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.