the green light. Till now the announcement has yet to be made as a committee is still “deliberating” on the pros and cons, but Andrew Cheng of Kingsmen is quietly confident that the Formula One will carry on, as it has already boosted tourist revenues and made the whole island abuzz with talk of F1 racing and the performances which come along with it annually. If the extension were to come to pass, this would represent more recurring revenue for Kingsmen’s Museums and Exhibitions division.

On the Universal Studios Singapore (USS) front, it is also anticipated that theme parks such as USS will hand out frequent variation orders (VO) to companies such as Kingsmen to refurbish their existing attractions, while fabricating new ones. Shrek’s castle and Madagascar were two recent parcels of work completed by Kingsmen, and for 2012 USS would have to update its attractions to ensure it remains relevant (Transformers 3, or Harry Potter, perhaps?) and thus will enlist Kingsmen for these VO. These parcels of work are expected to come in phases but will still be an almost annual or biennial affair, so it should represent a form of recurring income for Kingsmen as well, assuming they can continue to build up their theme park portfolio outside of Singapore.

Prospects and Plans – Packaged Solutions for Customers using IMC

Right now, R&D and IMC divisions are minor contributors of revenue to the Kingsmen Group, the bulk belonging to Interiors and Museums and Exhibitions. This may change in the next few years as Kingsmen intends to leverage on offering a packaged complete solution to its existing and new clients; and IMC will be at the forefront of this new packaging. Integrated Marketing Communications basically includes new media like outdoor display panels featuring adverts, as well as new forms of marketing media which Kingsmen will utilize to achieve its intended effect(s) for the client. Andrew Cheng mentioned that this division could see its revenues soaring if the new media is readily accepted by new clients, and Kingsmen is trying its best to roll-out these new medium in order to capture a growing slice of the market for innovative advertising.

R&D also has its place in that clients can engage Kingsmen’s services to find out more about different advertisement styles or to brainstorm on creative ways to market their products or to reach out to a mass audience. With Kingsmen’s intention to drive these two divisions to capture more market share, it will probably take some time and patience before their efforts bear fruit. Nevertheless, it is heartening to note that Management is not just casting aside these two smaller divisions and neglecting them.

Prospects and Plans – Sports Events and Signage Business

Kingsmen could potentially tap into another related area of business which is close to their Museums and Exhibitions Division, and that is sports marketing and sports event-related marketing. In my previous analysis of Cityneon Group, I noted that one of their business divisions handles sporting events and related signage for the events. Kingsmen thus far have not ventured into this area, and I feel there is good potential for them to broaden their range of services and to leverage on their Kingsmen branding to penetrate the market for sporting events. Note that the Sports Hub will be completed by the year 2015, and as such major sporting events would be able to be held in Singapore; thus the business could become a lot more lucrative in future. Kingsmen can start planning and building up their capabilities and competencies in this area so as to capitalize on opportunities once the Sports Hub is completed.

Others – Management Re-Shuffling Jan 1, 2011

On December 29, 2010, Kingsmen announced a slew of Management changes and shuffling in order to take the Group to the next level of growth. The changes are summarized as follows:-

• Mr. Anthony Chong (former executive director, Kingsmen Exhibits since 1999) – He will be promoted to Managing Director of Kingsmen Exhibits and will remain as Board Director. His new roles and duties include sourcing and identifying new business opportunities and businesses to drive the Museums and Exhibitions Division, including Thematic works.

• Mr. Alex Wee (former executive director, Kingsmen Projects since 2000) – He will be promoted to Managing Director of Kingsmen Projects and be responsible for growing the Group’s retail and corporate Interiors business.

• Mr. Simon Ong (founder and Group MD) – He will be promoted to CEO as well, and oversee the Group’s operational aspects, chart its strategic direction and be in charge of the creative direction and standards of the Group.

• Mr. Benedict Soh (founder and Executive Chairman) – He will transition out of his day-to-day roles (handing over to Mr. Simon Ong) and be in charge of business development and Kingsmen’s overseas operations.

All the above changes will take place on January 1, 2011. I believe the aim of the internal re-structuring is to place more attention on Kingsmen’s overseas businesses, which have been lagging somewhat; and also to sharpen their focus on Interiors and M&E divisions. I guess the results will only show up in the next 6 to 8 quarters, as I believe the Group is steering itself to clinch the mega theme park projects in the region. Since Kingsmen keeps a tight lid on news (because of confidentiality clauses), and can only report their order book four times a year, it is difficult to do any meaningful projects of revenue and of deal flow. Kingsmen is expected to release their results in one or two days time, and it will be 1H FY 2011 results, so it is critical to assess if their business development efforts have bore fruit; and to also assess the healthiness of the cash flows of the Group. I will be looking forward to the same 1.5 cents/share interim dividend as per 1H 2010.

Others – Privatization Target?

It is interesting to note that Kingsmen may be a potential privatization target, as it has a proven business model, is selling very cheaply (in terms of valuations) and is also generating very healthy and consistent free cash flows. Cityneon was actually privatized by Laviani Pte Ltd (a wholly-owned subsidiary of Star Publications Sdn Bhd) back in November 2008 at a historical PER of 12.7x (the revised offer at the time was 62 cents/share, up from the original 58 cents/share). Interestingly, the original offer for Cityneon was madeby Yellow Pages back then at 55 cents/share.

Kingsmen is currently trading at a historical FY 2010 PER of 7.2x (EPS of 7.93 cents for FY 2010, last done price at 57 cents/share). Assuming the same valuation was accorded to it as the Cityneon buy-out 3 years ago (at 12.7x), Kingsmen’s fair value should therefore be in the range of $1.007. This would value the entire company at about $190 million (189.381 million issued shares), which still seems cheap compared to its cash generation potential, strong track record and capable Management Team. Of course, Mr. Benedict Soh did allude to suitors asking to buy over the Company at lower valuations, and his reply was naturally to reject such offers as he did not see Kingsmen’s value being fully realized or appreciated. His aim was to double Kingsmen’s revenues by 2014 compared to FY 2010’s revenues. This would make EPS higher, and coupled with a proven business model of requiring low working capital; these factors would make the Group more attractive for sale by then.

Another reason for potential privatization (besides the fact that Mr. Soh had been approached before on more than a few occasions) is that neither of the founders have their children working for the Group. Mr. Soh, who is 63 this year, has three children who are pursuing their own professions – one is a legal counsel, one is in medical school while the youngest is in law school. Mr. Ong, who is 59 this year, has two children (both daughters) – one is studying in the USA while the other is an architect (information courtesy of Pulses Magazine Sep 2010 Issue). This would imply that the founders would wish to sell off the business if their intention is to retire, and since they have no direct descendants who are going to manage the business. Assuming Ben Soh’s vision of doubling revenue really comes true by 2014, he will be 66 years old while Simon Ong will be 62 years old. If Kingsmen proves to be such a valuable business, I am sure Mr. Market will, in time to come, price the Company accordingly as well. Considering the fact that Kingsmen has a much more established client base and international reach as compared to Cityneon, it might even be justified to accord it a much higher valuation premium than the 12.7x which was offered for Cityneon three years back.

Until the day comes, I will, in the meantime, continue to enjoy healthy dividends from the Company (1.5 cents interim, 2 cents final and 0.5 cents special for FY 2010).

This concludes my comprehensive analysis for Kingsmen, and the usual disclaimers apply. I will probably only do another review and analysis of Kingsmen after the release and digesting of the 1H FY 2011 results (tonight).

Porter’s Five Forces Series Part 3 – Threat from Substitutes and Customer Power

2011-08-06T19:00:00.002+08:00

In this third part of the Porter’s Five-Forces series, I shall be combining two of the five forces into one post as the threat from substitutes is very short and sweet, while customer power has more to elaborate on. This continues the series on Porter’s Five-Forces which was left behind some time back as I concentrated on doing corporate analyses. Now with those behind me and the two recent AGMs of MTQ and Boustead concluded, it’s time to dive back into some academic discussions.

Threat from Substitutes

Substitutes are products or services which perform essentially the same function, and this can arise to become a serious problem for companies should their product be substituted for either a cheaper alternative, or a more efficient one. The example given in the book was that of the beverage packaging industry, whereby consumers do not differentiate between plastic, aluminium or glass. Imagine your Yeo’s Soya Bean Milk – it can come in an aluminium can or tetra-pak but the contents are still the same. Hence, those packaging companies have to be wary of materials which can eventually replace their own material to such an extent that it will become obsolete. History has shown that some products seemed invulnerable to substitutes, until one actually appeared and took away market share (and profits) by storm. One example is Eastman Kodak who were too slow to switch to digital photography; and ended up being left behind in the dust.

Even some companies which seem to be doing very well in their own industry may be vulnerable to a newfound discovery which would stun experts and revolutionize the way we live. An example would be petroleum (oil) – it seems almost impossible to envisage a world not using oil, and many industries and companies have sprung up to capitalize on the continued demand for black gold. Currently, other technologies such as nuclear power and solar energy are still not viable due to high costs and inefficiency (energy emitted), and so they lag behind as potential substitutes. But should the day come when these technologies improve by leaps and bounds, oil companies will start to sweat, and with good reason. I also recently read another article from BBC about Graphene, which is an amazing material as it can conduct electricity, is just a layer of atoms thick and has a host of other interesting properties. The article also mentioned that it could eventually replace silicon in semi-conductor wafer chips. Though this new material’s research is still in its infancy (compared to more established materials), it still goes to show how threats from substitutes may render an entire industry obsolete once it can be mass-produced commercially in a cheap way, and offers either the same or even better functionality.

Admittedly, the threat of substitutes is made even worse when switching cost for the buyers is low, and the ratio of price to performance is better; meaning that even though the substitute may not work as well as the original, it is so much cheaper that people still embrace it.

Buyer (Customer) Power

Buyer power enables customers to negotiate for better terms, prices and materials and can force down prices in an industry. Buyers are in a strong bargaining position if one or more of the following apply:-

1) There is a concentration of buyers – In an industry where there are only a few major buyers, this puts most of the purchasing power in the hands of the customers, rather than the supplier. The supplier is in a weak position if there are not many customers for it to supply to, and they can become beholden to the buyer if the buyer exerts pressure on them.

2) Product is standardized or commoditized – If the product features are much the same across all suppliers, then the buyer has the choice to freely switch between suppliers who give them the best rates. Thus, the supplier is in danger of losing business from the buyer if it fails to price competitively.

3) If the product accounts for a large percentage of the buyer’s costs – Buyers are more likely to push for bulk discounts for items which make up a large proportion of their cost of goods sold.

4) If the buyer has low switching costs – If it is costly for the buyer to switch suppliers then the supplier’s power is enhanced.

5) Buyers suffer from low profitability – If the buyer suffers from poor margins and low profits, they may continually pressurize the suppliers to co-operate with them to lower prices together, in effect cutting their gross margins down.

6) If buyers can integrate backwards – If buyers can threaten to integrate backwards and make the product then they can use this to threaten the supplier. These involve “make or buy” decisions and if the buyer can make the product without much hassle or almost at the same cost as purchasing from an outside vendor, then they are deemed to have power over the supplier in negotiating prices or terms and conditions.

7) If the consequences and risks of product failure are low – If the product or service is crucial to the buyer in terms of their system of operations then the buyer is less likely to haggle on price. A very good example of this is the Blowout Preventer (BOP) for MTQ. The costs of failure of the BOP are very high (in terms of $ and human lives as a result of the Deepwater Horizon disaster), thus the customers of MTQ are not likely to haggle if MTQ raises the price of repairs and maintenance of their BOP.

8) Buyer has plenty of information – It goes without saying that if the buyer has a lot of intimate knowledge of the supplier’s cost of operations and margins, then they are in a better position to bargain since they will be aware of how low prices can be set before the supplier makes a real loss.

This concludes Part 3 of my Porter’s Five-Forces analysis. The next part of this analysis will focus on Supplier Power.

July 2011 Portfolio Summary and Review

2011-07-31T13:00:00.014+08:00

July 2011 was interesting as there was quite a bit of unexpected corporate news flowing from the companies which I own. This was surprising considering I only own 6 companies right now in my portfolio, one of which is a REIT. Also for this month, Suntec REIT and SIA Engineering released results which will be profiled in the respective company summaries below. Over on the political front, Norway suffered a horror terrorist attack on July 22, 2011 which highlighted just how vulnerable we all are to this kind of violence. Meanwhile, Spain and Greece continue to hog the headlines on their debt problems; and USA has decided to join the party with the Senate debating on whether to raise the debt ceiling to allow the country to borrow even more money. As if the amount they owe wasn’t obscene enough…..

On the local economic front, COEs and HDB resale prices have hit yet another high – it’s like a tired old stuck record when reading this kind of news. Nothing and nobody seems to be able to contain or control the raging increases in the cost of cars or of public housing, despite the many “draconian” controls imposed on the housing market in the past 18 months. With MAS tweaking their inflation forecast for the year from 4% to 5%, I somehow think that the economists over there are under-estimating the problem. As I mentioned before in a previous post, the combination of cheap debt and hot money will continue to drive prices up in the short-term beyond fundamentals. Therefore, for couples who wish to buy for the long-term, make sure you get a fair deal and stick to BTO flats if that is possible (i.e. income ceiling below $8,000).

There has been an addition in cost to my portfolio for July 2011, and this is attributed to an increase in stake in MTQ as a result of their recently announced acquisition of PSL (Premier Sea and Land). Cost has now increased from $210,000 to another new high of $219,000. As explained before, pending the refund of monies paid for my daughter’s hospital bill (through insurance claim which is taking forever to process), I shall not have very much more monies to channel into equities in the short term as I need to maintain a reasonable and sufficient cash buffer for emergencies.

Below please find my portfolio as well as corporate summaries for July 2011:-

1) Boustead Holdings Limited – On July 8, 2011, Boustead announced that its wholly-owned subsidiary, Boustead Projects, had entered into an S&P Agreement to sell a strata divided building to be constructed at 61 Ubi Avenue 1, for S$38 million. However, the sale will only impact FY 2014’s earnings. On July 22, 2011, Boustead Projects was awarded a Design, Build and Lease contract for Continental Alloys to build an integrated distribution and manufacturing facility at Jurong Industrial Estate. The facility will be completed in 2Q 2012 (which means costs will be incurred till then, after which recurring revenues will be recognized from rental income), and will take up 5,500 square metres. This latest contract brings Boustead’s industrial leasehold property portfolio to >90,000 square metres. Further on July 27, 2011, Boustead Projects was presented with two very prestigious awards at the Workplace Safety and Health Awards 2011. They are the WSH Silver Performance Award (third consecutive year running) and Safety & Health Award Recognition for Projects (“SHARP”) for zero accidents achieved over 1.5 million man-hours at its largest project – the $107 million Rolls-Royce Achord at Seletar Aerospace Park. I also attended the AGM held on July 29, 2011 and will do a post on it in time to come.

2) Suntec REIT – Suntec REIT released 2Q 2011 results on July 21, 2011. DPU for 3Q 2011 was 2.532 cents per share, a marginal increase over last year’s DPU despite the acquisition of 1/3 stake in MBFC. This was due to the DPU dilution arising from the issuance of new shares to fund the acquisition. Occupancy rates remained high for Suntec’s properties, though, and this should underpin the healthy dividends to be received every quarter. The dividend will be paid on August 29, 2011.

3) MTQ Corporation Limited – On July 6, 2011, MTQ announced a significant acquisition – that of Premier Sea and Land (PSL) and PEMAC for US$19.6 million. PSL provides oilfield equipment primarily used for drilling applications in Southeast Asia and has relationships with over 20 OEMs. PEMAC is a machining facility specializing in repair, retrofitting and component manufacturing of oilfield equipment and machinery and speciality fabrication. The acquisition was at 4.7x PER as PSL generated US$4.1 million worth of profits for FY 2010 (ended Dec 31, 2010). It was funded by US$5.79 million in cash and US$13.51 million in debt.

I also attended the AGM which was held on July 22, 2011, and took the opportunity to engage the Management on pertinent issues relating to the business; and to clarify doubts I had over recent acquisitions by MTQ for its Engine Systems Division as well as NMS and PSL. I will be summarizing the findings and thoughts on the AGM in a future post. I will also detail my thoughts on the latest acquisition of PSL and of MTQ gearing up into a net debt position to finance this purchase, among other matters. Some of my comments will be in line with a recent article by The Edge Singapore with Mr. Kuah Boon Wee regarding PSL as well.

*Please Note for MTQ – XD date has passed for MTQ and I have chosen to accept scrip, but the scrip dividend issue price has yet to be determined. Thus, for computation of XIRR returns as a benchmark against the STI, I had to assume that the dividend was paid in cash on September 16, 2011 in order to give an accurate XIRR figure. When the issue price of the shares is determined and I know my full allotment of scrip, the market value of my portfolio will then be adjusted for my September 2011 portfolio.

4) GRP Limited – GRP announced on July 13, 2011 that it was divesting itself of its 63.5% stake in GRP (China) Pte Ltd, which is its uPVC business division. The consideration for the disposal will be $1.92 million and GRP will book a gain on disposal of $313,327 for FY 2012. The rationale for the disposal was that uPVC has seen revenue declining for 3 consecutive financial years, and was also unprofitable and (I suspect) bleeding cash. Divesting it will free up GRP to re-focus resources on its Hoses and Marine and Measuring Instruments Division and also allow some working capital to be channelled back into the business. Overall, I see this as a mildly positive move but the financial effects are still unknown until the Company sends the Circular to shareholders seeking approval for the disposal in an EGM. Meanwhile, it is likely that FY 2011 results will be released in late August 2011.

5) Kingsmen Creatives Holdings Limited – Rather predictably, there was no news from Kingsmen Creatives for July 2011. Their 1H FY 2011 results should be released around mid to end-August 2011, and I shall be expecting the usual 1.5 cent/share interim dividend to be declared, barring unforeseen circumstances.

6) SIA Engineering Company Limited – SIA Engineering released their 1Q 2012 results on July 26, 2011. Revenue fell by 3.7% to $277.6 million, while net profit attributable to shareholders decreased by 3.8% to $68.1 million. If one-off items were excluded, then net profit attributable to shareholders would have decreased by just 0.7%. I shall not be doing a review on the results as this is just the 1Q results release. I skipped the AGM which was held on July 22, 2011 (same day as MTQ); and the dividend will be received on August 11, 2011.

Portfolio Review – July 2011

Realized gains have increased to S$62.6K due to SIA Engineering going ex-dividend on July 26, 2011 and Suntec REIT going ex-dividend on July 27, 2011. For MTQ, as I have decided to choose scrip dividend, I will not be recording any realized gains from dividends. When the scrip dividend is credited to my CDP account on September 16, 2011, I will automatically adjust my cost to reflect the reduction in cost arising from the scrip shares, and my portfolio market value will also account for the increased stake multiplied by the closing share price for September 30, 2011.

For the month of July 2011, the portfolio has increased by +0.5% (using XIRR in MS Excel to compute) against a 0.0% fall in the STI (flat); thus my portfolio performance has finally outperformed the STI by 0.5 percentage points. This was much better than June 2011, when the portfolio was on par with the STI. Cost of investment has increased from S$210K to S$219K and unrealized gains stand at +12.6% (Portfolio Market Value of S$246,500).

I guess I still have a “backlog” of posts especially the super long overdue Kingsmen Comprehensive Analysis Part 5, as well as the continuation of the Porter’s 5-Forces Series. Inadvertently, I started a new series on Annual General Meetings as well! I guess I have quite a bit on my plate to blog about but as usual the problem is time constraints due to work and family commitments.

August 2011 should be a fairly interesting month. I am expecting 1H 2011 results from Kingsmen Creatives, FY 2011 results from GRP, and quarterly results (1Q 2012) from Boustead. As MTQ only reports half-yearly results, I will have to wait till October for them to report 1H FY 2012 results. Of course, I am expecting dividends from both Kingsmen and GRP.

My next portfolio review will be on August 31, 2011 (Wednesday).

The Annual General Meeting (AGM) Part 1

2011-07-24T01:06:00.000+08:00

After attending more than my fair share of AGMs, I thought it strange that I did not write a generic post on how I usually prepare for an AGM, or how I go about extracting information and conducting due diligence during an actual AGM. It’s interesting because the process often involves not just being ready with the questions which you have prepared, but one should also carry with them the willingness to warmly engage Management in discussions on the Company’s prospects and strategies. It’s as much a human relations exercise as it is an exercise in financial and corporate (business) analysis. Of course, it can be argued that one gets better over time as one attends more of such AGMs and gets to meet their fair share of interesting and varied personalities, ranging from the downright unfriendly to the exceptionally warm. This post serves to highlight the preparatory efforts which I undertake before an AGM, an account of what to do during the AGM, as well as the follow-up required after the AGM to verify facts, collate information and glean valuable insights.

Part 1 will discuss mainly on the Annual Report, how to go through it, and what information to glean from it; as well as the preparation of questions and pointers to be brought up during the AGM. Part 2 will focus more on the AGM itself, including the proper decorum to observe, things to do and people to approach. Part 3 will wrap up with a discussion on the aftermath of the AGM and any follow-ups required, as well as how to analyze, collate and make sense of the information gathered in order to glean knowledge from it.

Preparatory Work – Receiving the Annual Report

Obviously, one could argue that the very first step towards preparing for the AGM proper consists of reading and downloading the Company’s latest full-year financial results from SGXNet. This is usually within a window period of 60 days from the date of year-end for the Company. For example, in the case of Boustead, their year-end was March 31, 2011 and results were released on May 26, 2011 (within 60 days) on SGXNet. The AGM, though, is usually held about 2 months after the release of the results; in this case for Boustead it will be held on July 29, 2011 (Friday). This means that four (4) months would have elapsed from the date of release of the full-year results till the actual date of the AGM. Note too that the AGM is almost always held on a weekday, therefore in order to attend, one must take leave if one is engaged in full-time employment. I try to do so as much as I can as this is a once-a-year affair.

For the Annual Report, however, it will usually be issued two (2) weeks before the date of the AGM. In my case, I received Boustead’s Annual Report in my mailbox on July 18, 2011 (Monday) but the online soft copy version was already available on the Company’s website as early as July 15, 2011 (Friday).

Obviously, one will not have the luxury of time to peruse through the Annual Report, as there are only about 12-14 days between the time of receipt of the Report, till the date of the AGM. Below are some pointers on the salient aspects to look out for in the Annual Report to cut down time taken for analysis.

Preparatory Work – Digging Deep into the Annual Report

The Annual Report (AR) is usually perceived as a rather daunting document, as thick as a small encyclopedia and filled with glossy pages lauding the Company’s achievements. Essentially, though, it has two main sections. I call them the marketing section and the financial section. Marketing section consists of full-page, mostly glossy photographs of the Company’s projects, products or premises, while the financial section is chock-full of numbers, tables, explanations and (obtuse) accounting facts and estimates. Most people who are not accounting-trained would tend to shift their focus almost exclusively to the marketing section, as the pages there are easy to read, usually in full-colour, presented in columnar format (for easy comparison) and the English used is not too archaic. For example, using Boustead’s FY 2011 AR as an example, the Group’s four divisions are clearly segregated and explained, and tables are used to summarize major projects and milestones for each division. There is a Chairman’s Statement which is 4 pages long, as well as a financial summary showing five years of revenue, profits and dividends. While I do not deny that this section can be used as the basis for questions, it is usually the stuffy numbers in the financial section which should be scrutinized up-close, and for a person without accounting knowledge this task would seem like a mammoth one. Therefore, I would strongly encourage readers to acquire a basic understanding of accounting by reading books such as “Value Investing for Dummies” which explains the key concepts involved in the three financial statements, as well as some other accounting concepts.

It would be a good starting point to concentrate on the numbers which “stand out”, meaning any big changes in profit margins, revenues or anything which is an aberration and not quite “normal”. What these are will, of course, vary from report to report, but they generally centre on the following:-

1) Significant Events - These include acquisitions and divestments during the financial year, and their effects would have been described in notes such as Goodwill, Subsidiaries, Associated Companies or Investment/Investment Properties.

2) Receivables - Bad debts being written off, more being provided for. A note on Receivables will usually contain a summary of these by ageing profile, and under Risk Management the auditors will also assess the fair value of receivables to ensure no (further) impairment is required.

3) Debts - This note can be pretty detailed for a company with significant loans, and will include comprehensive conditions on each loan, repayment amount, interest rates (usually Cost of Funds + Spread), currency and repayment period. These can give an indication of whether the Company needs to refinance soon, as well as give an idea of the finance costs for the coming year.

4) Subsequent Events - These include significant events which occurred after the financial statements were released but before the printing of the AR. Some of these may have a material impact on future financial periods and may give rise to questioning.

5) Investments and Investment Properties - For those analyzing an asset play, this note would be very useful. The market value of properties may exceed their book value and thus hidden value may be present in the properties which a Company has.

6) Commitments (Contingent and Capital) - These include potential liabilities which have yet to crystallize due to uncertainties such as lawsuits or corporate guarantees; as well as commitments for capital expenditure in the next financial year which may give a sneak peak as to how much cash needs to be channelled to these purchases.

There are, of course, other aspects which need to be looked at on a case by case basis, but the above is a simple laundry list of the more important notes to look out for when browsing through the AR.

Preparatory Work – Taking Notes

As one peruses through the AR, one should continually jot down notes on a separate piece of paper (or type it out if you wish) in order to organize your thoughts on what you wish to be clarified. Structure and focus your questions to make sure you tackle the crux of the issue and not just to scratch the surface. For example, a question on debt may require you to query on why borrowings had to increase so much when cash flows were actually healthy and seemingly sufficient, and at the same time, one can also ask about the cost of debt if Management is willing to reveal the blended yield for the Group.

Formulating A List of Questions

After reading through the AR and making notes, I will usually compile a more detailed list of questions for the AGM. These are categorized into business strategies, business divisions, financials and plans/prospects; but readers are free to choose a format which they are comfortable with. The key is to make sure you cover the points you wish to raise systematically, and to ensure you organize your thoughts well. This is because you will seldom be able to keep glancing at your list during face-to-face interactions as it may be construed as rude (more on this and other etiquette in Part 2). Try to remember key information such as net margins, important debt amounts, and other numbers such as revenue growth, profit growth, projections, numerical forecasts and dividend yields. This is not so much to impress Management but it also allows you to flow more smoothly from one question to another should you receive a reply which allows you to do so. Since questioning and fact-finding can be a fluid affair it is important to have some facts and figures at your fingertips in order to make the process a whole lot more efficient and effective. Remember too that Management has limited time to interact with shareholders and may have to rush off for some important meeting or do what they do best – work to grow the Company to greater heights!

Part 2 shall delve into the AGM proper as you arm yourself with your list of questions. It also describes basic behaviour to be observed, dos and don’ts and what else you should bring along.

Boustead – FY 2011 Financial Results Analysis Part 3

2011-07-17T13:00:00.026+08:00

Part 3 of my Boustead’s FY 2011 analysis will feature the entire transcript of Boustead’s FY 2011 results audiocast. As per prior years, I will be inserting my own thoughts and comments periodically throughout the audiocast session, and these will be indicated in square brackets [ ] and in blue. However, this analysis will be different from previous years in that I will NOT be sharing any insights from the Annual Report 2011. I will be splicing that into a separate post after I attend the AGM to be held at Starhub Green on July 29, 2011 (Friday) and combine my insights and remarks into one post to make it easier for readers (and myself) to digest. If the information is too voluminous (i.e. audiocast cum annual report), it makes it difficult to read on and by splitting it into two separate posts, I hope to be able to achieve better clarity and focus on these two separate yet connected events.

After the transcript portion, I will also discuss on plans and prospects briefly (as gleaned from the audiocast); but a more in-depth discussion of this will be provided after the AGM as I intend to touch on more detail during this event.

Boustead FY 2011 Audiocast Transcript (recorded on May 26, 2011)

Question (Tan Choon Kiat): I noted that the geo-spatial division has performed very, very well. And that is despite, you know, we sort of like was saying the growth of this division would plateau off. But it doesn’t seem to be so, in fact the geo-spatial division grew nearly 30%. Eventually, out of this 27% PBT growth, how much would you attribute to favourable currency effects, and also specifically, what is the sustainable long-term growth (for this division) in the next 3-5 years which your team is actually looking at? The other thing, of course, the recurrent part of the real-estate portfolio that you guys have been building up is looking very nice and is steadily growing notwithstanding the fact that the size of each project secured is becoming a bit smaller. My question right now is a very pointed one – it appears to me that looking at these two divisions alone, the profit before tax (PBT) of these two units seems to be hitting $35 million and is still growing.

FF Wong: First question first, Choon Kiat, Geo-Spatial. The main reason for the growth in this financial year was not really because of the currency. In fact, it is because of the growth of countries outside of Australia, especially Singapore, Indonesia and Malaysia too. And the other thing is the maiden contribution from Mapdata Pty Ltd which was acquired two years ago. So these are the two main reasons. You asked also whether it is sustainable. It appears to be sustainable because over the years there has been steady growth, even though percentage-wise it was not to my liking, or to shareholders’ liking. But that’s also because the Australian market is maturing, and yet we haven’t really been able to quicken the steps of development especially in Indonesia. So we have been putting in serious effort in growing the markets outside Australia and it appears that it’s bearing some results, and as you know Indonesia is so big, and with the current craze in resources development, mining and so forth, we see huge potential in Indonesia, and we have also embarked on non-traditional methodology to expand the market instead of following the standard global ESRI methodology. That, I believe, should be able to give us some quantum leap with respect to the growth in those respective countries like Indonesia. I firmly believe that our growth and our revenue in Geo-Spatial will be sustainable. Next question on industrial real-estate. The size of the projects are a bit smaller principally because in the year before (2009) when we secured Rolls-Royce projects, these two projects are huge (humungous). So, by comparison with the usual industrial building projects, these are unlikely to be repeated in future from what I can see, but who knows? But there are a lot more projects in the marketplace. We have secured quite a number, especially in the last 3-4 months. I would think that there are also a lot more design, build and leaseback projects – we are negotiating quite a number of them quite near closing stage but not quite yet, so can’t make any announcement as such yet but the pipeline is very healthy with respect to design, build and leaseback. That’s not included in the order book (in the backlog). Yes I think that’s about it, I hope I have answered your questions. You can pose another question later on.

[It would seem that Geo-Spatial still has ample room for growth, even after the seemingly sharp jump in revenue and profit before tax of 26% for FY 2011. Boustead’s efforts to expand beyond Australia and into Indonesia seem to be bearing fruit, and according to FF Wong Indonesia still holds untapped potential for this Division. It’s good to know that Geo-Spatial, being Boustead’s cash cow, can continue to be milked and that the tap would continue to gush for many more years to come!]

[As for Real-Estate Solutions Division, note that FF Wong mentions that “quite a number” of DB&L projects are being negotiated, and are “near closing”. If we look at the announcement pipeline for this Division since the audiocast, there was only one announcement of a Design & Build contract worth S$23 million for Bell Helicopter; so I am guessing that these DB&L contracts are probably still under negotiation, and may be announced perhaps in August 2011 (if we look back at 2010 there was one D&B contract announced then as well as one DB&L)]

Question (Mr. KK Phua): When is the AGM held (the actual date)? I would like to make myself available to attend.

FF Wong: We have not actually fixed the date yet, but from our previous practice, it is likely to be end of July 2011.

Question: Do you foresee any further recognition of losses arising from the civil war in Libya?

FF Wong: We have done a complete review with our lawyers. We believe that our present recognition of losses and provisions should be sufficient but then again, of course, it is a long tedious process. We are not 100% sure but we are confident.

[Disappointingly, on June 24, 2011, Boustead announced that there was possibly another S$23.3 million worth of exposure for Libya as a result of a litigation involving corporate guarantees given by the Group. It seems that Libya is turning out to be a very painful and long drawn-out mistake for Boustead]

Question: Previously, you estimated the maximum Libyan exposure at $39.6 million. The provision this quarter is about $14 million. How do you view the risk of the other exposures? Would there be more provisions in the next financial year?

FF Wong: I think we just answered this question. There is about $24 to $25 million exposures in performance guarantees. We have altogether made $19.1 million provision for the whole financial year. We believe that is sufficient – as mentioned we have consulted our lawyers and have taken advice from them.

Question (Francis Teo): What is your opinion of the investment in Hankore (i.e. Bio-Treat) so far?

FF Wong: Our investment in Bio-Treat is relatively small, it’s only $4 million. We like the Management, and we have been interacting with them for nearly a year and we think that this new Management are sincere people and they are good in what they are doing. The only thing is they will be embarking on BOT projects. The business model is something which I always find not quite attractive for us, however, they have a huge network especially in China (in this industry). We feel that there is a need for them to make use of our expertise, and being associated with them will help us to open up opportunities in China, especially in areas where they do not have experience and expertise, especially in seawater desalination, pure water purification and also in industrial water treatment applications for power industries. Being associated with them, I think, is a good move.

[Somehow on Hankore, I feel that FF Wong may be investing that S$4 million more for “relationship management”, rather than through a rational and objective assessment of the business which yielded solid prospects for the business. From what I can observe from the Balance Sheet and Cash Flows of Hankore, it will probably be an uphill task for them to achieve decent profitability and sustain it through more than a few quarters. This is due to the BOT business model which requires huge upfront capex. Even though the investment is “only” S$4 million which is a paltry sum compared with Boustead’s cash hoard, it’s the principle of the matter and I certainly hope FF Wong does not let this S$4 million dwindle into something a lot less!]

Question (Desmond Wee): With regards to working capital requirements, what is a current ratio that Management is comfortable with?

FF Wong: Very good question! We are principally an engineering company. There are a lot of opportunities in this region, and some of these infrastructure projects are so attractive we would like to keep a healthy cash balance in the bank so that we can capture these opportunities as and when they occur. In other words, we are rather flexible here. I always maintain we would like to keep ourselves cash-rich so that we can capitalize on the opportunities available.

Question (Desmond Wee): Can you identify the investments made in 4Q FY 2011 (the $16 million non-controlling interest, $6.4 million trading investments and $1.5 million available-for-sale investments?

FF Wong: The $16 million I believe you are referring to the remaining 8.3% shareholding in Boustead Projects. With the acquisition of that interest, we will end up with 100% control in Boustead Projects. The $6.4 million trading investments are relating to the purchase of corporate bonds which give us a pretty attractive yield as compared to so much money sitting in the bank giving us 0.1% yield. And $1.5 million, these are the convertible bonds.

[A minor note here – FF Wong was very sharp to buy over the 8.3% stake as I believe he is aware that Boustead Projects is gearing up for greater things in time to come, so it’s good for Boustead to be able to consolidate 100% of the earnings instead of letting part of it be shared by the non-controlling interest. As for the corporate bond investments, it would be interesting to find out what is the blended coupon rate on this investments, and whether the risk of default is high on those bonds?]

Question: How’s the economics of design, build, lease, sell projects so far in terms of margins, return on capital etc?

FF Wong: It varies. For design, build, lease and sell projects, there isn’t any fixed margin per se. However, the economics (if I can understand you correctly) obviously it will be better for us if we are able to secure design and build projects that cater for MNCs, generally we will be able to get cap rate there when we sell out to the REITs or property trusts. You work on cap rate instead of design, build – that would be on the basis of EPC, generally your margin will be (of course it varies from) 10% to 20% these days, being so competitive. In the case of IBM, I think you can read from the Balance Sheet. Our investment was $46 million and we were able to re-sell it back to IBM for $68 million, so we net a profit of $22 million. So you can work out the economics, $22 million against $46 million is nearly 45-46%; so that depends on what base you use. If you use 68 as the base, then it’s 40-odd percent.

[Apparently, the margins are indeed pretty good if there is strong demand for a piece of property. On July 8, 2011, Boustead announced the sale of a yet-to-be-built strata divided building located at 61 Ubi Avenue 1 (incidentally, this is located beside Boustead House), for a cash consideration of S$38 million. It was not stated if Boustead was also responsible for building this, and what is their cost of building it]

Question: You said that you hope to leverage on Hankore’s network in China to land some projects (different kinds of projects). Would you consider EPC or would you consider collaborating with them on a BOT basis?

FF Wong: Most of the people would know that I am pretty negative about BOT, because the cash flow is just no good, and if you notice the Company emphasizes so much on cash flow. BOT is not the type of business model we prefer. Of course, there are exceptions. At the moment in China, it’s so competitive and there is so much money going around. It’s difficult to get BOT projects that would interest us. However, EPC yes, especially in areas that we can compete. I early on said desalination projects, demineralization projects, pure water projects, projects for more sophisticated applications where very few Chinese competitors have acquired the skill and the expertise (as well as the track records). We have been invited recently to bid for a water treatment project for nuclear power plant but unfortunately we are tied up here. We are working on a big project over here so we thought perhaps we will leave it to next time.

Question: Over the years, we have been talking about new areas which Boustead will be looking into. In fact, I think Boustead’s history has been checkered by a lot of hits and misses. This year we really had one big miss after what we thought had been a big hit back in FY 2007. I think everybody acknowledged that. Nevertheless, I always salute the spirit of the Boustead team when it comes to looking into new areas and ventures and executing them. At the moment it looks as if there seems to be very new ground that the Group is actively looking at. We have read in the various media through your interviews with magazines like The Edge that you have been busy looking for these new opportunities. Indonesia is actually one area, Vietnam is another area. If I remember correctly, in that interview, there has been some mention about looking at infrastructure projects that are resource-based in Indonesia. And also, I think, Boustead has a presence in Vietnam for quite a while now. Vietnam has always been {not audible}, notwithstanding the volatility of the currency. So would you care to update about two new markets? Indonesia and Vietnam and perhaps some other regions where there is something that is actually coming through materially. Also, on top of it, I was also looking at power plant potential in Indonesia. Could you elaborate on what you will be focusing on and will it be contributing to the current income meaning it could be BOO or just an EPC type of project?

FF Wong: It’s a very long question but I’ll try, I’ll try. First of all, Vietnam. We have secured a small project recently under Boustead Projects. It is a construction project – not very big but it’s the second one and going on pretty smoothly. That’s one; we’re still working on an interesting project. It is – I don’t want to be too specific, but we have been working on it for 2.5 years. We’ve been promised the project; it is a BOT project but though we have got supposedly all the approvals but the approval process is so long. Until today we haven’t been able to complete it. We were told that we definitely have secured the project but it’s not coming, so frankly I have lost a bit of interest there. I thought I had lost all interest but surprisingly, coincidentally, yesterday we had just been notified that the license had been issued. We need one final presentation on the technical arena. Our guy is going to Vietnam, Hanoi, next week and hope that this will be the last hurdle. But I can’t be sure exactly because in Vietnam, with the bureaucratic complexity. In Vietnam, we are still looking at a lot of other projects. I will not say “die”. Indonesia, we have been very active in Indonesia, especially myself, in the last year or so. Yes you are right, we are looking at infrastructure projects with respect to resources development, including mining. We hope that soon we will have some good news to share with you all. And these are the projects that will give you recurring income. It’s supposed to be closed yet not yet there, a bridge too far perhaps; let’s keep our fingers crossed. That’s all I can disclose to you. I would not let our setback in Libya deter us from venturing into countries which give us tremendous prospects. I do know that some of you who are not used to working in emerging economies, you may be frightened but it’s all a matter of matching your exposure. In the case of Libya, we were carried away with the early successes in Libya – in fact we were doing quite well in Libya. We had put in a lot of claims and the project team had also agreed and approved (supposedly) these claims to be submitted to the authorities. All of a sudden the war broke out – what can I do? Perhaps you can say that with respect to our Balance Sheet, we probably put a bit too much in Libya. We knew about that, however, which was why we brought down our equity participation from 65% to 35%, but the implementation (process) of transferring the money out just took too long, and the war just broke out. Have I answered the question(s)?

[From the reply above, it would seem that FF Wong has got quite a bit on his plate, but these various initiatives have yet to pan out successfully and thus he cannot elaborate more specifically on them due to their market-sensitive nature]

Question: But Mr. Wong, yeah yeah you have answered the questions. But let me put it this way, I think in businesses, it’s not always smooth sailing. So don’t get us wrong, as shareholders we know your team’s track record. As long as we can make good with 1 out of 5, I think that’s life, life just has to go on. No worries about that.

FF Wong: Thank you. But I think if you look at the presentation with Keith, you’ll notice in the last 7 years we have been able to achieve from 20% to 30.9% on your ROE. And that’s even with that sort of equity base which is inflated by the cash hoard. If we were to take the cash out, you would notice that our ROE has been very, very respectable.

Question: Yes, we have no doubt about that. Being shareholders in this company for coming close to 9-10 years, we have already seen the company growing from strength to strength. Let us be forward-looking in terms of what the recurrent business is actually showing, it’s already giving us quite a fair bit of comfort, and with your initiatives which have been put in, I think we definitely have good years to look forward to, as long as all the execution and processes have been well-contracted. That’s all I have to say. Thanks for all the efforts.

FF Wong: Thanks Choon Kiat.

Question: Sorry to bug on the current ratio, but I was thinking that the net cash position is a little misleading, since when the cash is removed, the current ratio falls to about 1, which seems tight. So I was wondering if Management can give a rough figure on what current ratio is comfortable for them, and how much of the cash is ready for deployment in investments?

KK Loh: Hi Desmond, this is KK Loh and I will take your question. If you dissect your analysis, let’s just have a common understanding. In the Balance Sheet, if you remove the cash, current assets will drop to $226 million; but correspondingly, for current liabilities you must remove the borrowings which will fall to $219 million, so the current ratio will be about 1.03. In our borrowings of facilities with the bank (credit facilities which were obtained from the bank), the bank is comfortable with a current ratio of 1. And in FY 2010, our current ratio was 1.78 and in FY 2011 it was 1.95; and dissecting the net cash position, it’s $184 million. But actually cash in the bank is $210 million, we net off $3.5 million of unsecured debt and long-term debt of $21.6 million which would not payable in one year. Looking at it we are quite comfortable, but you are asking is how comfortable we are with our current ratio. I think it all depends on whether we have enough facility to gear. If you can borrow to the hilt (the exposure), and you have good businesses, why not? But at the present moment, we are cash-rich so I think that is not our problem in terms of the ratio. Hope I answered your question. Thank you.

------------End of Transcipt----------

Plans and Prospects for Boustead (based on audiocast)

1. There was not much mentioned about Energy-Related Engineering, and the press release itself alludes to high oil prices benefitting this division, though growth was not expected to be significant. It would seem that short of a significantly large M&A for this division, there would be limited growth and I expect it to just plod along. Though it is expected to be profitable, I cannot see any catalysts which could spur a jump or permanent spike in revenues and profitability as most of the revenue is contract-based and therefore lumpy. Assuming Boustead is able to re-structure all units successfully, perhaps the increased efficiencies and economies of scale could improve margins further for waste to energy projects, but let’s wait and see.

2. Notice that almost nothing was mentioned or asked about Salcon (Boustead’s water and wastewater division)? It seems that after announcing the termination of the project in Libya due to the civil unrest, Salcon has not come up with any meaningfully large contracts, or even small ones for that matter. Interest in this division has also gradually waned as the turnaround had probably taken too long and there is no confidence in the division being able to sustain profitability after the Libyan blip. I guess questions about Salcon would be reserved more for the AGM rather than the audiocast.

3. The Real-Estate Solutions Division appears to be headed in the right direction, with FF Wong alluding to more deals in the next few months and a build-up in Boustead’s recurrent income flow through more DB&L projects. The fact that Boustead Projects can cater to niche markets bodes well for the now 100%-owned subsidiary, as this means more projects of significant size and clout would raise its profile and create a positive feedback loop. It remains to be seen if the division can manage to scale new heights in terms of revenue and profit contribution, as a large portion of its contracts are “lumpy” as well; but with FF Wong’s assurance that he is building up the DB&L orderbook flow, this may mean that revenues and cash flows at Boustead Projects would become more stable, consistent and predictable. One positive side effect is that dividends may also increase as a result.

4. Geo-Spatial can be classified as a slow performer, and is usually under the radar when it comes to shareholders asking about Boustead’s performance. I guess it can be classified as the least “glamorous” of the 4 divisions and many (including myself) do not fully understand the technical aspects involved in this division’s services being provided. It is evidently the cash cow division of the Group as it has high barriers to entry, high gross margins and very healthy cash flows (as most of its customers are government agencies and thus have the ability to pay). In terms of projected growth, unless another good acquisition like Mapdata Pty Ltd comes along, I would expect a 5-10% slow but steady growth for this Division. I will not rule out a possible collaboration or M&A for this division though, knowing how Boustead can evolve and continue to leverage on emerging cutting-edge technologies to enhance the user experience (with whereto.sg being launched recently), I feel this division has the latent potential to grow further, just that it requires patience and time.

5. On the investment front, it appears that Bio-Treat’s investment in Hankore will be a very long-term strategic kind of partnership, as FF Wong himself alluded that he does not take too well to the “BOT” business model for Boustead itself; but is somehow willing to invest in a company which derives the majority of its revenues from BOT projects. Granted, Hankore does have many concessions in China and the most recent announcement from the Company was that it had inked a strategic cooperation agreement with the Xianyang City Environmental Protection Bureau and was granted the preferential right to invest in environmental projects with value not less than RMB 1 billion. At the same time, on July 13, 2011, Hankore also announced a new substantial shareholder Firstree Group Limited which purchased 338,374,474 shares (8.17%) at a price of 5 cents per share. This is 20% higher than Boustead’s 100 million share investment at 4 cents per share, and makes Firstree the second largest shareholder of the Company.

6. Boustead’s ongoing cash management program is seeing the Group invest in corporate bonds, and utilizing their idle cash to generate returns at least above inflation. While the exact returns are not known, my understanding is that they invest in short-term liquid corporate bonds which can give a decent yield; but which also probably have a probability of capital loss. It will be good for me to clarify this point with them during the upcoming AGM.

My analysis above is predicated on the fact that some queries need to be raised during the AGM, and more questions will probably need to be raised as well after browsing through the Annual Report 2011 in greater detail. But for now, these are my observations and my accompanying analysis of Boustead.

Personal Finance Part 23 – Functional Versus Status Items

2011-07-12T18:30:00.001+08:00

Looking around me daily at Singaporeans around me on buses and the MRT, I have come to realize that possessions do indeed constitute a form of “signalling” to tell others more about yourself. Whether it be branded goods, an iPod or a luxury car, all these material possessions are a way of declaring your financial status, or in some cases, showing off how indebted you really are! I was mulling over this over the last few weeks, and decided to write something on it which is appropriately titled “Functional Versus Status Items”. I will seek to explore items which many possess which can be classified as just being functional, as compared to having some sort of status attached to it. For each category, I will state the functional items within and the approximate cost, then compare this to a similar “status” item and state its cost as well.

Clothing

Clothing is arguably one of the true bare necessities of life, other than food, water and air. For to be clothed is to be protected from the elements and their harsh effects, and to prevent our skin from the harmful effects of radiation from the sun. But for some, clothes are also used as a means of expression of taste, style and individuality. For myself, I usually dress in a simple T-Shirt with Bermudas or for working sake, long-sleeve shirt and long pants. These are usually not branded and the long pants are from G-2000. Functionality would be simply to make one look presentable and to ensure one gets protection from the elements, but for people going after status, they could spend in excess of $150 for a shirt and probably $200 for a pair of “branded” pants. For my shirts, they are mostly in the $30 to $500 category and for pants, they range from $49 to $69 at G-2000 sales (GSS is still on as I type this). Thus, one could conceivably spend 2 to 2.5 times more buying branded clothing as compared to non-branded ones.

For casual wear, bermudas for me usually cost $30 to $40 a piece while T-Shirts can be from various tourist destinations like Redang, Phuket or Cambodia and cost less than S$5 a piece. I am not aware of the cost of a similar “status” T-Shirt and Bermuda but I am sure it could be more than twice or thrice the amount.

Spectacles (and LASIK)

The basic aim of spectacles is to improve your eyesight, but there are those who would make a fashion statement out of it nonetheless, which truly baffles me. Most of the time, I would visit my nearby neighbourhood spectacle shop to have a pair of lens and frame made for about $200/-, but moving around the MRT I have seen young adults wearing a particular brand of Emporio Armani spectacles which I guess could cost in excess of $500? The frame is thicker closer to the lens and has the symbol of the black eagle on white, and it looks more sturdy than normal frames, but otherwise still manages to sit on the bridge of the nose and enables the eyes to focus through the lens. So functional versus status implies a cost saving of about 50-60% in this instance.

And for those who do not wear glasses, ask if they have gone for expensive LASIK treatment to permanently correct their eyesight. The treatment is much cheaper (and safer) now (compared to 5 years ago) and costs probably around $999 per eye, for a total of about $2,000+ (including eye-drops and follow-up clinical sessions). The reason I avoid it is not because of the cost (pretty expensive in my opinion and no guarantee of permanent freedom from short-sightedness as it can still relapse), but also due to safety issues such as blurred vision and complications. Call me risk-averse but I’d rather save my money and my potential anguish and stick to my tried and tested spectacles.

Bags/Wallet/Shoes

I lumped these three items together because they usually come together when one shops, especially for men. I tend to buy a new bag cum wallet and shoes at the same time if I need a change, but I know women probably have very different shopping habits. For functionality, a wallet is simple a place to store your cash, credit cards and coins; while shoes are to protect your feet. Yet many also choose to indulge in the status aspect of wallets and shoes. For ladies, the most obvious would be the purchase of a branded handbag, be it Coach, Prada, Miu Miu or the ever-famous LV. This aspect differs from that of men as women usually tote their bags around and having a beautiful label usually boasts of spending power and wealth. Such bags can cost in excess of a few thousand dollars, compared to the around $100 discount handbag (which may be a remnant of last season’s fashion statement, perhaps) which my wife purchases at Robinsons or Isetan. So that is a premium of almost 30-40 times just to “look good”. Wallet-wise, I stick to Braun Buffel around $98 as it is made of good leather and has enough compartments + an easy to access coin pouch. I’ve seen more branded wallets such as LV going for a few hundred, so I figure I’ve saved about 50-60% by sticking to functionality over status.

As for shoes, my belief is that they should look decent for work, and for leisure they should have the effect of protecting you from many hours of walking (yes, I am a walking freak). Thus, a decent $49 to $69 pair of black working shoes will suffice from OG or Robinsons (during a sale). The more expensive working shoes can cost up to $89 to $149. For casual shoes, I buy those costing at most $89 for decent comfort and soft material, and I guess in this area I don’t save that much; but brand wise it is not anything status-related like Hush Puppies.

Mobile Phone

Oh, now we have come to the mother of all status items – the mobile phone. This probably constitutes the most pervasive and conspicuous status item which everyone on the street is carrying but which not everyone is aware of. Most of the newer models of smartphones (including Blackberry, iPhone 4 and Android-based phones) are considered status items as they include functions like surfing the net, taking photos, downloading music and other nifty programs. To me, a phone is basically a tool for communication; thus the basic functions would be to call and SMS. Hence, I have retained my 5.5 year Nokia model from the dinosaur era and it still works very well, has a decent battery life of 2-3 days without recharging, and can withstanding quite a few occasional knocks without complaints. My phone came FOC (of course) with a new contract donkey years ago, while the new smartphones like iPhone 4 usually come bundled with data plans and cost $400-$500 upfront with a $49 monthly subscription before GST. I think I probably saved about 60-70% in the long run in terms of total costs by avoiding functions which I can live without (like MSN on the go and updating Facebook with every single morsel you chew on).

This also happens to be (unsurprisingly) the item which everyone else seems to badger me about. In order to keep up with the crowd and the so-called “status” of being a manager, I am constantly asked to upgrade to a snazzy-looking smartphone by concerned colleagues and close friends who hand me that “oh you are so pathetic” look. Trying to manage the handful of them has kept me busy enough without even considering the upgrade to a “better” phone (no, this is NOT a joke). After some moments of reflection and intense contemplation I concluded that I did not need those functions anyway and I was very contented with my Nokia phone, and I remain happy and satisfied to this day. The “harassment” continues unabated, however, but this is part and parcel of living in a society which places “status” over “functions”.

Watch

The basic function of a watch is to tell the time, but as usual there are many functional watches and there are also many status watches. There are some who argue that watches like Rolexes constitute a viable investment, as their value will not depreciate and it can be handed down to the next generation. But for myself, I used to own a watch which told the time but ever since that broke down, I relied on my (old but trusty) mobile phone to remind me of the time; and those who see me in real life will not that I do not wear a watch, and have not been wearing one for more than a year. I still am punctual for all my appointments and am hardly, if ever, late for work; so it’s a matter of discipline and having that innate sense of time and how long it takes to engage in certain activities.

Status watches can range from anything around a few thousand to hundreds of thousands of dollars, so I will decline to speculate on how much I saved by not owning a watch; but you get the idea.

Summary

Well, I could go on, but I think the above is a simple laundry list of items which one can choose to be purely functional, or having some sort of status element attached to it. Some may even argue that a hybrid exists – functional items with a hint of status (mid-range watches and wallets), and I do not deny this. For myself though, I am a bare necessities guy and I hardly spend on anything deemed status-worthy, thus this post is just to share how much one could save if one drastically cut down on his status “wants” and lived a simple yet fulfilling life based on family, friends and relationships. Possessions may fade but the joy of experience persists – clichéd but very true in my opinion!

Boustead – FY 2011 Financial Result Analysis Part 2

2011-07-06T19:00:00.002+08:00

Part 2 of my Boustead’s FY 2011 analysis will touch on divisional analysis, and will also provide some insights into Boustead’s varied divisions and talk about the prospects and plans for each. I guess I have probably done this about three times already in the past, but please bear with me as I feel that this is an essential part of the analysis as it seeks to break down the financial results into divisions; and for Boustead its divisions are so diverse that each should be scrutinized on its own merits. I will do the usual divisional breakdown analysis, as well as the margin analysis for each division; and add in my own comments and views.

Divisional Revenues Breakdown and Analysis

Glancing at the table above, it can be seen that Boustead had managed to grow revenue for Engineering Services to new heights, as a result of steady oil prices and a burgeoning order book for their Real-Estate Solutions Division. Sadly, Salcon did not do well due to slower recognition of projects, and there was also an absence of a large contract like the one for Toshiba Corporation in FY 2010. The boost in revenues therefore came mainly from Energy-Related Engineering, rising 15.2% to $140.9 million, and Real-Estate Solutions Division, rising an impressive 61% from $183.7 million to $295.7 million. This was despite the lack of recognition of any revenue at all from the (now) suspended Libyan Township Project (Boustead Infrastructures) due to the ongoing civil war conflict. Boustead’s Oil and Gas Division continued to do well as oil prices remained firm and their downstream services were very much sought after. In spite of a “subdued” performance from their upstream business and solid waste recovery business, the division still managed to post a rise in revenues year-on-year.

One would notice that Real-Estate Solutions Division now takes the lion’s share of revenue, as a proportion of Engineering Services Division. It made up 63.6% of revenues as compared to just 50.9% a year ago, and I am confident that this is the reason Boustead decided to buy out the minority interest in Boustead Projects (of 8.3%) during FY 2011 and make Boustead Projects a wholly-owned subsidiary. As a proportion of total revenues of $560.6 million, Real Estate takes up 52.7% of total Group Revenue, up from just 41.9% a year ago. This attests to Boustead’s strategy of focusing this division on a niche market in which it can compete very effectively and “lock-in” good margins. Boustead Projects is also building up its portfolio of Design, Build and Lease (DBL) projects which provide recurring income and cash flows, apart from just bolstering their Design and Build order book.

A somewhat surprising result also came from Geo-Spatial Division, which saw revenues increasing 26.6% from $74.8 million to $94.7 million. The major contributor to this was Mapdata Pty Ltd which was acquired in FY 2010, and FY 2011 saw a full-year contribution from this subsidiary. I have always maintained that this division is Boustead’s “Cash Cow”, and so I had expected slow but steady growth of 5-10% per annum; so I guess the results more or less blew me away! I do feel, however, that this may just be a one-off “spurt” due to the recent acquisition, and growth will likely moderate and slow down into either single-digit, or at most low-teens by FY 2012. Of course, as long as the division continues to generate tons of free cash flows, I for one will not be complaining.

Divisional Margin Analysis and Review

The numbers in the above table show throw up some very interesting observations. I guess it really pays to look deeper into the margins per division and not just rely solely on revenue figures and revenue contribution, as that only tells one side of the story (and not even the most important side). This is because margins often give a more detailed insight into what is happening within a division or company, and can offer tell-tale signs of trouble if one knows how to read and interpret the information.

Note that for Energy-Related Engineering Division, PBT margins were actually lower for FY 2011 (at 12.1%) compared to FY 2010 (at 16.3%). As a result, the increase in revenue of 15.2% was negated and PBT fell 14.6% to $17 million. No specific explanation was given either in the press release or audiocast as to the reasons behind the margin erosion, but I suspect this could be due to the nature of the contracts, with most of them being from the downstream oil and gas division which may command lower margins. For FY 2010, it could be that higher margin contracts were secured by other sub-divisions and resulted in a mix which yielded a higher PBT margin. Though contract flows are likely to remain relatively healthy due to the resilient oil price, I am concerned as to the sustainability of margins and whether they can improve back to FY 2010 levels; hence I will probably raise this as a pertinent concern during the upcoming AGM.

Water and Wastewater Engineering Division was actually doing somewhat decently before the massive write-offs due to the Libyan conflict. Boustead reported that PBT would have been $3 million if not for the write-offs, so based on a revenue base of $28.7 million, that would yield a PBT margin of about 10.5%, which is lower than last year’s 14.2%. Still, I take comfort in the fact that the Libyan write-off is a one-time adjustment and that Salcon is still managing to remain profitable in spite of stiff competition and niche focus. I had originally harboured hopes of seeing Salcon report three consecutive years of profits but as a result of the write-offs, this was not to be. For FY 2012, I am optimistic that the division can get past its troubles and shine again under the capable leadership of FF Wong.

Real-Estate Solutions Division had its results somewhat distorted by the sale of property to IBM, so the 61% surge in revenue must be adjusted for that. The PBT margin had improved to 12.8% which shows that the division is performing robustly, and notwithstanding the distortion the division has also built up an enviable track record of handling niche projects in the aerospace and electronics industries. The Division has, since the release of its FY 2011 results, secured more D&B projects as well as a few DB&L projects, and is on track to continue to grow its base of recurring income and cash flows.

Geo-Spatial Division was relatively stable in terms of margin performance, and netted a very high 25% PBT margin. Hence, growth would only come from top-line as the division expands through either acquisition or strategic alliances. This cash-cow division of Boustead has been performing well since Day One when I became a shareholder, and I suspect a lot of the dividends have come from the steady performance of just this division alone, against the more volatile results of the other three divisions.

Prospects and Plans by Division

I could probably provide a more comprehensive commentary on the above if I had attended the AGM, and if the Annual Report 2011 was in front of me! Nevertheless, I shall summarize the strategy for each division based on information which is already available.

For Energy-Related Engineering, Boustead will continue to focus on its upstream, downstream and waste to energy units to get them running on full throttle. Somehow, I feel that these three sub-engines have yet to run at full steam, thus depriving the division from realizing its full potential. With oil prices are a recent high (though they have somewhat moderated), this should bode well for this division and it has secured about $45 million worth of contracts for FY 2012 thus far.

Salcon is an enigma, to me at least. It’s tough to figure out if it does indeed have the competitive advantage which it touts, in order to bid for specialized projects which are very different from the BOT or BOO model which traditional water treatment companies go for. It also has the likes of Hyflux and SembCorp Industries as major competitors to contend with, so I really cannot tell if the division will continue to do well. Rather than struggle in its uphill task, my thoughts are that Boustead should consider divesting this division and focusing on the other three instead.

I guess Boustead Projects (now 100% owned) should continue its trajectory of contract wins, and I feel confident that this division can sustain its revenue levels and also generate good cash flows. Boustead Infrastructures is almost a complete write-off due to the problems in Libya, and with the additional exposure for Boustead due to the corporate guarantees, I do not see much light at the end of the tunnel. I guess Boustead would try to mitigate its loss where possible and recover as much as it can.

For Geo-Spatial, growth will definitely moderate as the effects of the acquisition tone down. But with sustained demand and good margins, this division should continue to perform well. There have been no specific plans mentioned to grow this division but I will find out more during the upcoming AGM.

Part 3 of this analysis shall present the full transcript of Boustead’s audiocast, and also include my comments on various sections of it.

June 2011 Portfolio Summary and Review

2011-06-30T18:22:00.003+08:00

June 2011 was one of those months where there was a lot of economic and political news – that of Greece (almost daily), USA, China and India; but not even a whisper of corporate news. So I guess I spent most of the days relaxing and catching up on precious family time as well as digging deeper into work (yes, my workload has increased). My previous post had mentioned that my daughter was admitted to hospital, and this also consumed my time somewhat. Fortunately, she has been discharged and I am now more wary of bacteria and viruses which could potentially infect my poor child again. Call it fatherly instinct if you will, but now every time she sneezes or coughs I almost have a fit. Thankfully, I have very helpful in-laws as well as my own parents who spend a lot of time fussing over my daughter to make sure she gets the best possible care.

On the property front, the release of a massive supply of housing (as mentioned in my last blog post) and the (in)famous $880,000 (reduced to $778,00 later on) Sim Lian DBSS had the whole internet community abuzz, though mostly with decidedly negative reactions. While it remains to be seen if the measures will have any effect, countries like China are still seeing real estate prices go UP. Only when the hot money stops flowing from the West to the East will this inflation finally subside.

To avoid being overly long-winded (again), let me dive right into my portfolio and corporate summaries. My portfolio and comments for June 2011 are as follows:-

1) Boustead Holdings Limited – Boustead had a relatively slower month in June 2011 as there was only one announcement of contract win. On June 16, 2011, Boustead announced that its Energy-Related Engineering Division had secured S$23 million worth of contracts for downstream oil refineries and gas processing plants in Australia, Singapore and Turkmenistan. Adding these contracts to the S$25 million announced in April 2011, Boustead’s order book for this Division stands at over S$55 million in just the first three months of the financial year, and represents a good start for Boustead. Since I am already planning an analysis of their FY 2011 financials to continue into Parts 2 and 3, I shall say no more here.

A piece of disappointing news announced on June 24, 2011 was that of Corporate Guarantees demanding from it from Bank of Commerce and Development for about US$18.8 million. These were related to the Libyan Township project which was now put on indefinite hold due to the ongoing crisis. Boustead had not made provisions for this amount in its FY 2011 results as it was advised by its legal counsel that there was no necessity for it at the time. So it looks as though Boustead may be exposed to another potential S$23.3 million in losses for FY 2012 which would impact its financial performance.

2) Suntec REIT – There was no news for Suntec REIT for June 2011.

3) MTQ Corporation Limited– There were no corporate announcements from MTQ for June 2011 per se, but Neptune Marine Services (“NMS”) did announce that Blossomvale (a 100% subsidiary of MTQ) had increased its stake in the Company from June 8 to June 27, 2011. Please refer to the table above for the stake changes. Over a period of 11 trading days, MTQ had taken the opportunity to average down on their original purchase of NMS shares (200 million shares at A$0.05 per share) by purchasing an additional 68,455,000 shares at prices ranges of A$0.035 to A$0.0387. This had the effect of increasing their stake in NMS to 268,455,000 shares (or 15.31% of the total issued share capital) and lowered their average cost in NMS from A$0.05 to A$0.0467.

I am also expecting MTQ’s FY 2011 Annual Report in July 2011, as well as news on the location and timing of the AGM.

4) GRP Limited – Predictable, there was no news for GRP for June 2011.

5) Kingsmen Creatives Holdings Limited – There was no news from Kingsmen Creatives for June 2011.

6) SIA Engineering Company Limited – On June 28, 2011, SIA Engineering announced the renewal of an MRO Agreement with SIA Cargo valued at $385 million over 3 years, to be extended by two more years if conditions are fulfilled. Since this is a renewal agreement, there is no material impact on FY 2012’s financials. SIAEC’s AGM will be held on July 22, 2011 11 a.m. at Marina Mandarin Ballroom.

Portfolio Review – June 2011

Realized gains have remained at S$59.2K due to the absence of any shares going ex-dividend (SIAEC will go ex-dividend in July while Boustead on August 3, 2011).

For the month of June 2011, the portfolio has dropped by -2.2% (using XIRR in MS Excel to compute) against a -2.2% fall in the STI; thus my portfolio performance is on par with the STI. This was 0.4% better than May 2011’s under-performance of -0.4 percentage points. Cost of investment remained at S$210K and unrealized gains stand at +12.2% (Portfolio Market Value of S$235.5K).

For this month at least, I managed to blog about some topics on valuations and also relate some of my experience along my investment journey. I guess July 2011 should see some interesting AGMs coming up – that of MTQ, Boustead and SIAEC. However, as I am bogged down with work commitments, I guess I have to be selective with regards to which AGM I decide to attend. Boustead’s analysis will also continue this month, and I may also have time to squeeze in a post on Porter’s Five-Forces and perhaps wrap up my long-overdue Kingsmen Comprehensive Analysis Part 5.

If you think June 2011 was amazingly dry in terms of corporate news (just see the above summary and you will know what I mean), July 2011 might just beat it as it is also well-known for having very little corporate news (at least, this applies to the companies I own). Some companies seem to release news almost daily, like Olam for example. Only Suntec REIT will announce results in July 2011, and since I own such a pathetic amount of shares I don’t even see reason to comment on it! I will have to wait till August 2011 to see Kingsmen release their 1H FY 2011 results. UPDATE: SIA Engineering will release their 1Q FY 2012 results on July 26, 2011 (Tuesday).

My next portfolio review will be on July 31, 2011 (Sunday).

Property – Expectation Theory and The Perfect Storm

2011-06-26T13:00:00.009+08:00

It’s been a while since I wrote something on property, since there was nothing really new or ground-breaking for me to comment on since Mr. Khaw Boon Wan (KBW) took over from the reins of Mr. Mah Bow Tan after 11 years at the helm of the Ministry of National Development. However, on June 10, 2011, Mr. KBW blogged about a possible “perfect storm” which may brew in 1-2 years time, and which may either cause the property market to cool significantly, or, in the worst-case scenario, crash resoundingly. He said that housing prices could not go up indefinitely, and cautioned many speculators and investors to do their sums carefully and to make prudent purchases to ensure they could hold in case of falling prices. The perfect storm consisted of three aspects: record-high land supply, possible drop in influx of foreigners (demand-side) and the rising of interest rates. I shall tackle each of these points separately, then offer a summary of my thoughts and comments.

Record Supply of Land

In response to runaway property prices and the frustrations of young couples yearning to purchase their first HDB BTO property, Mr. KBW has released an unprecedented number of sites for development of residential units. For 2010, there were 13,945 units for private homes but for 2011, it is planned that 17,510 units will be released to cater for the strong demand. This bumper supply is supposed to assuage the fears of Singaporeans who constantly complain that there are insufficient HDB flats for application. Their complaints are not unfounded though – some of the recent BTOs have seen over-subscriptions by up to 6 to 7 times the number of flats offered. With the injection of such a massive supply of land in such a short time, the Minister’s aim is that an equilibrium will be reached in terms of prices as demand will then be balanced by adequate supply.

However, some experts and veterans have been quick to point out that as a result of KBW’s zealousness in solving the problem of under-supply, he may have inadvertently pushed the property market into an over-supply situation. Keeping in mind that property cycles are longer than stock market cycles and that a lot of the price determination depends on Government policies (especially those relating to % loan quantum), the effects of such a significant supply of land coming onstream probably will only be felt in 1-2 years.

Falling Demand

With Greece facing problems once again and the USA’s economy stagnating after the effects of QE2 have worn off, it looks as though the world in general may face another prolonged and painful slowdown. The usual suspects embroiled in economic hell are Europe, UK and the USA; and it looks as though the problems will get much worse before they get better. If printing cheap money is the way to solve problems, then the USA would have solved their problems long ago! As it is, inflation and the falling value of the USD may precipitate another crisis in terms of lowered consumer spending; coupled with a stagnant housing market, this means the projected US recovery may falter and splutter for the next few years at least. Even China and India are not spared from economic problems, as they seek to tame runaway inflation and soaring property prices (in China and Hong Kong). China recently raised its banks’ reserve ratio to curb bank loans for property speculation, while Hong Kong has reduced the amount which can be borrowed for property from 60% to 50%, in desperate but vain attempts to rein in prices.

Assuming the troubles persist in Greece, USA and other areas of the West, this would have a spillover effect over in Asia as less foreigners will be sent over here for work attachments or seconded here for jobs. This will lead to a fall in demand for foreigners renting apartments. A sharp fall in demand may also be the result of a combination of the above-mentioned, coupled with a tighter immigration policy, especially after it was made known that the foreigner influx has been continuing unabated for the last 5 years; and which has resulted in a lot of discontent and dissatisfaction amongst Singaporeans.

Rising Interest Rates

Probably the worst whammy of them all – rising interest rates will hit property investors hard, as though they had been pummelled by Thor’s hammer. The problem, of course, is that interest rates have been hovering around historical lows for more than 2 years (since late 2008), so there is not much fear or trepidation among the masses that it may rise. This may explain the somewhat gung-ho and cavalier attitude taken by investors who are rushing to leverage and lock in the low rates for the next 2-3 years. The flood of liquidity has also further exacerbated the problem and 4 rounds of cooling measures have failed to dampen the demand for loans and property. This is because the measures have only tweaked the loan quantum % but have not affected the interest rates charged by banks, as this is by and large pegged to USA Federal Reserve rates.

Problems will most likely arise only after most of the current crop of investors’ lock-in periods have expired, which will probably be in 2012 or 2013 (assuming most loans were taken up in 2009-2011 and have a lock-in fixed period of 1-3 years). Once interest rates start to float, and with banks charging their usual 125 to 150 basis points spread, the rates charged by then could be significantly higher than what they are presently. If an investor only has to cough up say $2,000 in instalments at 1.5%, then this will more than double when interest rates hit above 3% once the world economy normalizes, and there is reversion to the mean in terms of long-term interest rates.

The Perfect Storm

Yes, I know the title sounds like a bad Hollywood movie on tornadoes, but remember that if this potent cauldron of three factors comes into play almost at the same time, it most likely will result in a crash in the property market. Though it is unlikely that all three factors will converge at the same time, what we do know is that supply will most definitely come on-stream, while demand may or may not taper off in 2012 and 2013. Interest rates in Singapore are unlikely to rise in the near future, but it is very hard to see past 2012 as the economic picture looks very murky and uncertain at the moment.

Expectation Theory

Expectation theory ties in with markets in general (not just property), and is rooted in psychology. In brief, it simply means that if market players anticipate and expect changes to the macro-economy which may impact their investments or their decision-making process, they would take immediate action to mitigate their exposure and minimize their risks. This means that technically, prices could begin to fall even way before any of the above ingredients which constitute the perfect storm actually come to pass; because people are anticipating the storm in advance and are simply reacting to it as quick as they can. Hence, pessimism and risk aversion can set in suddenly and without warning, and like a disease, can spread like wildfire within a short span of time and “infect” more and more people, resulting in either a slump or a mini-crash. We see this occur in fast motion in the equity markets, when a sudden turn of events or a change in mood can precipitate a sudden crash in stock prices. For the property market, I will liken it more to a slow-motion train wreck instead.

Another Sign of A Bubble - New players in Property Scene

In a further sign of possible exuberance in the property market, there have been a rash of new players entering the property scene, some of whom have had no prior experience. It is generally acknowledged that many new entrants flooding into property is a tell-tale sign of a possible market top, and so one should view such signs with immediacy and a sense of trepidation that things may go downhill soon. For starters, Ron Sim of OSIM has, in his personal capacity, bid for commercially zoned land in Paya Lebar and Punggol. JL Asia Resources (owner of K-Box) teamed up with Mary Chia to open Porcelain Hotel in Mosque Street; while Thakral Corp, an electronic goods distributor, has taken stakes in several property projects in Sydney and Melbourne. All these were recently reported in the news barely a month ago, and most property booms have led to companies jumping into the deep end to capture a slice of (seemingly) lucrative money-making opportunities. Whether or not this will end in pain and misery, I guess only time will tell.

Conclusion

So the perfect storm may indeed come to pass, and for those who are willing to wait till 2013, the answer may turn out to surprise everyone, as such trends are difficult if not impossible to predict accurately. With recent news that a new DBSS flat was being offered (by Sim Lian Group, no doubt) at $880,000 (Centrale 8 in Tampines), I too am beginning to wonder if the market is getting way too frothy for my own comfort!