December 2008 Portfolio Review and FY 2008 Year-End Summary

December 2008 was a very quiet month in terms of corporate activity as none of my companies announced any corporate developments or updates. Of course, the quiet was balanced by the continued turmoil in the financial markets and economy, which has threatened to blow up into the biggest financial crisis since the Great Depression. Japan, Germany, USA, Hong Kong and Singapore are now officially in recession, and many countries may be set to follow. Even giants like India and China are likely to report muted growth for 2009, way below originally projected targets, as the global financial maelstrom blows all over the world.

In terms of bailouts, the latest is by way of a capital injection of about US$5 billion into GMAC to ensure the auto-maker has enough liquidity to operate at least for the next 3 months. The term “bailout” is probably the most popular word for 2008 and has become almost synonymous with the current recession and economic malaise. Rumours are rife that the next wave of companies to ask for bailouts may be real estate companies, as sales of homes fall to new lows amidst the worst housing crisis USA has experienced since the 1930’s.

Amazingly, we have not even started talking about potential collapses of even more banks, as the global financial landscape is irreversibly changed. With more writedowns expected for credit card and student loans in the coming months, perhaps the crisis is still far from over ? With massive liquidity injections from the Fed and other central banks around the world, this has helped to prop up ailing sections of the economy for now. Whether these measures are sufficient to provide a fiscal boost remain to be seen. In Singapore, the Government has plans to boost infrastructure and construction spending by bringing forward deferred projects so as to ensure constant demand, and to ensure unemployment does not surge too high.

It’s been one piece of bad news after another, to add to the almost endless barrage of about 10 consecutive months of terrible, pessimistic news. Just flip open the nearest newspaper and be greeted by more doom and gloom, with doomsayers predicting anything from a total collapse in the economy to dire predictions of a Second Great Depression. So it’s no wonder that my general mood is that of extreme pessimism as I too have been affected by all this doom and gloom. Of course, this is the perfect environment to be purchasing shares of solid companies and part of my brain knows this, therefore I am trying to detach my objective brain from my emotional one. It’s not easy but in order to prosper in 4 to 5 years time, it has to be done.

The only significant update was Ezra’s AGM which I had already summarized in a previous post. Other than this, there is almost nothing to report for each of my companies. Therefore, I will not be doing a summary by company until the next month-end review in January 2009, as Ezra, FSL Trust and Suntec REIT should be releasing their results in the following month.

Portfolio Comments – December 2008

December 2008 saw a period of relative calm and stability in stock markets, which were devoid of wild swings and volatile periods. My portfolio improved from a total loss % of 34.5% as at end-November 2008 to 25.0% as at end-December 2008. Part of this loss was offset by additional dividend from Boustead.

There were no further purchases made this month either as market prices of the companies I am eyeing did not fall to sufficiently attractive levels to warrant purchases. I am also building up more cash reserves in view of the deepening recession and the threat of job cuts, pay freezes and pay cuts.

Portfolio Review for Financial Year 2008

During the entire year of 2008, I had made no sales of shares at all. Since Mr. Market was content to go on a manic-depressive roller-coaster ride, it made more sense to purchase from him rather than sell to him. A summary of purchases made for 2008 are as follows:-

i) January 2008 – Purchase of First Ship Lease Trust
ii) July 2008 – Purchase of more Pacific Andes
iii) September 2008 – Purchase of more China Fishery, also purchased Tat Hong
iv) October 2008 – Purchases of more Ezra, Swiber, China Fishery, Boustead and Tat Hong

A total of S$67.5K was pumped in to make the following purchases, with the effect of increasing my cost from S$58.3K (as at end-December 2007) to S$125.8K (as at end-December 2008). As a result of the global financial crisis causing severe depression of market prices, the year ended with a -33.5% unrealized loss to portfolio. This was partially offset by total cumulative dividend gains of S$10.7K, which resulted in total unrealized loss of -25%.

During 2008, total dividends received amounted to about S$6.5K. Taking this amount as a % of total cost as at year-end 2008, the dividend yield is approximately 5.16%, which arguably is still much better than leaving your money in a bank account or in fixed deposits ! My expectations for dividends in 2009 is somewhat tempered though, as companies are very likely to retain more cash as a result of the global financial crisis. Hence, I have factored in a 50% reduction in dividends received, for a total yield of about 2.58% for 2009 (still much better than a bank account !). Moving forward, dividends are expected to continue to form a critical role in providing passive income and for improving the overall performance of my portfolio.

My role as an investor is to continue to seek investments in solid companies at a margin of safety, for the long-term; and I will adhere to my value investing philosophy as we move into a possibly even more turbulent 2009.

My next portfolio review will be on Friday, January 30, 2009 after market close.

Wishing all readers a very Happy New Year and may 2009 bring good health, good fortune and greater prosperity !

Financial Resolutions for 2009

As 2008 draws to a close, the curtain is about to fall on one of the worst years in terms of economic growth and stock market performance. While economies around the world have been battered by one piece of bad news after another, individuals also have to contend with strange fluctuations such as high inflation in 1H 2008, then sagging economic indicators and widespread retrenchment in 2H 2008, flowing into 2009. These have the effect of making one feel extremely jittery, gloomy and pessimistic. That would aptly describe my feelings and emotions as we start to usher in a new year, and can be summarized in one succinct word - PESSIMISM.

I guess with all the "damage" that's been done to people's wealth on a global scale, I of course was not spared the carnage either. Suffice to say that the feeling is like trying to collect raindrops in a cup to fill the cup up, only to realize (after one year) that the cup actually had a hole at the bottom and the water was slowly draining away; thus the cup could never really get full ! Throughout 2008, I was quite intent on building my wealth and to ensure I kept expenses and my liabilities under control, but somehow the entire year felt like my wealth was draining away, slowly but surely. I kind of get the feeling that instead of advancing in terms of getting wealthier, I was actually retarding. Granted, most people would have felt this way in 2008 as the global financial maelstrom wiped out most traces of wealth accumulation in terms of equities investing and also fund performance.

Entering the new year with a somewhat heavy heart, I had already listed down some financial resolutions for the New Year which I hope (somehow) can be fulfilled. Perhaps some of these will sound familiar to you as well, dear reader.

1) Continue to save 40-50% of my take-home salary and build up my savings. This should continue to be done because of the recession and the threat of losing one's job anytime. With a comfortable savings "egg", this money can then be chanelled into worthwhile investments should opportunities arise.

2) Look out for good bargains in the stock market, and adhere to value investing guidelines and margin of safety principles. For 2008 I pumped in a total of about S$80K into equities as there were many bargains, but of course the cons of investing in a bear market is that somehow you feel that your money is disappearing into some sort of black hole. The key is to remain focused, keep up with my companies and adopt a long-term view. I would expect decent returns in about 4-5 years time, but definitely not in the immediate term. In the meantime, I shall steel my nerves and continue to invest whatever spare cash I have.

3) Perform better money management and do more budgeting for household essentials, in effect "tightening the purse" more whenever I can. This is due to the ongoing recession and economic crisis which is creating uncertainty with respect to jobs. A dollar saved could be an extra dollar available for emergencies in future.

4) Continue to use public transport and avoid committing to a car. Somehow 2008 was a year whereby I heard of many friends purchasing cars - this could be because of the sudden dip in COE close to year-end and also because many friends started having kids, and so they felt that a car would be necessary for mobility and convenience. Since I do not have children yet, there is no necessity for me to get a car which would impose an unncessary burden to my finances and crimp my ability to build wealth for 2009. Even if I have a kid, I will assess if a car is 100% necessary as I have seen many parents coping with young children on buses and MRT. Worse case scenario, there's always the taxi.

5) Continue to ensure adequate insurance coverage for me and my wife. Insurance is a very important form of protection against death and disability and my insurance also includes a savings plan which helps me to compound my money over the years, while making it available for withdrawals should the need arise (for emergency). Hence, I have ensured that I have reserved sufficient funds to pay all my insurance premiums.

6) Continue to seek ways to improve passive income sources. I am glad to say that my dividend income for 2008 hit about S$6K, thus this is about S$500 per month which is fairly decent. However, I hope that this can be at least sustained in 2009,if not then I hope the drop is not too drastic as I know the recession will make companies conserve more cash. I am exploring other ways of obtaining passive income such as rental or monetising my blog further, but these are all very preliminary. At most, I will seek out potential tutoring opportunities and use that as an alternative form of income (not passive but what the heck).

With the above resolutions in place, I hope that I can survive 2009 without the sinking feeling that I am getting no more richer than when I had started out the year.

In 2 days time, I will write my year-end summary and thoughts for 2008 with respect to my investment decisions, as well as give a brief summary of my investment portfolio and the companies I own. It will of course not look pretty, but I intend to make it a learning experience so that I can become a better investor, and enter 2009 with an improved value mindset to be able to tackle the unprecedented challenges to the value investing concept. Stay tuned for that !

Ezra - FY 2008 Annual General Meeting Highlights

After attending the AGM for Ezra and speaking with Finance Director Mr. Tay Chin Kwang, my feel is that Management is prudent and are treading cautiously into FY 2009 with a view to lower their capex commitments as well as conserve cash. Here are some of the issues asked about and Management's clarifications and replies. Note that this is typed purely from memory (I did not take any notes as it would be awkward) and so the writing may seem haphazard and disorganized, so please forgive this.

Question: Will lower oil prices have a significant impact on Ezra's operations and business outlook moving forward ? Note: As of this writing, oil prices are hovering at around US$40 per barrel.

Answer: There should be no significant impact of lower oil prices on current E&P activities and projects which have already started. The lower oil prices MAY affect decisions to invest in capex for deepwater E&P by oil majors, this is still quite fuzzy and unknown, but current projects which are ongoing will continue to generate oil, and cannot just be "switched off" this month and then "switched on" again when prices rebound. Currently, all of Ezra's vessels are on time charters which last 1-3 years and utilization rate is 100%, so there is no expected impact on the lower oil prices on current charter contracts.

Question: Are charter rates expected to ease off since there is an expected influx of new AHTS vessels for shallow waters ? How are charter rates holding up now ?

Answer: Management reiterated that there is no such thing as a published spot charter rate. These charter rates vary according to the period of charter, type of vessel and also the usage so it's almost impossible to determine the current rates as they depend on so many factors. Some rates may be mis-quoted as being very high because the charter term is only for a month, and the oil major may be desperate and willing to settle for supernormal rates. That said, the general trend of charter rates is still going up since Ezra's vessels are very specialized. However, Management does see a possible softening of charter rates once additional supply comes in for the shallow water division.

Question: Any updates on the proposed review of the MFSV in light of the economic crisis ? Are there plans to cancel these contracts, will there be penalties involved and moving forward, how will the Company resolve these difficulties ?

Answer: Ezra is currently reviewing 3 newbuilds, 2 are 27,000 bhp MSFV being built by Karmsund in Norway while the other is a MFSV built by Keppel Singmarine (recently announced). The remaining 2 30,000 bhp vessels being built by Dubai Drydocks (formerly known as Labroy Marine) will continue to be built. Ezra's 1Q 2009 results are expected to be announced some time in mid January 2009. By then, there may or may not be a decision on whether to pull the plug on these 3 newbuilds. However, the Management has said that they will respond latest by February 2009. As for the deposits paid to Karmsund, it is 20% and there is a clause for a full refund should construction not continue. It is Management's understanding that the company (Karmsund) may be running into financial difficulties and needs financial support from the Norwegian Government, which is why they decided to review the newbuilds. As for Keppel Singmarine, the deposit amount will probably be forfeited but this amount is small compared to the committed capex assuming the building had gone ahead.

Question: How are the yards progressing in Vietnam ? What is the status of Saigon Shipyard and the new yard at Vung Tau ?

Answer: Saigon Shipyard is fully operational and is taking on Fabrication and Construction jobs. In fact, capacity is getting quite constrained at this yard, but the Vung Tau yard is still in the intial stages of being developed and it not ready yet to take on any jobs or to ease the congestion at Saigon Shipyard. Gross margins for such projects are anticipated to be about 20%.

Question: Any updates on EOC's proposed bidding for their second FPSO contract to be awarded in Vietnam ? This was reported some time back.

Answer: EOC is still finalizing the details for this FPSO contract and there is no news of them being awarded it yet. The main issue to be resolved is the funding for this US$1.2 billion (sufficiently massive !) FPSO deal, which involves a charter period of 9+7 years (total 16 years) ! Currently, Lewek Arunothai is only contracted for 3+2 year term. If EOC manages to secure the funding and clinches this project, it will be a massive boost for earnings to the Group. But I would rather the company settle all the issues surrounding the technically complex FPSO deal before it announces any firm contract award. Though gearing for EOC is high (currently), these FPSO deals bring in very steady and predictable cash inflows which should ease the gearing level over time as long as the company (EOC) has no other capex requirements.

Question: How are cashflows likely to be for the Company assuming it cancels 3 of the newbuild MSFV ? What does Management intend to do with any excess cash ? Would it be more economical to purchase growth (i.e. assets) rather than build ?

Answer: Considering the company has already secured the necessary funding (via bank loans) for the newbuilds, cancelling them simply frees up the cash commitment. However, for the bank loans, since they were earmarked for the capex, they will have to be sought again should the Company undertake another capex exercise in future. Internal funds would not need to be used though and can be saved for better opportunities. Management is currently NOT looking at acquiring assets and are adopting a wait and see attitude to determine if good assets or companies can be acquired at fire-sale prices. Especially vulnerable are those companies which had leveraged heavily to grow during the boom years of 2006 and 2007 - these will be ripe for the picking should they need to sell themselves off to pay their creditors.

Question: Will the company really be privatized ? Wasn't that what the MD mentioned during a recent Bloomberg interview ?

Answer: The MD was mis-quoted and was quoted entirely out of context, and the Company has released a statement to clarify this.

Question: What is the purpose of the 66.7% acquisition of Telemark and how does it gel with the Group's business ?

Answer: Telemark is a company which deals with engineering design and they are the ones who measure and calculate the engineering specs for oil and gas projects (the technical stuff la). Currently, the company is engaged to provide the design work and specs to Saigon Shipyard for the fabrication of say, turrets for oil and gas projects. These are then built by the shipyard and then sold to final customers at a mark-up. Thus, Telemark's end customers include oil majors as well as contractors who work on behalf of the oil majors to supply equipment to them.

Question: Page 66 of the Annual Report states a loss of US$2.152 million relating to the disposal of 5 vessels in FY 2008. What has caused this loss ? Was it because of a drop in market value of the vessels to be disposed of ?

Answer: No, the loss on disposal was a result of unfavourable exchange rates causing a realized exchange loss. The sale and leaseback for the 5 vessels was settled at a fixed price 2 years ago, but part of the contracted sum was denominated in local currency. As the USD weakened, the conversion from SGD to USD led to this exchange loss being realized in the books.

Question: Note 15 states an increase in the provision for Trade Receivables of USD 7.239 million during FY 2008. What is this for and are there any issues with collectibility from customers ? What is the customer mix like ?

Answer: Ezra's major customer is Shell currently, and the Company is doing work for Shell at 4 different locations now, taking up about 30% of total revenues. Other customers would include National Oil Companies and other oil majors and small independent oil companies only constitute about 5-10% of Ezra's revenue base. This provision relates to a project loss suffered by Samsung Heavy Industries, for which they are attempting to counter-claim against Ezra. Ezra has, for prudence, included this amount as a potential liability but Management asserts that their claim is baseless and there is a good chance of this amount being written back in subsequent periods.

Question: What is a conservative estimate of the company's growth for FY 2009 ? Is the company expected to grow at all or remain stagnant ?

Answer: The Company took delivery of 5 new vessels in FY 2008 which were only chartered for several months for FY 2008, so for FY 2009 they will be chartered for a full financial year so there should be positive impact there. Also, core earnings are expected to grow at double digits though Management could not elaborate more due to market sensitivity of the information.

Question: Energy Services division contributed their maiden revenue stream in FY 2008. What are the prospects like for this division ?

Answer: Energy services are expected to remain flat for FY 2009 but growth is expected from FY 2010 onwards as more oil rigs come onstream and also the large deepwater vessels.

Overall, the mood was light and cordial and Management was friendly and approachable. There were the usual questions about why a dividend was not paid but these were tactfully handled by the Management Team. When asked if a rights issue was possible (like what DBS recently announced), Management affirmed that no further fund-raising was required as they do NOT intend to grow further as visibility into the future was too poor. If they were to order vessels now, they would have to see beyond 2010 and right now the future outlook is very murky and uncertain.

I trust that the best move now is to conserve resources and allow cash to build up, and wait for good opportunities to deploy them productively. In this, I have faith that Management can continue to deliver as we move in a new calender year 2009.

Bernard Madoff - Where Integrity crumbled in the Face of Greed

Most readers here should be familiar with the case of the rogue hedge fund manager Bernard Madoff, who appeared in the news after admitting to running a Ponzi scheme of unprecedented scale. He is allegedly the mastermind of the world's largest Ponzi scheme (valued at US$50 billion and counting) and who had been duping investors for quite some years before everything began falling apart like a house of cards. Much has been reported in the news (CNN, CNBC, Time, Reuters and Forbes), each with their own views on the case and also different commentaries about what happened and why it happened. Perhaps I can take the time to dissect some aspects of the case so that we can all learn a lesson about honesty, integrity and greed.

Leaving aside the details of how Madoff managed to fool investors (and amazingly, the SEC) for so long, we delve into the fundamental reason for his deviant behaviour. It all simply boils down to - GREED. Greed of course is simplifying the whole issue, since arrogance, failure to accept losses and probably even self-denial came into the picture somewhere along the way, but the penultimate driving force should have been greed (for money and reputation) because it is like lifeblood for some people - it keeps them going and it fills them with a sense of self-importance. Were investors to know that Madoff had lost money in certain years and opened his fund more judiciously to outsiders, he would then have lost that "awe" which he commanded in his loyal followers. It was precisely because of this hero-worshipping that got so many "sophisticated" investors into deep trouble. Madoff was a man hungry for power and status, and the recognition which came with it. If he had admitted being anything less than infallible, his demi-god status in the hedge fund circles would have been instantly shattered.

The most important thing in investing (and, in fact, all other aspects of life too), I feel, is to have integrity and honesty. Warren Buffett did mention that it takes almost a lifetime to build up a solid reputation but just 5 minutes to ruin it totally, and this is oddly reflected in the way Madoff totally blew everything in just under 3 minutes by confessing to his sons that he was "finished" and had been running a massive Ponzi Scheme all these years. I value integrity more than making money, and would gladly admit to all my investment mistakes, missteps and failures rather than delude myself and others that I am always doing well (and making money). Because once people lose that trust (and consequently, their respect for you), it can almost never be recovered and it's like tying a noose round your neck and releasing the trap door.

Another point I would like to grouse about is the apparent lack of controls and procedures in regulating these hedge funds. The SEC was given ample warnings over the years over Madoff's operations, yet chose not to pursue these leads further. This makes one wonder if the current body in charge of oversight and policing these funds is sufficiently equipped to handle their role competently; or has there been a conflict of interest in allowing Madoff to get too close to them; such that independence has been compromised, allowing familiarity to breed into complacency which then led to the loss of the life savings of so many individuals and retirees. The SEC is probably in need of some soul-searching and after this scandal has been fully investigated, needs to undergo a radical overhaul to ensure this kind of nonsense does not occur again. If necessary, President-Elect Obama could even suggest the setting up of a separate body to regulate the SEC, so that the 2 bodies act as counter-balancing weights such that neither gets too cosy or dominant in terms of influencing decisions which could have a life-changing consequence.

The promise of 1% returns per month consistently through good times and bad stinks of impossibility, as even Warren Buffett (arguably the greatest investor who ever lived) had periods of severe under-performance as the economy and stock market went into periods of extreme volatility. One would have suspected that if something is indeed too good to be true, it sometimes isn't ! Ponzi schemes are perpetuated on the fact that human beings are gullible and will let their guard down when they are greedy for supernormal returns. This also applies to expert investors as much as novices, because we are all subject to human emotions which can cause us to make flawed investment decisions.

What is the purpose of a Stock Exchange ?

It seems with the daily barrage of news, forecasts, predictions and commentaries by pundits, professionals and "sooth-sayers", perhaps no one has really realized the purpose of having a stock exchange in the first place ! The way the newspapers and publications go about it, you would not be blamed for mistaking the stock market as some national lottery game or gambling den, or even some fast-paced high-octane game where "The Winner Takes It All" (as ABBA sang it so succinctly some 30 years ago).

Nothing could be further from the truth though. The stock exchange's true purpose is for purely business reasons and it is merely one method which companies can use to raise funds for business expansion. Let's examine the main reasons in more detail:-

1) Private Companies sell shares to the public to raise funds for business expansion, using the stock exchange as a platform. They thus become "public" or "listed" companies from then on.

The main purpose of the stock market is to let aspiring companies sell shares to the general public in order to raise funds to expand their business. These are also known as "Initial Public Offerings" or IPO. A company needs to have some track record usually (3 years of consecutive revenue and profit growth) as well as fulfill several other conditions before it is allowed to list. Note that this is just ONE of the methods which a company can utilize to raise funds, others will include bank borrowings or issuance of debentures (bonds or notes) which are a form of debt. Listing on an exchange is a way of raising funds through equity, and it involves an expansion of a company's share capital. In a way, one can argue that it dilutes the stakes of existing owners but it also makes the company's shares liquid, thereby ascribing a market value to them almost as soon as the shares begin to trade.

2) Secondary Offering - Additional funds raised through a secondary offering of shares using the stock exchange as a medium

Even after being listed, companies can utilize the stock exchange (called the "capital markets") to issue more shares to raise even more funds for future business expansion, assuming there are buyers to take up the additional shares. This is known as a secondary offering and is most popular when share prices are HIGH, therefore this method is very common during a bull market. When share prices are high, companies can raise higher amounts of money through the issuance of less shares, thereby raising more capital with less dilution to existing shareholders. Notice now in the current bear market, no company is using a secondary offering to raise funds ? At the most, we hear of companies doing rights issues which ensures proportional participation in the company's fund raising and ownership.

3) A listing status may raise the profile of companies which may enable them to widen their scope of business expansion and get better recognition from suppliers/banks.

An intangible benefit of being listed (on the Singapore Stock Exchange at least) is that it confers to companies a certain status which is recognized by suppliers, customers, banks and other stakeholders. Knowing that the requirements for being listed are pretty stringent, this would imply that the company has "what it takes" to make it as a listed entity, and thus it would accorded a fair amount of respect. This would enable it to raise its profile and use its listed status as a "marketing" tool to reach out to more potential customers and to expand its business. Of course, one must also recognize that the quality of listing aspirants drops drastically as the market goes on a bull run, up to the point where the quality of those listed just at the apex of the bull market really gets very questionable ! I won't pinpoint names but suffice to say that certain China companies (S-Shares) fall under this dubious category.

4) A stock exchange gives the intelligent investor the opportunity to be a part-owner of companies.

This is the part I love best about the stock exchange. Aside from the hullabaloo and nonsense being spouted daily about the stock market and whether it is going up or down, the intelligent investor need only be concerned about one thing - the ownership of good companies at reasonable prices for the long-term. The stock exchange is a medium which makes this possible, as it allows sellers and buyers to transact. Without this medium, investors would not be able to partake in the profits and growth of companies (which is actually partaking in the growth of a slice of the economy). Provided one researches companies well and does not overpay for a piece of a wonderful business, one can enjoy many good long years of fabulous returns (much higher than the bank FD rate, trust me !) with little or no risk. One may argue that blue chips are a sure way of achieving this, but be aware that in the current economic crisis, the USA has proven that even blue chips may not be that "blue" after all and can be prone to total collapse (like AIG, Fannie Mae, Lehman Brothers). Thus, it is always prudent to do a thorough analysis of any investment before purchasing it, whether it is small-cap, mid-cap or blue chip.

And so I hope that the rationale for a stock exchange has been adequately explained in the above 4 points. Anyone who has more to add, please feel free to use the comments box or to discuss/debate over the 4 points which I brought up.

Personal Finance Part 10 - Creating a Personal Budget for 2009

As the year-end approaches and a new year beckons, it's time for the common man on the street (i.e. you and me) to plan and budget for the new year and the challenges it may bring. Next year is particularly important for this budgeting exercise as it has been widely tipped to be a "recession year" in which growth will slow across all sectors. This makes one's job more vulnerable than ever as well as one's income stream too, which may be subject to (touch wood !) pay cuts or pay freezes. Already, many firms in Singapore are retrenching (mainly banks) or cutting pay (e.g. SPH) and many more will probably do so in the first half of 2009.

So what exactly goes into a Budget ? One can do a detailed spreadsheet for this or one may just keep a rough hand-written guide; but it must consist of your probable cash inflows (through salaries and/or bonuses and expected dividends) as well as your major expenses. At this point, I would like to remind readers of several "one-off" expenses which are payable for the year. This may or may not be applicable to you, depending on your financial circumstances:-

1) Property Tax - Usually a notice is sent in December or January the next year, and IRAS will assess the property tax payable based on the Annual Value of your house. Incidentally, for 2008 and 2009 the Government has granted a S$100 tax rebate for most HDB flats, to be offset against their property tax bill. The (apparent) joke is that the Annual Value of most HDB flats has been raised since 2008, so the effects of this rebate are hardly felt at all !

2) Income Taxes - Usually arrives around the middle of the year, but the deadline for submission is April 30, 2009 which is the close of the government's financial year-end. Remember to set aside some cash to pay for income taxes, and if you had donated money to charities in the last year, you can claim double deduction for the donations.

3) Subscriptions - Most subscriptions are renewable after 12 months, which means one has to be prepared to cough up a lump sum payment to maintain any subscriptions they have, be they magazine ones, or club memberships.

4) Insurance Premiums (Annual) - If you were in my situation, you would have to make a lump sum insurance premium payment for annual coverage. I prefer this to monthly premium payments because annual premiums tend to give you a slight discount, and it also ensures you don't have regular cash outflows throughout the year. So you justhave to set aside cash for that one lump sum payment and forget about it till next year, while enjoying coverage all the way.

5) Discretionary Items - This of course varies from person to person, but will include items which form part of capex such as a new wardrobe, fridge or perhaps (if a new baby is coming) new clothes and a crib/stroller. Each person has their own priorities and items to buy for the new year, so make sure you set aside the cash for that extra something.

Once the Budget is essentially complete, it should be able to tell you if you have surplus funds to last you through the year. Remember to set aside about 6-9 months of cash for emergency or contingency expenses (those things we wished never happened though there is always a remote possibility).

One should note that every month, there should be positive cash flow arising from the Budget. This ensures that some of your income is put aside as savings every month BEFORE it is spent, as I strongly believe in "paying yourself first". For lump sum payments, ensure that the cash set aside is really used for that purpose and not for some other sudden indulgence or impulse purchase, as this may derail your plans for retirement savings and building your nest egg. Since dividends are an uncertain portion of my cash inflows, I usually do not budget for them or else just use a more conservative number (e.g. instead of assuming 3 cents per share which may have been the historical payout rate, I will use 1 cent per share instead). It's always better to budget less money coming in than more, as it will ensure you tighten your belt further. If more money happens to flow in, then all the better as you would end up with "extra" savings.

Perhaps readers can share their experiences in creating and following through a budget which they have prepared, and what goes into it. This would make a more interesting and dynamic discussion rather than me just listing generic items which goes into everyone's Budget.

Wishing everyone a Happy New Year in advance ! And may all your companies do well and may your dividends continue to flow in !

Investment Sins Part 6 - Anger/Wrath

In this sixth installment of my investment sins series, let's explore the emotion of anger (sometimes also known as "wrath") and how it can screw up our investments. As the saying goes, don't get angry, get even ! There is some truth to this statement as it is basically trying to tell us to calm down and think through the situation in order to identify the optimal solution to be implemented. Anger is an emotion which clouds our judgement and causes us to do impulsive things which we may later regret.

Basically, the book by Maury Fertig talks firstly about the targets of wrath, which is where we, as investors, like to target our anger when something goes wrong. During bear markets (such as the current one) where everyone sees falling prices and gets a sense of helplessness about their investments tanking daily, anger can be a particularly powerful emotion. The problem is that investors generally do not know where to channel this anger constructively and end up blaming i) The Media (for dispensing an endless barrage of bad news which makes markets tank) ii) CEOs (for not managing their companies properly) iii) Financial Analysts (for downgrading their favourite stock) or iv) a Group with a Vested Interest (such as the Federal Reserve which is responsible for the mega bailout plan for auto-makers and financial institutions). Whatever the case, anger which is misplaced often has negative effects for the investor, as it causes him to lose focus and make bad investment decisions.

Next, Mr. Fertig talks about being "normally angry" and being "sinfully angry". Confused ? He goes on to explain the differences between these two terms.

Sinfully Angry

1) Never blames himself for an investment which has gone wrong
2) Always looks for scapegoats to vent his anger upon
3) Makes inpulsive investment decisions (in the heat of the moment)
4) Finds the stock market more stressful and aggravating than other aspects of his life
5) Is only able to relieve angry feelings by making another (impulsive) investment
6) Major investment decisions are often preceded by a bout of anger
7) Views investing as a macho competition where aggressive, instinctive behaviour is rewarded

Normally Angry

1) Upset with himself when he makes an investment loss
2) Avoids blaming others or making excuses when an investment does not work out
3) Allows anger to dissipate before making an investment decision
4) Becomes upset about news and investments, but no more than other aspects of his life which may also be upsetting
5) No correlation or pattern between anger and making an investment
6) Sees investing as a cerebral (thinking) activity which rewards analysis and objectivity and tries to avoid strong emotions such as anger to cloud the decision-making process

The last traits in both sinfully and normally angry should be of note. If one treats investing as a competition or a war, then aggression and anger would probably dominate your thought processes and not allow you to think clearly. By using objective analysis to guide your investment decisions, we can start off from a clear base of thinking and proceed to justify why we should be investing. Even if something goes wrong (and inevitably it does some time in our lives), at least the anger we feel is "normal" and not "sinful".

Although the chapter has other aspects of anger and discuss other important stuff, I will not attempt to "lift" too much from the book, but instead just highlight the more important sections. The final portion I would like to discuss is how we can keep anger out of our investing lives and stay cool. Here are a few suggestions/tips:-

A) Force yourself to take breaks from the investment world and your portfolio

It is good to "take a breather" sometimes and not be overly obsessed with one's investments or the stock market. When things go wrong, we minimize the probability of getting sinfully angry which may occur if we were too emotionally drawn into our investments.

B) Remind yourself that it's business, not personal

We must remember that investing should be done in a business-like manner, with careful thought and analysis. The stock market is not a living breathing person who is "out to get you". So one should avoid feeling as though we need to "take revenge" on the market for playing you out or to settle some personal grudge, because when we take things too personally, we tend to lose sight of the big picture - which is to get a decent return on our investment by owning good companies over the long-term (as a business owner).

C) Keep an Investment Journal

Make a record of all your investments, whether good or bad (a blog is also a good way to do this !). You can track investments you had made and whether they were a result of emotion or a careful thought process. One can also learn from mistakes and prevent anger from building up over "wrong" decisions if one has a good historical record of all decisions made (with supporting reasons of course).

D) Vent your anger productively

Yeah I know this sounds like what psychologists would say ! But the point to note is we can help the anger and frustration to dissipate if we channeled it properly, for example playing a game of football or squash (whack the ball hard !); or perhaps talking/confiding to a friend or loved one about how one feels.

To conclude, anger is a very destructive emotion - just look at how flaring tempers have destroyed families and caused crimes to be committed. The same goes for your investment performance, do NOT let anger destroy your investments - keep a cool head and always be logical and rational.

November 2008 Portfolio Summary and Review

November 2008 was similarly peppered with interesting developments in the financial and economic world, which saw once spectacular blue-chip institutions such as General Motors and Citigroup being brought to their knees as the credit crunch continues its devastating rampage. At the risk of sounding like an over-zealous newscaster, I will elaborate on the events of this month in the next paragraph, and will try to temper the tone of language in order to achieve a more sober address.

With Hong Kong, Japan and Germany officially in recession, it would just be a matter of time for the United States. This will probably culminate (and go down in history) as the first truly global recession and economic downturn. There are probably many books which will be written on this in the years to come, and the amount of wealth destruction has gone into the trillions of USD. So, if you are an individual (like myself) and feel that you are getting somewhat poorer, don’t fret because millions of others around the globe are probably in the same boat or doing much worse. Even billionaires and millionaires have been unable to escape unscathed as their wealth has fallen dramatically during such hard times. It is only with prudence, fortitude and determination that one can get through these unprecedented times.

The problems with USA auto-manufacturers rose this month as a result of a sharp drop in USA consumer confidence and spending, leading to the worst sales for auto manufacturers in at least 20 years. The 3 biggest car companies (located in Detroit), namely General Motors, Ford and Chrysler, petitioned for the Federal Reserve to extend financial assistance to them, or they may be bankrupt by June 2009 as a result of high cash burn and flagging sales. As of this writing, there was still no definitive solution to their woes, though President Obama has mentioned some form of aid package to be made available to them. Citigroup, the once vaunted financial institution, was on its knees as it laid off 50,000 staff worldwide and sought to raise more capital. You can read on Bloomberg or CNBC the steps taken to rescue Citigroup, and I shall not elaborate on it.

With all these nerve-racking developments, it is no wonder everyone is living in a climate of fear and trepidation. With the most recent news of political turmoil in Thailand and terrorist attacks in Mumbai, India, this really is NOT helping the already fragile economic situation. South-East Asia is set to destabilize further as confidence in the region erodes, and more funds pull their monies out for fear of further instability. Singapore and Hong Kong may benefit though, as they are seen to have stable economies with limited trouble, but in the near term the export-oriented nature of both countries would cause investors to remain cautious.


There was significant news regarding the companies I own, as five of them had released their financial results during the month. Since I had already covered this in a previous post, I will keep this short and only report other material news:-

1) Ezra Holdings Limited – Ezra announced yesterday that they would be reviewing their options for 5 MFSV ordered some times in 2007 and 2008, in view of the challenging global economic conditions. The first contract to be reviewed is a US$68 million one signed with Keppel Singmarine, and Keppel has affirmed that they are “in talks and discussions” to negotiate on the contracts by Lewek Shipping (a subsidiary of Ezra). Assuming all 5 options for MFSV are cancelled, Ezra stands to lose just the deposit and future contracted revenues (assuming charters had already been secured). In the near term however, the move is positive as it allows cash flow to be eased and for the company to remain more nimble to deal with current issues. I will raise this (and other issues) at the upcoming AGM in December 2008.

2) Boustead Holdings Limited - There was no news from Boustead for November 2008. Note that the ex-dividend date for the interim dividend of 1.5 Singapore cents per share is on December 1, 2008. I had done a review on Boustead’s 1H FY 2009 in a previous post.

3) Swiber Holdings Limited – There were no announcements from the Company for November 2008. Shareholders are still awaiting news on the EGM to approve the third wave of sale and leaseback for 5 vessels. I had done a quick review of Swiber’s 3Q 2008 results in a previous post.

4) Suntec REIT – Suntec REIT did not release further news for November 2008. I have included the dividend in my realized gains for this month’s portfolio summary.

5) Pacific Andes Holdings Limited - There was no news from PAH for November 2008 (other than the results announcement), other than director Bernie Cheng Shao Shiong buying up 400,000 shares over 4 days (including today) at a price of S$0.145.

6) China Fishery Group Limited - There was no news from CFG for November 2008, other than the results release which I had highlighted in a previous posting.

7) First Ship Lease Trust – There was no news from FSL Trust for November 2008. The dividend of 3.05 US cents per unit (converted at an exchange rate of 1.5287 to the USD) was received on November 28, 2008.

8) Tat Hong Holdings Limited – There was no significant news for the company for the month of November 2008, other than their 1H FY 2009 release of financial results. I had done an analysis of the Company in a previous post, and I had included the interim dividend of 3.5 Singapore cents per share in my realized gains for my November portfolio review.

Portfolio Comments

November 2008 was somewhat unchanged from October 2008 in terms of sentiment (still fragile) and valuations (still depressed and attractive for long-term accumulation). As at end October 2008, the STI was trading at 1,794.20; by the end of November 2008, it had dropped by 3.4% to 1,732.57. On a positive note, my portfolio improved from a total loss % of 41.8% as at end-October 2008 to just 34.5% as at end-November 2008, helped by the life blood of dividends during this protracted and prolonged bear market.

There were no further purchases made this month as market prices of the companies I own did not fall to the lows seen during October 2008. If such opportunities present themselves again in the coming months, I will not hesitate to increase my position and to average down further.

My next portfolio review will be on Wednesday, December 31, 2008 after market close, and will include a special year-end review and commentary (similar to year-end 2007).

Boustead - 1H FY 2009 Financial Review and Analysis

Boustead had released their 1H FY 2009 results on November 14, 2008. At first glance, it looked as if the Group had done quite terribly, as net profit due to shareholders was down 41.6% for 1H 2009 compared with 1H 2008. On closer inspection however, it seems that the reason for the apparent decline was because of exceptionals which had been recognized in 1H 2008. Stripping this out, net profit attributable to shareholders would have increased by 30.2% for 1H 2009 to S$15.2 million, implying that core net profit for 1H 2008 stood at S$11.7 million. More will be elaborated on in the following sections.

Profit and Loss Analysis (Note: All numbers used are for 1H 2009 and 1H 2008, not 2Q 2009 and 2Q 2008)

Revenues increased very slightly from S$206.2 million to S$210.5 million, up 2.1%. The good news is that cost of goods sold fell 0.8% in the same period, thus Boustead saw its 1H 2009 gross profit margin improve to 31.4% from 29.4% in the previous corresponding period. Other operating income fell 64.1% due to the absence of exceptionals in 1H 2008 (gain on disposal of assets held for sale). In addition, there was also a gain of S$6.1 million from the sale of a leasehold property and S$1.9 million in a tax write-back. Stripping all these out, net profit attributable to shareholders would have increased 30.2% as mentioned above. Net margin based on net attributable core net profit is 7.2% for 1H 2009, versus just 5.6% for 1H 2008.

Administrative expenses increased quite a bit, by 29% mainly due to increased head count. FF Wong had mentioned before in interviews that the main problem with getting more contracts of higher value was to attract suitable talent to be in charge of such projects. As a result, the Company has gone on a recruitment drive to bring in people of caliber to oversee these new projects. This would explain the increase in head count, which may also herald more projects in future as the Group now has the human resource to manage such projects which are of a larger scale.

Financing costs were also somewhat higher at S$851K, though the magnitude of the increase is dwarfed by the % increase. I suspect this could be due to short-term project financing using bank loans, of which rates have risen due to the high LIBOR rates as a result of the credit crunch. This is a short-term phenomenon which is unlikely to persist.

An interim dividend of 1.5 cents per share was declared and is payable on December 18, 2008. At today’s closing price of 66 cents (November 18, 2008 when this analysis was done), this represents a dividend yield of 2.27%.

Balance Sheet Review

Trade receivables have increased slightly from S$98 million to S$111 million, probably also a result of the ongoing credit crisis which makes payments from debtors slower. It could also be a result of progress billings which have yet to be collected as Boustead takes on more higher-value contracts. Properties held for sale has increased by about S$7.4 million as Boustead had announced purchasing a S$6.7 million property in the UK, most likely for investment purposes. Contract work-in-progress nearly doubled to S$24.1 million from six months ago, which demonstrates that the Group had started on more projects as announced in their press release.

Current ratio stood at 1.58 for Sep 30, 2008, compared to 1.68 for 1H 2008. This was mainly due to the decrease in cash of 21.4% from S$165.3 million to S$129.9 million (to be elaborated on further in the Cash Flow Statement review). It was partially offset by the increase in trade receivables and contract work-in-progress, resulting in current assets increasing to S$328.6 million. Current liabilities had increased to S$207.8 million due mainly to the increase in trade and other payables to S$174.2 million.

Cash Flow Statement Analysis (Note: numbers used are for 1H 2009 and 1H 2008)

Cash inflows from operating activities was just S$1.5 million for 1H 2009, compared to a very healthy S$18.7 million for 1H 2008. There are several reasons for this: lower net profit recognized during the period, an increase in work in progress implying cash outflows, an increase in receivables and also an increase in properties held for sale. All these are considered negative working capital and are cash outflows. This was partially mitigated by the increase in trade payables, while payment of income taxes came up to a hefty S$9.5 million (S$8.7 million for 1H 2008 even though net profit was higher). This was probably due to non-deductible items in the Group’s tax computation for 1H 2009.

Cash flows from investing activities decreased by S$13.3 million for 1H 2009, compared to just S$1.6 million for 1H 2008. This was attributable to the following: purchase of additional stake in GBI Realty thereby increasing Boustead’s ownership from 30% to 40% (this cost them S$3.4 million), a loan to associated company worth S$6.3 million as well as purchase of fixed assets worth S$8.7 million. Though 1H 2008 saw purchases of fixed assets hitting S$9.5 million, this was offset by a one-off cash inflow from the disposal of assets held for sale of S$10.2 million.

Cash outflows from financing activities was mainly due to the payment of the final dividend of S$18.1 million. Other than this, there was some repayment of bank loans amounting to about S$2.5 million. The net result was a net decrease in cash or 1H 2009 of S$33.9 million, with Boustead having an ending cash balance of S$127.4 million.

The project nature of most of their contracts means that cash inflows can be lumpy, and the increase in contract work in progress should be testament to that. For 2H 2009, the sale of property by GBI Realty of S$200 million will put more cash into the Company, and more operating cash inflows are expected in 2H 2009 as well with the commencement of the Libyan wastewater project (for Salcon) and the Al Marj Project as well (for Boustead Infrastructures).

Analysis of Revenues by Business Division

Please see Tables 1 and 2 below for more details and remarks:-


Discussion of Prospects (by Division) and Future Outlook

For the energy-related engineering division, I would expect contract flow to slow considerably as oil and gas prices have slumped from a high of US$147 per barrel to just US$54 per barrel as of this writing. This would affect their downstream and upstream oil and gas services as the Company reported that growth may be moderated.

For Salcon, Mr. FF Wong had in an earlier interview mentioned that a new R&D initiative was being tested in a Chinese textile company, but there was no news of whether the technology is effective and can give the company a sustainable competitive advantage. It will be good if Management (including CEO Mr. Yeo Ker Kuang) can update shareholders on the progress of this initiative, as it could mean that Salcon would be able to make use of the technology to scale up its earnings and margins. Lagan Construction had also filed a claim against Salcon but this is not expected to be material and would not impact FY 2009 results too much.

For the real estate division, it would be good if Boustead Projects can keep the contracts flowing into FY 2010 as well. The last contract announcement for this division was on July 9, 2008 for a S$67 million contract to design a semi-conductor facility. It has been more than 4 months without news of any contracts being clinched. This could be partly due to their order books being full and the division being unable to take on further projects. If you note for FY 2008, the 3Q 2008 (Oct to Dec 2007 period) also saw no contracts being announced for Boustead Projects. Contracts only began flowing in rapidly from March 2008 onwards (close to tail end of FY 2008 and beginning of FY 2009). Thus, I believe contract flow should resume by late FY 2009 when their current order books are depleted, but it is hoped that the Group can take on more projects in order to grow this division further, instead of being constrained by capacity. With the increase in head count, it is hoped that they will be better equipped for larger and more complex projects. The press release was deliberately vague on the prospects for real estate but with the current credit crisis affecting the property market as well, I believe Boustead should experience a slowdown in contract flow. However, their reputation as a specialist contractor and their niche focus on high-end industrial buildings with state of the art technology and facilities should give them an edge.

Also note that the Al Marj project under Boustead Infrastructures Pte Ltd is proceeding, albeit slowly. More revenues are expected to be recognized in 2H FY 2009 as well as FY 2010. Boustead has taken a 65% stake in this project which is worth S$300 million.

Geo-Spatial technology is expected to continue to receive firm demand but the weakening of the AUD will have some impact on profits moving forward. Still, this division is a cash cow and Boustead should hold on tightly to it for the long-term as growth is slow but steady.

In light of the continuing financial and economic crisis, this has thrown up juicy opportunities for Boustead to consider as potential M&A targets. Management is actively seeking out potential candidates and had already rejected one during their FY 2008 announcement as it was deemed not attractive enough (even though S$1 million was spent on the due diligence !). I am hopeful that the Group can source for an eventually find a worthwhile investment target which will match the stringent criteria set by Mr. FF Wong.

The Group is in a net cash position and has a healthy order book as well as operating cash inflows. Based on the above, I am confident the Group can deliver a strong FY 2009 come results announcement in May 2009, and I am also expecting a decent final dividend to boot.

Note: There will be NO detailed analysis for 3Q 2009 results, unless there are material developments within the company which are worth discussing or mentioning.

Ten Habits of Successful Value Investors (Adapted)

This post is a timely reminder on value investing principles amid the worst credit crunch in 8 decades ! Apparently, the news just can't get any worse (or can it ?), and no prizes for guessing that someone will pop up every day to say "hey the worst ain't over yet". It is during such times that sticking to an investment philosophy helps to keep one focused and in tune with his financial objectives. Below are 10 habits of value investors (highlighted and summarized, along with my own personal commentaries) adapted from the book "Value Investing for Dummies" by Peter J. Sander and Janet Haley (1st Ed.). Note that the second edition came out just after I bought the first one, so just my luck ! If someone has their hands on the 2nd (updated) edition, perhaps you can help point out if there are any changes to this section.

1) Do the Due Diligence

There is no substitute for hard work and nitty-gritty research, and every aspiring value investor has to get down on his knees and do the field work himself. Avoid relying too much on analysts or others who purport to have a view on a company or industry - best to do the legwork yourself to give yourself the required assurance.

2) Think Independently and Trust Yourself

Basically, avoid following the herd. The stampede can leave one bruised and somewhat crushed and it is never a good idea to behave in a lemming-like way. Make conclusions based on facts and objective data and do not be afraid to appear to deviate from common understanding. Sometimes views may be different purely because of a difference in time horizon (e.g. analysts are looking at a company with a 5-week view; but value investors use a 5-year view). Trusting yourself is a very important quality and having faith in one's ability is paramount in being successful in investing (and trust me naysayers jump at any chance to prove you wrong and shoot you down - people seem to enjoy the misfortune of others, especially so if they feel they are not alone in their misery).

3) Ignore the Market

This point cannot be over-emphasized. When you purchase shares, you are purchasing part-ownership of a company which sells products and services. The stock market is simply a venue for the transaction to be executed. We should thus ignore the noise and din the market is generating unless it is to our advantage to transact to own more of a piece of business.

4) Always Think Long-Term

This goes along with Point 3, ignore the market and focus on the long-term prospects of the businesses you own. Over time, compounding and the effects of dividends will serve your long-term financial goals well, provided you chose the right company of course !

5) Remember that You're Buying a Business

Think of buying shares in the company as if you would like to purchase the entire company. Know more about the company than others and be able to explain the company to a 4-year old (not that a 4-year old will ask, but you never know !). Keep a close watch on the company and keep track of the business, NOT the share price.

6) Always buy "on Sale"

Purchase shares of companies which are going on sale ! This means cheap valuations relative to the long-term growth prospects of the company. By buying cheap, we create greater margin of safety and provide more upside as compared to buying expensively.

7) Keep Emotion out of it

Rationality is important in evaluating potential investments, and emotions should be left at the door. One should purchase a company for its economic characteristics ("fundamentals") and not to be part of one big family (assuming you love the products it sells). Also, do not hesitate to admit mistakes as it can help one to learn and avoid them in future. Value investors have a rational system to determine when to sell in case facts or change or their original reason for owning the investment changes drastically. As humans, we can't be right 100% of the time, but it's how we cope with mistakes that make us a better person over time.

8) Invest to Meet Goals, not to earn Bragging Rights

Investing should be aimed at generating a decent return on your capital, and is a form of rational capital allocation to maximize returns over time. Some people tend to treat investing as a way to boast or brag about their achievements, and how their investment had reaped 20-50% in a bear market while others have "tanked". This is bad form and bad practice because the purpose of investing is not to show-off, but to ensure one can meet one's own long-term financial goals.

9) Swing Only at Good Pitches

This comes from Warren Buffett's baseball analogy. He is saying that as investors, we do NOT have to take every investment that comes along, only the very attractive ones. Thus, we can stand at the pitch all day and refuse to swing at all the balls that come our way, until we see a very good one coming ! This is akin to ignoring Mr. Market who throws all kinds of companies at all kinds of crazy prices - value investors need to sort through the heap to find the gems.

10) Keep your Antennae Up

This last point essentially means an investor always has to keep a lookout for good companies, and always needs to be aware of when attractive valuations may arise. This may not just include local companies, but it can be extended to include shares of companies trading in other countries as well, provided the investor understands the tax laws and operational aspects of the company in that country.

So that's a quick 10-point summary of some value investing habits one should adopt. It's a process of continuous learning and there are probably more habits to absorb than the 10 above, in order to make a good investor. I have not even included the behavioural finance aspects yet ! So let's all keep learning, stay humble and continue to share knowledge !

Tat Hong - Analysis of 1H FY 2009 Financials and Prospects

Below is my analysis of Tat Hong's financial statements as well as a discussion on their prospects in the next couple of years in light of the global financial crisis, which has so far thrown Singapore, Hong Kong and Japan into recession (in Asia). I will do the usual sectional analysis for Tat Hong but will keep it short in order to discuss more of the growth and cash flow aspects of the company in the coming years. I will also be posting a transcipt of an interview which CEO Mr. Roland Ng did with Reuters on October 7, 2008, in order to extract some sections to comment on.

Profit and Loss Analysis (note: numbers are for 1H 2009, not 2Q 2009)

Revenues increased 26% from S$298.3 million to S$375 million, as a result of all divisions growing their revenues by double digits. More on that later as I drill into the divisional analysis. Gross margins however, contracted by 1.7 percentage points from 38.5% in 1H 2008 to 36,8% in 1H 2009, as a result of higher COGS (an increase of 29%), therefore gross profit only increased by 20% from S$115 million to S$138.1 million.

Expenses for 1H 2009 were kept well under control, as evidenced by all categories of expenses increasing by less than the increase in revenues of 26%. Other operating expenses and finance costs only increased by 16% while share of profits of associates increased by 24%. However, moving forward, I would expect share of profits from associate (Yongmao) to fall as the tower crane rental division may take a temporary hit from the global economic crisis.

Net profit (attributable to shareholders) increased by 28% from S$40.2 million to S$51.3 million. Since earnings will be fairly stable and be driven more by rental income rather than sale of cranes, I will use a rough PER approach to ascertain the PER at this point in time. Using S$51.3 million and annualizing it, we get S$102.6 million. EPS is therefore 20.32 Singapore cents. At today's closing price of 56 Singapore cents per share, Mr. Market is valuing Tat Hong, the world's largest crane company by crawler crane fleet, at a mere 2.75 times projected FY 2009 PER.

Balance Sheet Review

PPE went up to S$370 million as a result of additions to their crane fleet, while inventories remained or less constant. As mentioned in the financial report, the increase in PPE was due to expansion of rental fleet to meet increased rental demand. In the interview below, Mr. Roland Ng mentions that Tat Hong will be moving towards a rental business model in order to generate recurring income and sustainable cash flows. Cash had decreased from S$75 million as at 6 months ago compared to S$47.7 million at present (Sep 30, 2008), and more will be elaborated on in the cash flow statement review. Non-current financial liabilities had increased from S$96.5 million to S$122 million, which was the result of the drawdown on financial leases to purchase plant and equipment.

Cash Flow Statement Review (note: all numbers are for 6M 2009 and 6M 2008 cash flows)

Cash flows from operating activities increased by S$43.1 million and this is very healthy. Most of the cash inflows was generated by through profits and working capital changes did not reduce this figure very much (based on the "indirect" method of cash flow statement preparation). For investing activities, S$34.1 million was spent to acquire more fixed assets as mentioned, for rental purposes in the coming periods. Thus, FCF amounts to S$8.9 million for 1H 2009, compared to a negative FCF of about S$3.6 million for 1H 2008.

Cash flows from investing activities was a negative S$43.9 million for 1H 2009 mainly due to said PPE purchases, as well as the acquisition of a subsidiary and shares in Yongmao (increase of their stake to 20%, thus Yongmao is now equity-accounted for as an associate).

For 1H 2009 financing activities, the net proceeds from bank loans came up to just S$3.3 million, while the net effect of finance lease obligations is a payment of S$700K. Most of the decrease in cash from this category came from the payment of dividends, as a result of healthy operating cash inflows. Note that 1H 2008's cash flows from financing looked so good mainly due to a share placement raising S$56.8 million.

Business Unit Analysis

Please refer to the table below for the breakdown of business units, and associated explanations:-


As can be seen, tower crane division is their new growth area, with revenues rising 2.5x and contributing to 3% of total revenues for 1H 2009, as compared to just 1.1% of revenues for 1H 2008. I would expect the sale of cranes and equipment division to contribute much less to revenues in future due to falling crane prices in this recessionary environment. Management intends to ramp up its rental market (more to be explained later) and since rentals can command gross margins of up to 60% and above, this bodes well for gross margins in future, even though total revenues may dip for a few quarters running.

Tat Hong Interview by Reuters

As promised, below please find the transcipt for the interview (in blue) of Mr. Roland Ng by Reuters. I have highlighted certain sections (in red) for further explanation.

Tat Hong says slowdown will hit 2010 profit

* Slowing economy will curb profits in 2010
* Will meet profit forecast of S$96m this year
* Eyeing rental acquisitions worth up to $50m

SINGAPORE - Singapore crane rental firm Tat Hong said turmoil in the global economy will hurt earnings in 2010, but that existing leasing agreements will help it meet this fiscal year's profit forecast.

'We cannot run away and be unaffected by the world financial crisis,' Tat Hong chief executive Roland Ng told Reuters in an interview on Tuesday. 'But our projects are for six to 18 months so for full year 2009, we will still do pretty well.'

The firm, which rents cranes in Southeast Asia and Australia, will achieve its three-year target of growing net profit by an average of 30 per cent a year to hit S$96 million (US$65.39 million) in the financial year ending March 2009, he said.

Mr Ng said demand for cranes will continue to be strong in the resources and infrastructure sectors, picking up the slack from slowing residential construction.

Singapore still has a pipeline of mega projects including the republic's two multi-billion-dollar integrated resorts, a $1.9 billion sports complex and the upgrading of its train network in the next few years. In Southeast Asia, Mr Ng said resources projects in Indonesia will also boost demand for building equipment.

But Tat Hong's distribution business, which involves the buying and selling of earth-moving equipment, will be affected as the sluggish economy weighs on consumers and demand for residential housing, he said.

He also said the firm is looking out for further acquisitions in Australia through 70 per cent-owned subsidiary Tutt Bryant . Tat Hong will focus on companies worth up to $50 million each.

Tutt Bryant earlier this year bought an Australian equipment hiring firm for A$3.4 million (US$2.39 million). 'We have a very good credit standing, so borrowing such amounts shouldn't be an issue,' he said. Mr Ng also plans to further boost Tat Hong's cash pile, which stood at $80.6 million end June, by reducing inventory in its distribution arm.

The operator of the world's largest fleet of crawler cranes reported $29.2 million profit in the first quarter which ended June 2008. 'When the market is bad, people don't buy - they rent,' Mr Ng said.

Note the following points (in red):-

1) Tat Hong has projects which stretch till 18 months from now and will provide good earnings and cash flows until at least mid 2010. This means that the company should at least be able to sustain a decent level of dividends until mid-2010. Their most recent dividend declared was an interim dividend of 3.5 cents per share, putting my dividend yield at 4.9% based on my purchase price of 71.5 cents.

2) Demand for cranes is expected to continue to be strong, in light of recent developments such as the new expressway costing S$5 billion announced by the Singapore Government to be built by 2013, the deferment of the Sports Hub to 2012, the releasing of more construction and infrastructure projects by the Government to boost the export-oriented economy of ours and public housing demand remaining firm. Many public sector projects had also been deferred in 2007 due to the glut (at the time) in construction projects (coupled with the IR). These can be progressively "released" to provide consistent demand for crane rentals and heavy equipment usage, of which Tat Hong is a beneficiary.

3) Tat Hong's sales division which deals with cranes and heavy equipment will be affected by lower prices and the sluggish economy. Thus, I already expect this division to contribute less in future to Tat Hong's total revenue. Since this division has a gross margin of only 20%, I think it is a wise idea for Tat Hong to shift more of the revenues to rental so as to improve overall gross margins.

4) Management is on the lookout for further acqusitions in the range of S$50 million through 70%-owned Tutt Bryant Group. With valuations around the world being so depressed, Tutt Bryant should be able to source for a juicy deal. I am confident they can find a good acquisition target similar to Caradel Hire or Bradshaw in order to boost revenues (and earnings).

5) Tat Hong's cash pile stood at S$47.2 million as at September 30, 2008. Most of the decrease came from the payment of dividends. With the strong recurring operating cash flows, and Management's intention to raise more cash through divestment of assets meant for its distribution arm, Tat Hong should be able to boost its cash hoard even further to reduce its gearing and possibly pay out a very decent dividend by FY 2009 year-end.

6) Mr. Roland Ng is speaking from experience when he says this. During recessions, companies rent cranes instead of buying them as the capex upfront for buying can be saved and conserved for rainy days. Rental affords more flexibility to companies, but of course Tat Hong enjoys a higher mark-up and gross margins of up to 60% in its crawler crane rental business. Over time, we should see the effects of this move in Tat Hong's improved gross margin.

Prospects and Future Direction

In addition to comments from the interview, below is also a list of other points which I wish to independently raise to illustrate Tat Hong's prospects and how the company will cope with the current crisis:-

a) China had, on Nov 5, 2008, announced that they will spend an additional RMB 5 trillion (about S$1 trillion) in the transport sector to build roads, waterways and ports. This is in addition to its previous announcement to inject RMB 2 trillion (about S$400 billion) to upgrade infrastructure between 2006 and 2020. These moves bode well for Tat Hong's Tower Crane division as revenues and rental rates will be boosted by such measures.

b) The rental businesses for Tat Hong are expected to remain relatively stable as demand for rental is still present. Thus, these divisions should not see a very large negative variance in revenues. Margins could possibly suffer temporarily though, which I will not be surprised at, unless crane supply continues to remain tight.

c) Australia will continue to spend on infrastructure projects so Tutt Bryant should see steady demand for its services, even though Tutt projected a slowdown in the next few quarters. I encourage readers to visit Tutt Bryant's website (sidebar on the right of my blog) to read more of their financials and plans. It's too troublesome to post everything here !

d) Acitivites in the Middle East are also expected to remain firm, and Tat Hong's global reach should help it to buffer against the downturn somewhat.

I will be doing full reviews of most of my companies only at half-year or full-year results release. Either that, or when there is a major development worth writing about. Please leave comments if you wish to, and we can have a discussion in the comments box. Anyone posting nonsense or insulting remarks will get instantly removed without further warnings.

Corporate Results Announcements

As I have a serious lack of time, I will not be doing reviews for ALL my companies which have released results recently, but will just focus on one or two. I've realized that it takes a lot of effort to analyze and post all the analysis here on my blog, when actually one should be more concerned with the long-term prospects of the businesses rather than staying too focused on quarterly results. That is the domain of analysts, whose job is just to churn up reports based on short-term forecasts (yes, 1-year price targets are considered short-term !).

Tat Hong Holdings Limited

Tat Hong released their 1H FY 2009 results on November 12, 2008. Revenues for 2Q 2009 rose 15% but this was offset by higher COGS (increase of 20%), resulting in gross profit increase of only 5%. Profit for 2Q 2009 dipped 3% from 2Q 2008; but looking at half-yearly figures, net profit increased a decent 25%. The Company declared an interim dividend of 3.5 cents per share, payable on December 12, 2008. At my purchase price of 71.5 cents, this represents an interim yield of 4.9%. I will be doing a more detailed review of Tat Hong's financials and prospects in due course, as I have quite a bit to say about their various divisions and also for their regional prospects in the longer-term (up till FY 2012).

Swiber Holdings Limited

3Q 2008 revenues surged 186.5%, while COGS increased an even heftier 247.3%, resulting in a 68.4% rise in gross profits. As a result of lower exceptional items for 3Q 2008, net profit fell 7.4% while profit attributable to shareholders fell 18.7% on quarter. For 9M 2008, profits increased a healthy 58.9% to US$47.1 million, and this already more than covers the entire FY 2007 profits. During bear markets, analysts love to focus on the negatives, and I am sure the "surprise drop" in profits of 18.7% on quarter will be mentioned many times. Putting things in perspective, the lumpy nature of contracts and the increase in headcount and administrative expenses as a result of business expansion into the region probably added quite a bit to Swiber's cost structure, as did the finance expenses on their bank loans and bonds. While this is not good for the company in the short-term, in the longer-term their asset-light strategy and their larger spread of vessels will help to snare them larger contracts which are hopefully long-term (e.g. is the CUEL 5-year contract for US$50 million per annum).

Their Balance Sheet is healthy with gearing at about 1.06 and current ratio >1, thus there is no immediate cause for worry as their debt is not due till FY 2011. Their cashflows from operating activities is also healthy at US$19 million for 3Q 2008, though the bulk of their cash inflows still came from the raising of more banks loans worth US$74 million. Still, there is probably more visibility now in terms of operating cash inflows, and the Company will take a more cautious stance towards expansion, and has put their deep-water plans on hold until oil prices firm up in future years. Prudence will see the company through these lean times, and they should emerge stronger and more ready for challenges by FY 2010. I will NOT be writing a detailed review on Swiber.

Using US$47.1 million at an exchange rate of 1.50 to the USD, EPS is about 16.76 Singapore cents per share for 9M. If annualized, EPS will be about 22.35 Singapore cents. At today's closing price of 61 cents, this values the company at a mere 2.73 times PER.

Pacific Andes (Holdings) Limited

Revenues for 2Q 2009 dipped 4% while gross profit dripped 12.6% due to higher fuel costs and also the supply chain management division getting disrupted due to the Olympic Games. Net profits decreased by 16% on quarter and about 16% for 1H 2009 too. However, due to PAH's increased stake in CFG, profits attributable to shareholders rose 18.5% on 1H FY 2009 compared to 1H FY 2008. Management has reported that fish product prices have risen 10-20% due to increased demand during the economic slowdown (hey, people still have to eat fish right ?). Due to the deployment of less fishing vessels to the North Pacific, they suffered a temporary drop in fishing volume which will be made up in 3Q 2009 (4Q 2008 for China Fishery).

Higher fuel costs were also cited as one of the reasons for the fall in profits, which was largely in line with what I expected. Fuel prices have since dropped to around US$56 per barrel and are likely to remain low for as long as the recession does not blow over. Thus, this should ease the gross margins for CFG's fishing division. Catalysts for profit growth in 2H FY 2009 will include measures taken by CFG to fish for more catch and also for deployment of their elongated vessels to the North and South Pacific. In CY 2009, higher total allowable catch (TAC) is also expected as fish supplies have remained healthy due to sustainable fishing practices. There will be NO further review from me for PAH's 1H FY 2009 results.

China Fishery Group Limited

Revenues for CFG were up 3% for 3Q 2008 and 8.4% for 9M 2008. However, net profit dipped by 28.1% on quarter due to the problems mentioned in PAH's review - higher fuel costs and deployment of vessels to defer catch volume till 4Q 2008. As a result of these, lower volumes of fish were caught even though prices had risen. Gross margin for 9M 2008 was high at 34%, while net margin was a respectable 22%. The Group managed an 11% rise in 9M net profit to US$78 million. Assuming oil prices remain at current levels, and CFG replenishes the fish which they had failed to catch in 3Q 2008, this means that annualized profits should hit about US$104 million. Using exchange rate of 1.50 to the USD, annualized EPS will be about 20 Singapore cents. Using closing price of 61 cents, FY 2008 PER is just about 3 times. Considering their revenues are consistent and recurring (unless the ocean runs out of fish !), this is a very low valuation for a good fishing company to trade at, which is one example of Mr. Market's mood swings.

Net cash from operating activities was a healthy +US$42 million for 3Q 2008, and +US$60.1 million for 9M 2008. Net increase in cash was US$23.2 million for 9M 2008 after factoring in acquisition of PPE and subsidiaries. Net gearing improved to 92.9% from 108.3% as at December 31, 2007. Prospects are decent for CFG as they are expanding their number of vessels and also elongating their existing ones to increase the fish hold capacity. When the ITQ is implemented in Peru in FY 2009, this should provide a further boost to prices as quality of catch will improve. I have also noted the Chairman Ng Joo Siang's plans to eventually branch out to catching krill by FY 2010 and hope that they can implement this as an additional revenue stream. I hope to get more updates on this at the next AGM. Meanwhile, I will provide no more further analysis on CFG until the FY 2008 results are out some time in Feb 2009.

Boustead Singapore Limited

Boustead released a decent set of results today, underscoring their slow but steady growth in all divisions despite the economic downturn. Since I will be doing a more detailed review of Boustead's 1H FY 2009 results, I shall not say too much during this post. Suffice to say that the Company has grown all divisions decently, and has a net cash position of S$117.6 million. They have declared an interim dividend of 1.5 cents per share (a yield of 2.6 cents based on my purchase price) which is payable on December 18, 2008. On a comparative basis, after removing one-off items, net profit attributable to shareholders improved 30.2% to S$15.2 million.

One must note that the Company usually does better in 2H of the financial year and shows weaker financial results in 1H. Thus, due to their lumpy project nature of their revenues, it will not be wise to annualize their net profit to derive a valuation as it would be misleading. Also note that the sale of a leasehold property will net the Company another S$200 million in 2H 2009, and this should result in a very decent final dividend for FY 2009. I will be doing a detailed breakdown in a future post for Boustead, and discuss possible strategies which the Company may take to grow their top and bottom line.

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Stay tuned for more posts coming on Investment Sins, as well as a continuation of the Behavioural Finance series. I am also planning a future "Your Money and Your Brain" series after reading the book by Jason Zweig, to draw out snippets to illustrate the fascinating relationship between money and our own brains.

Predicting the Market Bottom - An Exercise in Futility ?

With the recent unprecedented volatility dogging the stock markets around the globe, and with the economic crisis fully under-way, more and more people have been congregating together to ask the mother of all stock market questions - where will the market bottom be ? To expand this question a little, it's actually a little more complex, being divided into events like "where will the bottom be", "when will it happen", "will there be another bottom" and the no-brainer "have we already missed the bottom and the boat has left" ?

Interestingly, there are no lack of experts and market analysts making predictions on the stock market, as they have been doing for the past few decades. The funny thing is that when retail investors jump in to offer their "psychic" views on what's going to be happen, then it gets truly hilarious. Everyone knows that market bottoms cannot be timed, yet people persist in trying. There is something perverse about human beings that likes to make simple things complex; and this is about one of the most complex things one can ever attempt to achieve. As mentioned, the stock market is a complex adaptive system, which means that there are a myriad of factors which determine how prices move on any given day, and thus far there is no predictable pattern for these random movements. Yet, almost everyone loves to chip in to try to predict what's going to happen next, and where the market is going to go. It's becoming a national pastime, akin to a game show, where people try to outdo and outsmart one another to be the first to "guess" the right answer. It strikes me as being silly and a waste of effort. Why ? Read on.....

The point of investing is to ensure one gets a fair return on his investment in sound companies over time. The purpose of a stock market is for companies to float their shares so as to raise funds for business expansion. Most people seem to have forgotten the two golden rules above, which is why the stock market has turned into a game, a contest and to some, a sort of battleground to test their wits and dexterity. I must emphasize that my view of the stock market is one whereby I can park my money in shares belonging to a good company which can grow steadily over the years, and eventually my stake in the company will be worth more by virtue of its business growth. This represents a way for the retail investor to grow his money in a slow and steady way. The problem is that many people are impatient for quick gains and thus engage in the speculative "game" of market timing, which ultimately results in futility as their efforts to discern patterns in stock prices usually end in failure.

Trying to pick a bottom in the stock market is the same as trying to guess when the top is here (in a bull market) so that you will know when to sell out all your shares and stay in 100% cash. There are a few flaws to this logic which many people do not notice:-

1) Assuming the bottom is coming (i.e. not here yet), how can one devise a way to properly anticipate this and be able time it exactly so that one can purchase shares at the bottom ?

2) Assuming the bottom has already past, many people will still be waiting for the bottom to arrive so that they can buy at lower prices; while the stock market may just march onwards and leave them in the cold;

3) The bottom for the stock index may not always signal a bottom for individual stock prices; so one who tracks the index closely looking for a bottom may fail to capture appropriate opportunities in individual securities as he too focused on the forest to notice the trees;

4) "Hindsight Investing", the bane of market timers, always results in one thinking that he will know exactly when to sell out and exactly when to buy back. I need not say too much more about this as I have often mentioned how silly a concept hindsight investing is.

5) Pattern-seeking human beings will always discern patterns in past data, clearly because they are available and not because they form any part of a larger picture of what's going to occur in the future. Correlation is not equal to causation; and what caused a market bottom in previous cycles may not always lead to one in the current cycle, as each economic crisis is different. So people who postulate based on past data are simply trying to anchor their expectations of the future based on information which may not be representative of what's currently going on.

The conclusion to all this rambling is that market timing is simply an exercise in futility, and my advice to readers would be to conveniently ignore the bunch of forecasters and analysts out there who are forever trying to predict the bottom. Time can be spent more constructively on sieving out good bargains in terms of corporate valuations in the current bearish environment instead of reading tons of commentaries by "experts" and "gurus" who think they know better. Thinking indepedently is one of the traits of a successful investor, but at the same time, be open to opinions about your companies which are objective and may be of value to your assessment of a company's potential.

October 2008 Portfolio Summary and Review

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Portfolio Comments

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

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

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