Thursday, January 31, 2008

End-January 2008 Portfolio Summary and Review

Volatility seems to be here to stay, and the Index of late has seen very violent and unpredictable swings which have caught many speculators off guard. For those who choose this period of time to do proper research and invest with a margin of safety, then you would have peace of mind as you will not be emotionally affected by the volatility and temporary insanity of Mr. Market. I was not too worried about the companies I owned, as they did not appear to report any news which affected their business prospects, though of course I am wary and keeping an eye on interest rates which may have a mid-term effect on loans and borrowings.

After some digestion of facts from sharing on forums, I have a much deeper understanding of shipping trusts and the structure of FSL Trust in particular. I must attribute nearly 90% of my enhanced understanding to a forumer known as d.o.g. (Disciple of Graham) who has painstakenly answered my queries on the growth and long-term prospects of FSL Trust. His argument is very logical, objective and analytical and after evaluating the facts which he presented, it would seem that FSL Trust has “more than meets the eye” (to quote a phrase from the old cartoon “Transformers”). I will be digesting his arguments as well as other forumers’ comments before deciding on how to proceed with this investment. Evidently, I admit I made a mistake in not researching deeply enough into the structure of FSL Trust and the underlying growth story; but instead merely got “blinded” by the high yield. Value investing involves learning as I go along, so I will take this as a good lesson learnt on how to understand my investments better.

Below is the summary of my investments and related news as at January 31, 2008 (STI at 2,981.75 points). I have included Year-To-Date (YTD) gain or loss as a way to benchmark each company’s share price performance instead of a total portfolio basis:-

1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.30, Gain 257%, YTD Loss 43.5%. Ezra announced, on January 24, 2008, that EOC had successfully wound up its first major Offshore construction and pipelay project using Lewek Champion’s DP2 positioning technology. This project was completed on schedule and within budget, and hopefully paves the way for EOC to clinch more contracts as more vessels come on board.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.27, Gain 75.3%, YTD Loss 7.7%. There was a broker report on Boustead which mentioned that some of the project revenues would be delayed in recognition to FY 2009 instead of FY 2008. This merely defers the revenue recognition as Management has reiterated that project delays are part of business risk. Boustead had, on January 21, 2008, announced that Singapore Airport Logistics Centre 2 Pte Ltd (a 50:50 JV company with Boustead Mec Pte Ltd), had disposed of a warehousing facility at 80 Alps Avenue for a consideration of S$46 million. This will substantially add to their cash hoard and the Group will recognize a gain of S$11.93 million from this disposal. For 1H FY 2008, net profit attributable to shareholders stood at S$25.9 million; thus this will boost net profit to about S$37.83 million. For FY 2007, net profit attributable to shareholders was S$35.2 million, which means that Boustead should be on track for a sixth consecutive year of record revenues and profits. I will be expecting a net profit improvement of about 10-20% to about S$42.2 million.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.31, Gain 128.7%, YTD Loss 36.7%. According to Energy Current website, Swiber Conquest has, on January 10, 2008, headed for Poleng to join the crane barge Da Li Hao for its first mission in the Madura Sea off Indonesia. Swiber Conquest will be deployed to lay three pipelines totaling 94 kilometres, while Da Li Hao will commence the installation of an offshore platform in the vicinity. Other than this, there was no news from Swiber for the half-month ended January 31, 2008.

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.49, Gain 34.2%, YTD Loss 11.3%. Suntec REIT announced result on January 30, 2008 and DPU increased 16.5% year-on-year to 2.279 cents per share for the quarter ended December 31, 2007 (1Q FY 2008). Based on my buy price of S$1.11 and by annualizing the dividend to 9.116 Singapore cents, my yield for Suntec REIT will be 8.2%.

5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.45, Loss 31.3%, YTD Loss 27.4%. There was no news from the company during the half-month ended January 31, 2008.

6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.72, Gain 14.7%, YTD Loss 7.0%. There was no news from the company during the half-month ended January 31, 2008.

7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.02, Loss 7.7%. I have reviewed FSL Trust’s results in another post, and this evening the company announced that they had secured an additional US$200 million loan facility from a few banks. This is a four-year term loan at 120 basis points (i.e. 1.2%) above the US$ 3-Month LIBOR. Hopefully, with this new facility, they will be able to make more yield-accretive acquisitions to enhance DPU.

Overall Portfolio

My overall portfolio has increased by 56.4% without taking into FSL Trust’s cost. If included, the gain is 38.7% from a new cost of S$80.4K as at January 31, 2008. The market value of my portfolio without FSL Trust is S$91.1K, and if FSL Trust is included then the portfolio value is S$111.5K. Realized gains remain are about S$4.9K, an increase of about S$300+ due to the dividend from FSL Trust.

Comparison against STI

The STI had declined by 14.37% since the start of 2008. Without FSL Trust, my portfolio has declined 21.6% thus under-performing the FTSE STI once again. This can be attributed to the steep price drops for Ezra and Swiber as compared to the beginning of the year. Since the businesses are inherently stable, I see no cause for worry.As a result, to date in 2008, my portfolio has under-performed the new benchmark STI by 7.23 percentage points.

My next portfolio review will be on Friday, February 15, 2008 after market close.

Sunday, January 27, 2008

Enduring Volatility - Dealing with Mr. Market's Mood Swings

Of late, the stock market has been experiencing wild volatility. Experts (those who study stock market theories such as EMH) say that this means risks have correspondingly increased because after all, volatility equates risk, doesn't it ? For value investing, risk has a totally different definition: that of permanent loss in the value of your holdings. Thus, true investors do not equate volatility with risk; instead, they see it as golden opportunities to purchase part-ownership in companies with strong, stable earnings at fire-sale prices. Volatility should be embraced as a friend of the value investor, because it periodically under-prices companies so ridiculously that they almost beg to be bought !

Benjamin Graham (the father of value investing) wrote in this book "The Intelligent Investor" Page 203 that investors who "permit themselves to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage". He created the perfect market allegory called "Mr. Market" to explain the wild swings and volatility sometimes observed in the stock market, and this is by far the most apt and appripriate analogy of human behaviour and psychology that there is. Mr. Market is seen as an individual who is willing to buy or sell you a stake in a company at a given price daily. The fundamentals of the business may remain stable and even boring; but Mr. Market's moods can be highly volatile, swinging from manic-depressive to overly-optimistic one moment to the next. As we have seen in Jan 2008 thus far, he has been extremely pessimistic and is offering low prices for most companies, regardless of the valuations and fundamental characteristics of each company. As investors, we should laugh and scoff at his irrational behaviour because who would bother selling something cheaply to a madman who is prone ot wild mood swings ?

Sadly, most people fall under the influence of volatility (Mr. Market's moods) and become affected emotionally by them. As an investor, being able to perceive the true value of a company is an enormous advantage as it allows you to know what price to buy or sell a company; thus making Mr. Market your servant instead of your master. Human beings are emotional creatures and more so when it comes to finances (money) as it can be seen as an extension of one's ability and ego. Thus, investors allow themselves to be stampeded by the madness of crowds and be influenced by Mr. Market's mood swings, and it is their financial loss which becomes the financial gain of those who understand the true value of a business and are willing to take a long-term view.

The recent sharp market selloff did not have much effect on me, as I chose to totally ignore Mr. Market's perception of the true value of my companies. Within myself, I had confidence that I understood the business well enough and that nothing adverse was happening to them; thus I welcomed lower prices so that I may purchase more of the company at a margin of safety. My principle is to avoid companies which I did not thoroughly research on; thus I avoided most of the companies even though prices were attractive as I did not wish to compromise my principles. An opportunity cost is always better than investing in companies which you had no full understanding.

Another paragraph in "The Intelligent Investor" says that a "man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement". Essentially, this is telling us not to monitor the prices of our companies like a hawk, as there is no need to if the business is doing well. The problem with most investors and speculators is that they are too focused on price instead of value. Oscar Wilde once said that "people know the price of everything, but the value of nothing", and this is very true when it comes to the market. If people assessed a company based on value instead of price, then they would have different perceptions of whether to buy a company or not. It is ridiculous to see postings in forums which say that "hey look ! The price of the shares have gone up so it must be a good company !". That must be the most shallow observation I have seen thus far, and likely to cause the person who uttered it much pain and sorrow, as he does not comprehend the concept of margin of safety.

At the risk of sounding overly preachy, risks actually DECLINE when prices fall and RISE when prices rise. Most people think of it the other way, which is why volatility has such a bad name to it. If people saw volatility as a way of buying shares of companies cheaply, then they would welcome volatility. Of course, such moves have to be combined with sound and objective judgement, a long-term view as well as a knowledge of margin of safety. For those concepts, I suggest reading and re-reading "The Intelligent Investor" as a reminder. This book's concepts hold true in the current market turmoil and will continue to act as a beacon of light for those who are looking for a true path through the darkness and uncertainty.

Thursday, January 24, 2008

FSL Trust - 4Q 2007 Financial Review and Analysis

FSL Trust is a shipping trust which acts as a finance company. It enters into sale and leaseback transactions with ship owners ("customers") and purchases the assets (vessels) from them, only to lease it back to the customers. In this way, the customers can receive immediate cash in order to expand, and also remove the asset from their Balance Sheet, thus keeping it light. I had explained this form of financing for growth before for Ezra and Swiber, so regular readers of my blog should be fairly familiar with this mode of financing by now.

For the quarter ended December 31, 2007, FSL Trust's net profit after tax was US$1.882 million against a projection of US$2.196 million (-14.3%) due mainly to higher depreciation and interest expenses incurred as a result of the acquisition of two product tankers from Groda Shipping & Transportation on November 7, 2007. The important thing to note for a shipping trust is the amount of cash generated, as this will essentially be almost 100% paid out to unit-holders (after paying fees to the trustee manager). Thus, cash flows are very important for a shipping trust and the average length of lease for FSL Trust is 7 to 9 years on average. These are on 100% bareboat charters which means the lessee (not the lessor) bears all costs of maintaining and repairing of the vessels. In a way, this helps to ensure stable and predictable cash flows which make up the high-yield.

Looking at the Balance Sheet, one can see that the amount of secured bank loans as at December 31, 2007 amounts to US$158.1 million. The trustee manager had entered into a revolving loan facility to provide up to US$250 million worth of debt and these are secured by the vessels and lease agreements and earnings as collateral. This would mean that there is still about US$92 million worth of undrawn loans with which FSL Trust can use to make further acquisitions. The loan tranches carry interest rates of 6.24% and 5.77% per annum in two tranches, but the yield FSL Trust is getting is obviously more than that, or they would not be able to pay out such high dividend yield and they also would not have taken on the debt if it was too expensive.

The cash flow statement shows that the trust only drew upon the loan facility for cash when it was necessary to make an acquisition. In this case, US$113 million was the consideration for the acquisition of the 2 product tankers, and the drawdown of loan amounted to US$114.13 million. Mr. Philip Clausius, CEO of FSLTM, said that the annual acquisition target for FSL Trust has been raised from US$200 million to US$300 million, in light of the better opportunities for sale and leaseback as a result of the global sub-prime financial mess. The good thing is that FSL Trust had indicated that their ideal debt:equity ratio target is 1:1, which means they still have US$200 million AFTER the drawdown of the current facility, in order to make acquisitions. They expect to raise these debt funds within the 1Q 2008, so I would expect Management to be on the lookout for yield-accretive acquisition targets.

The DPU for 4Q 2007 is 2.42 US cents per unit, which at the exchange rate of 1 USD = 1.43 SGD translates to about 3.46 Singapore cents per unit. When annualized, this amounts to 13.84 Singapore cents per unit and at today's closing price of S$1.08, represents a yield of 12.82%. My averaged down cost is about S$1.1333 which means my approximate yield is 12.21%. Assuming the DPU and exchange rate remain constant, it would take roughly 8 years for me to make back my principal investment. What I am concerned about, though, is that FSL Trust promised to pay out 100% of distributable income till December 31, 2007. What about for FY 2008 and beyond ? If anyone has some clue, kindly enlighten. I understand that Pacific Shipping Trust (PST) is paying out 75% of net distributable income. This means that the yield could potentially drop below 12% in the near future, ceteris paribus.

I am still in the learning phase for shippnig trusts so if any readers have further comments or insights I welcome you to post a comment, thanks !

Tuesday, January 22, 2008

Ezra - 1Q FY 2008 Financial Review and Analysis (Part 2)

Dear readers, I shall continue with Part 2 of my review and analysis. Please do note, however, that all opinions regarding valuation are subjective; while my write-up on future prospects and strategies are based on objective verifiable evidence in either the company's Annual Report, or through discussions with Management during the recent AGM as well as through IR contacts using email.

Cash Flow Statement Analysis

Cash flows from operating activities dipped to S$12.3 million for Nov 2007 as compared to Nov 2006's S$16.2 million. This is even though the net profit from core operations increased by 270% to S$16.6 million, up from only S$6.15 million a year back. The main attributable causes are because of the increase in inventories which come with increased vessels, thereby reducing cash by S$9.3 million. This was balanced off by an increased receivable from an associated company of S$13.1 million (net). Trade payables had also decreased for the 3 months ended Nov 30, 2007, resulting in a cash outflow of S$6.2 million as compared to a year ago when there was a cash inflow of S$5.9 million from an increase in trade payables. This is an area of note as it could mean that creditors are reducing their payment terms to Ezra; or it could simply be that Ezra is paying off creditors faster due to higher availability of cash resources. Interest paid also increased about 2.4 times from S$1.4 million to S$3.3 million as a result of more bank loans being taken up to finance their fleet expansion. Interest income corresponding rose as a result of them placing more of their cash in short-term deposits, while taxes paid rose because of taxes incurred in other jurisdictions which are not exempted under Section 13A of the Singapore Income Tax Act.

Cash flows from investing activities recorded a net cash inflow of S$106.8 million, and this was mainly due to the proceeds from the disposal of interest in EOC of S$200.1 million. Purchase of fixed assets took up a significant chunk of cash at S$87.9 million, and the Group also spent S$4 million investing in a joint venture company.

Financing activities saw the purchase and sale of treasury shares, which, when net off, did not give rise to much cash inflow or outflow. There was significant repayment of bills payable while loans taken from banks dropped to S$8.2 million from S$28.2 million a year ago, as it reflects Ezra's cash rich position.

Overall, there was an increase of S$118.2 million in cash and bank balances, mainly boosted by the proceeds from the listing of EOC Limited on Oslo Bors. I will be watching Ezra's cash flow from operating activities in 2Q FY 2008 (1H FY 2008) to see if it continues to be healthy.

Future Prospects and Outlook

For Ezra, they are still on an expansion mode though the scale of it is not as grand as when they were first listed in 2003 and when they won their first maiden FPSO contract in Oct 2006. Below are a list of growth catalysts for Ezra Group in the near-term:-

1) Delivery of FPSO in July 2008 - This will dramatically increase earnings going forward into FY 2009 for the Group, but it will be recognized as a 48.9% stake through EOC Limited as this asset will be held by EOC directly.

2) Development of new yard at Vung Tau - This is currently a greenfield and we can expect updates from Management on the progress of the development of this future shipyard for Ezra's ship-building, maintenance and ship repair services. This new yard is expected to reduce reliance on third-party ship repairers and hence enhance net margins.

3) Completion of Saigon Shipyard and Fabrication Contracts - Saigon Shipyard is due for completion in FY 2008 and will be fully operational by the end of the financial year. This means that it will have the capacity to take on more fabrication projects in order to boost earnings, and this is a separate growth driver for the Group.

4) Aberdeen Office - The setting up of this office is positive as it allows Ezra to seek opportunities in other markets like Africa, North America and Middle East.

5) Staff Incentive Scheme - Details of this are expected to emerge in the coming months, and Ezra needs to retain its talent pool and attract new talent in order to significantly bolster their staff strength in anticipation for their expanded fleet. Such specialized vessels require intensive training and skilled labour and S$19.1 million was set aside for this purpose of recruiting and retaining talent. Although this will increase staff costs in the long-term, it is a necessary evil due to the severe shortage of skilled personnel for the O&G industry. Ezra also have plans to set up a training school in HCMC, Vietnam in order to train the new personnel.

With the above catalysts, there is much to look forward to for the company in the next 2-3 years. I will be providing more updates whenever the company releases any news, and I will be doing an EOC review of 1Q FY 2008 results probably next week or so.

Additional Purchase of First Ship Lease Trust

Today, I increased my stake in FSL Trust at an attractive price of S$1.06 per share, as this implies a dividend yield of about 13.3% based on exchange rate of 1.44 per USD, and assuming there is no increase in the current DPU of 2.42 US cents per unit. My average cost is now S$1.133 and I will be holding this with a long-term focus to achieve good yield.

I will be writing a short review on FSL Trust in the coming days in order to assess the trust's latest results and prospects moving forward.

Monday, January 21, 2008

Ezra - 1Q FY 2008 Results Review and Analysis (Part 1)

Sorry for the lack of updates as I was in Penang over the weekend and spent nearly 18 hours in a coach ! It was really tiring and even when I got back on Sunday yesterday, all I could do was to reply some comments before I just hit the sack and slept through the night. Anyhow, here is the first part of the review and analysis of Ezra's 1Q 2008 financials. The second part will, as usual, involve more of the prospects and future strategies of the company and Group.

Profit & Loss Analysis

Ezra reported a net profit (excluding exceptional items) of S$16.6 million, which was a 270% rise as compared to 1Q 2007. Exceptional items would include the gain on divestment of EOC of S$197.9 million (which they listed on Oslo Bors and now hold 48.9% of), a one-time provision of S$19.1 million (more on this later) and also sale of exclusive use rights of a vessel of S$1.29 million. The very positive news is that gross margins were lifted to 41.9% from just 32.1% in 1Q 2007, as increasing charter rates lifted Ezra's margins. Revenues increased by 110% while COGS only increased by 80%, resulting in a gross profit of S$28.2 million (an increase of 174%). Administrative expenses increased quite a bit from S$4.2 million to S$26.8 million but this was inclusive of a one-time provision of S$19.1 million for the staff incentive scheme. This scheme was introduced by Ezra in order to retain top talent for its growing fleet and also to recruit and train new staff as the Group's operations expanded regionally. More details of this scheme will be announced as Management irons out the details and I have already sent an email to their IR department requesting for details of this provision (which is why I am detailing it only now as I have only recently received their reply).

Financial expenses increased by 139% to about S$3.3 million, mainly as a result of the increased financing which was necessary in order for the Group to expand their fleet. Ezra have conducted 2 rounds of sale and leaseback thus far with a financing company and I feel that they may once again use this model if it helps them to realize cash upfront and to keep their balance sheet light. This has been their policy even for EOC Limited, which is why they divested part of it. Net margins stood at 24.7% which is healthy (I have used S$16.6 million profit to compute net margins), as opposed to net margins of 14.3% for 1Q 2007.

Balance Sheet Review

Ezra's Balance Sheet looked significantly lighter after the divestment of EOC, as they are only equity accounting for the profits from EOC as an associated company; thus they do not have to consolidate EOC's assets into their Balance Sheet as well. Of note is the S$47.4 million in long-term receivables from an associated company. This should comprise the remainder of the gross consideration of S$263.2 million from their divestment in EOC (after taking into account S$1 million in listing fees and paying professional fees to the listing Manager who helped to arrange the deal). Note also in the cash flow statement that there is a receipt of about S$200 million in cash from the proceeds of disposal of subsidiary company.

As a result of this divestment, Ezra has strengthened its cash and bank balance significantly, from S$17.4 million as at August 31, 2007 to S$178.7 million as at November 30, 2007. These funds are essential in order for Ezra to fund their purchased of 4 MFSV which are due to be delivered in FY 2010, and also for hiring more manpower and increased running costs as more vessels come onboard. Their FPSO will be delivered in July 2008 (4Q FY 2008) and I will elaborate more on that when I do a review of EOC's 1Q 2008 results and presentation slides.

Importantly, debt to equity ratio has fallen from 0.9 times as at Aug 31, 2007 to only 0.3 times as at Nov 30, 2007 while interest cover (meaning cash divided by interest expenses per month) has increased to 59.4 times as a result of the infusion of cash. I will elaborate more on the cash flow statement analysis in Part 2 of the review.

In addition, Ezra has also managed to sell 5,436,000 shares in the open market, as a result of their wrong purchase of 3,000,000 shares (pre-bonus) at S$5.60 without shareholder's mandate. They have 564,000 shares remaining to dispose of at a minimum of S$2.80 per share. They also purchased 5,436,000 shares from the open market and intends to hold these shares as treasury shares for their Employee Share Incentive Scheme.

I will elaborate more on Ezra's Cash Flow Statement as well as their plans and prospects for FY 2008 in Part 2 of the review due tomorrow.

Tuesday, January 15, 2008

Mid-January 2008 Portfolio Summary and Review

It has been a rather turbulent half-month from January 2, 2008 till today, with more sub-prime worries plaguing market sentiment and casting doubts on the ability of the USA to stem off a recession. With recession fears looming, the market has been sold down relentlessly by fund managers and house traders who are unwilling to take long-term positions. Of course, the selling of late has also been the result of margin calls, as people who purchased shares three to four days ago in the hopes of a quick contra gain could only watch helplessly as the market plummeted even more. Of the 10 trading days (including today) since January 2, 2008, the Straits Times Index only rose on 2 of those sessions, thus it was closing negative 80% of the time.

In total, since January 2, 2008, the STI has lost 327.72 points, falling from an year opening of 3,482.30 to the current 3,154.58 (a loss of 9.41%). Of course, one could argue that during that time, the components of the STI have been somewhat altered, and thus the index is not directly comparable any longer. For myself, I saw a good chance of buying into a shipping trust at an attractive yield of about 10.8%, and so I made my purchase yesterday of FSL Trust at a price of S$1.17. Such defensive instruments are good during periods of market turbulence as they give consistent yield, and at the same time, I also could not find many bargains for the companies which I was eyeing. Instead of parking my money in the bank earning a measly 1.5% per annum, I decided to stash some cash into this high-yield security.

Below is the summary of my investments and related news as at January 15, 2008 (STI at 3,154.58 points). I have included Year-To-Date (YTD) gain or loss as a way to benchmark each company’s share price performance instead of a total portfolio basis, as I have made changes to my portfolio on January 14, 2008:-

1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.87, Gain 345%, YTD Loss 13.6%. Ezra released their 1Q 2008 financials on January 11, 2008. I will be doing a review of their results in my next posting, along with their fleet prospects and charter rate review as well. One thing which I am unhappy with (and I have emailed to the Management) is the S$19.1 million provision for staff incentives as a result of the successful listing of EOC Limited on Oslo Bors. Apparently, CLSA also felt that this move was excessive and was not done in favour of minority shareholders. I personally do not expect a special dividend from the divestment of EOC as I know the company may need it for working capital or to expand their fleet; but knowing that S$19.1 million was set aside just for rewarding their staff is a little too much. I shall keep investors updated on Management’s response.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.34, Gain 80.7%, YTD Loss 2.9%. There was no news regarding Boustead for the half-month ended January 15, 2008, and it was not sold down enough during the last 10 trading days for me to consider adding to my position, as the company’s long-term prospects look good. Incidentally, in the first issue of The Edge Singapore for 2008, Boustead was listed as one of the magazine’s Top 10 stock picks for 2008, and it included a short interview with Mr. F.F. Wong on the company’s plans and latest negotiations for contracts.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.05, Gain 202%, YTD Loss 11.1%. There was no news from Swiber for the half-month ended January 15, 2008.

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.53, Gain 37.8%, YTD Loss 10.5%. There was no news for Suntec REIT during the half-month ended January 15, 2008.

5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.51, Loss 22.1%, YTD Loss 19.0%. There was no news from the company during the half-month ended January 15, 2008.

6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.58, Gain 5.3%, YTD Loss 14.6%. There was no news from the company during the half-month ended January 15, 2008.

7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price $1.17, Market Price $1.20, Gain 2.6%. There was no news from the shipping trust during the half-month ended January 15, 2008. Their FY 2007 results and dividend announcement are due out on January 16, 2008 (Wednesday) and I will provide a quick review of it.

Overall Portfolio

My overall portfolio has increased by 64.4% from a new cost of S$70K as at January 15, 2008. The market value of my portfolio is S$115.1K. Realized gains remain at S$4.55K.

Comparison against STI

As mentioned, the STI had declined by 9.41% from the start of 2008 till now. Due to the change in the composition of my portfolio, it will not be very comparative to do an adjusted cost, therefore I will report my portfolio results as if I did not make the FSL Trust purchase. Henceforth, I will be reporting in this manner, treating the FSL Trust as a separate company to be evaluated on its own, as I did not purchase it right from the start of the year. If any reader knows of a better way to measure total portfolio performance, please do drop a comment !Without FSL Trust, my portfolio would have declined by 11.3%, mostly as a result of the forced selling of Pacific Andes which exacerbated the unrealized losses. As a result, to date in 2008, my portfolio has under-performed the new benchmark STI by 1.9 percentage points.

My next portfolio review will be on Thursday, January 31, 2008 after market close.

Monday, January 14, 2008

First Ship Lease Trust - Purchase and Analysis of Purchase

I purchased some FSL Trust today at a market price of S$1.17 to add to my portfolio. After doing some research on the Internet and on forums for high-yielding stocks, I chanced upon shipping trusts. There are 3 of them currently listed on SGX, namely Rickmers Maritime Trust, First Ship Lease Trust (FSL Trust) and Pacific Shipping Trust (PST). Since this was a relatively new asset class and promised high yield, I decided to do my research to see what I could sniff out in terms of yield and returns.

Apparently, of the 3 shipping trusts, only FSL Trust works on a bareboat charter basis, which means that they are not responsible for the costs of maintaining the vessels under their care. The business model for all 3 shipping trusts is similar: buy vessels and lease them back to the shipping operators on an operating lease (usually 7 to 9 years lock-in). The trust will then collect the lease revenue, pay off the trust's management and distribute the remainder as dividends to unit-holders. What differs is that FSL Trust does purely bareboat chartering, in which the cash flows are stable and certain as they are NOT exposed to operating costs and NOT exposed to technical/vessel downtime. As a result, they are able to more or less guarantee a specific dividend being paid out of their profits as profits are more certain and predictable. This qualifies it as a "safe" investment as I do not like surprises when it comes to high-yield instruments.

FSL Trust started off by launching its IPO at US$0.98 which began trading on March 27, 2007. Initially, the trust had a portfolio of 13 vessels, of which 4 are containerships, 4 are product tankers, 3 are chemical tankers and the remaining 2 are dry bulk carriers. The average age of the vessels are 5 years old and they are leased to international shipping operators such as Evergreen Marine, Berlian Laju Tanker (which is also listed on SGX), Schoeller Holdings, Siba Ships and James Fisher. There is flexibility with regards to structuring such lease arrangements for lessees which makes FSL Trust's business model attractive. In addition, to date, FSL Trust has only utilized US$50 million out of a potential US$250 million loan facility to acquire new vessels. This leaves more room for yield-accretive acquisitions which can increase DPU (distribution per unit).

A business update by the company dated November 9, 2007 shows that they had acquired 3 product tankers on June 1, 2007 from James Fisher for US$45 million, marking their first acquisition post-IPO. In addition, there is also an option given by James Fisher to sell and leaseback a fourth vessel by June 30, 2008. The lease term is 10 years and is accretive to DPU. Another 2 product tankers were acquired on November 7, 2007 for US$113 million from Groda Shipping and Transportation for a lease term of 7 years. This acquisition is immediately accretive and we will see the effects in the upcoming 4th quarter DPU announcement due on January 16, 2008 (Wednesday).

Now for the numbers: The previous DPU for the period July 1 to September 30 (paid on November 23, 2007) was US 2.23 cents per share, thus annualized DPU based on this payout would be US 8.92 cents, or about SGD 12.67 cents using a conservative exchange rate of 1 USD: 1.42 SGD. At my purchase price of S$1.17 per share, this would represent a dividend yield of 10.82%. This is obviously much better than any REIT and bank account, and beats inflation by almost double (inflation is expected to hit 5% for 2008). The additional positives are that the trust will be looking out for more yield-accretive acquisitions to add value to shareholders, while yield plays generally do quite well during market corrections.

There are always risks to any investment, and the risk in this case is that distributions are paid out in USD, and the USD is currently on a decline, hitting 1.428 as I write this post. There is also a risk of lease rates slowing down and moving lower, thus limiting FSL Trust's capacity to acquire vessels to increase yield for unitholdings. Of course, the ever present risk is of capital loss, as in any investment which is listed on a stock exchange, but hopefully the impact can be mitigated by a higher dividend yield.

Comments are welcome and I appreciate some healthy feedback on shipping trusts in general, as well as FSL Trust.

Thursday, January 10, 2008

JEL Corp - Accounting Fraud, Manipulations and Misdemeanours

The latest scandal to hit the stock market belongs to JEL Corp, which was suspended in September 2007 following news that SGX suspected something was wrong with their reporting and financials. The CAD were called in and KPMG was appointed as the independent forensic auditor to investigate into the affairs of the company (the usual procedure). Needless to say, SGX had to suspend trading in the counter as it would not create a "fair and orderly" market.

Now, on January 8, 2008, the auditors have issued their audit report and it's not a pretty picture. Basically, the gist of it is saying that there were deliberate attempts to falsify documents, create fictitious invoices (hence boosting revenues), use creative accounting entries to reduce expenses (hence inflating profits) and non-disclosure of related party loans. The main culprits which were named include Mr. Eric Tan (former Chairman), Mr. Eric Leow (Director) and Mr. Wee Teck Han (CFO). After reading the KPMG report, I must say it's quite appalling how these "irregularities" have been committed considering it is a listed entity and we have been stressing on corporate governance and transparency. This is really a blemish and the perpetrators deserve to be punished severely as the minority shareholders will surely suffer a sharp drop in the value of their investment once trading resumes.

The KPMG report does not mince words and states clearly how the books were cooked in a variety of ways, some innovative and some downright plain and dirty. Apparently, there was insufficient independence and internal controls on the part of the audit committee to ensure these fraudulent transactions did not take place. The auditors have stated that FY 2006 profits will need to be restated; which means that the S$8 million profit for FY 2006 now becomes just S$1.92 million, while for 1H 2007 they are supposed to show a net loss of S$1.38 million instead of a net profit of S$4.35 million. This is a very significant, material and pervasive difference indeed and reminds me of the case of ACCS (now renamed MDR) where the Management also tried to inflate revenues to justify their "targets". Incidentally (or rather, coincidentally), MDR had almost entered into a strategic partnership with JEL through a share swap before this scandal broke out. That proposed joint venture was effectively scrapped when news of the scandal broke.

It remains to be seen if corporate governance and internal controls can help to prevent future occurences of such nature from recurring, as it seems that there has been a long list of casualties like MDR (former ACCS), Informatics and China Aviation Oil which have been through such scandals. Most do not recover and the stigma and bad reputation stay with them for a long time, causing their share prices to languish below 10 cents and making it very hard for the companies to raise funds through secondary equity offerings.

I hope that the perpetrators will be rightfully punished to send a strong message that this kind of insufferable behaviour will not be tolerated, especially when so many people's money is at stake. The selfish intentions of the perpetrators and the resulting fallout will only serve to haunt their conscience in the long-term, as they look back and reflect on the harm and damage they have caused to all those who had faith and trust in them. Incidentally, even veteran investors such as Mr. Sam Goi (Chairman of Tee Yih Jia Foods) and Koh Boon Hwee were conned into investing in this so-called "promising" company.

Tuesday, January 08, 2008

Ezra and EOC - EOC Annual Report and Declared Dividend for FY 2007

Sorry for the lack of posts, but I had a great time in Bangkok shopping, watching movies with my wife and going for massages; thus was not inclined to think of the stock market for a while ! The new year FY 2008 has just begun and markets are looking more attractive as prices across the board are falling. Investors who intend to make use of this opportunity to invest in solid companies should be careful on which company they choose (it should have a sustainable competitive advantage) and they should buy with a margin of safety to the intrinsic value.

A quick check on EOC's website showed that EOC had posted up a change in financial calender. The 1Q FY 2008 results will now be announced on January 14, 2008 (Monday) instead of the previous January 9, 2008 (Wednesday). This would mean that Ezra will also be releasing its 1Q FY 2008 results on the same day, as both companies would synchronize their reporting dates. The dates for the remaining announcements are still subject to change and EOC will do a filing with Oslo Bors to inform of any changes in proposed schedules for results releases accordingly, as is the rule and regulation for the Norwegian Bourse. For more details, please click here for the list of announcements by EOC (all dated December 27, 2007).

EOC has also released its Annual Report (AR) for FY 2007 which can be downloaded from the link above. Of note are the mention on Page 6 of the delivery of the Lewek FPSO 1 which is on schedule for July 2008, and how this will contribute strongly to earnings for EOC. All costs and equipment have been on budget and on schedule, and according to the AR, she is on schedule for first gas (which I believe relates to maiden voyage ??) by August 2008 (last month of FY 2008). Importantly, the AR mentions that EOC will be acquiring more hardware in FY 2008 to complement their fleet and to enable more operational flexibility and efficiency. Being listed on Oslo Bors means that it is much easier for EOC to do a secondary offering which will dilute Ezra's 48.9% interest, rather than directly diluting Ezra's shareholders. Mr. Tan did mention that the reason for Ezra to divest part of EOC was to remain asset-light, and Mr. Tay emphasized that any debt taken up by EOC remains EOC's debt, and will increase EOC's gearing and will not affect the Group's gearing. It remains to be seen if this will be the case, but it is almost a certainty that EOC's spin-off is to help it raise funds through a separate channel (in this case, Norwegian capital markets) in order to grow and expand. Remember that in Norway, oil and gas assets fetch better values as they are better appreciated there, as compared to Singapore.

The CEO's statement also talks about the successful delivery and deployment of Lewek Champion, which is the new accommodation and pipelay vessel. The AR mentions recruiting new blood in early 2007 to ensure the new sophisticated vessels of Ezra have sufficient skilled manpower to run them. Growth for EOC (and hence Ezra Group) will come through the secure of long-term charter contracts (ensuring a steady recurring revenue stream), higher charter spot rates (in a tight supply market where most vessels are old) and more offshore construction contracts flowing in. I do expect more positive developments from EOC in the coming months of FY 2008.

Finally, EOC has declared a dividend of 2.04 US cents per share, which is its maiden dividend paid after its successful listing on the Oslo Bors. The dividend is payable on January 11, 2008 and this will be reflected in the 2Q FY 2008 financial results for Ezra. Ezra holds 48.9% of EOC or a total of 54,226,462 shares in EOC, therefore they will receive a total dividend of US$1.106 million (or about S$1.592 million using an exchange rate of 1 USD = 1.44 SGD).

I will provide an analysis and update on both EOC and Ezra's 1Q FY 2008 results when they are announced.