A Value Investor's Test of Resolve

I shall type this post purely from scratch and this is based on the thoughts that I had rationalized over the last week as the stock market had taken probably the worst slide in the last 21 years (since the 1987 market crash). I intend to cover a few areas so please bear with me if the post seems haphazard, I am trying to organize my thoughts as I type and if there are some ideas which seem disjointed, it's because this is a rather "ad-hoc" posting.

What we have witnessed in the past 2 weeks is probably the worst rout in the history of stock markets, and for some time to come no doubt. I shall not go into the details as every major newspaper and website would have covered the events to death, sounding more doom and gloom to an already panicky cauldron of potent witchbrew. Mr. Market has shown time and again that he can be extremely emotional; as one year ago he was irrationally exuberant and bidded up the share prices of companies to lofty valuations. Now, exactly a year later, he is ferociously thrashing every one who made him look like a fool for being such an eternal optimist. I was reminded of some sections of the "Intelligent Investor" which stated that in a bull market, you'd worry about not making as much money as your neighbour; in a bear market, you just worried about whether your money will dwindled to absolutely nothing as the value of your portfolio dips by 50-60%. But I digress.

I am here to categorically state that as I am HUMAN too, I was affected by the emotional roller-coaster unleashed by a manic Mr. Market, and I was rather distressed throughout the whole week. This being my first true bear market (and a savage one at that), the severity, intensity and consistency of selling has truly amazed me. Reading books on such selling is one thing; actually witnessing it is an altogether different experience, one that I certainly won't like to experience too many times in my life. However, I would like to state that I did NOT capitulate and sell all my shares in a panic, even though the recent news on Ferrochina's bankruptcy and China Printing and Dyeing's scandal have further exacerbated my lingering worries about the financial health of my companies.

Being an aspiring value investor, I think the most rational and prudent thing to do would be to do a quick review on the underlying health of my companies:-

1) Ezra - I had sent the IR department an email on their loans and whether refinancing was needed or would be a problem. I also clarified if they were going ahead with their MSFV plans as industry conditions are more uncertain now. The reply was that they had no problems with their business as they had secured long-term charters with National Oil companies and International Oil majors (lower counter-party risk), while the Group had built up strong branding and relationship with their bankers over the years and there was no risk of the banks "pulling the plug".

2) Swiber - Some indications of their financial health are the consistent share buy-backs which Management is making, and also the recently sealed third sale-and-leaseback deal. Do recall that not too long ago in March 2008, the company raised S$100 million in bonds (at 4% interest rate) which have a 3-year maturity (maturing in FY 2011). As there is currently no announcement of their Equatorial Driller, this means that the company will not proceed to build it as yet and therefore does not need to pay a deposit to the yard, thereby saving more cash. I have also personally spoken to the Management, CEO and BOD and found them to be intelligent businessmen who know how to run a company; and they all have rich experience in oil and gas industry. Some Management also consist of talents such as Mr. Glen Olivera who has many years of offshore drilling experience; thus he would know how to properly run the ODS division.

3) Boustead - Off the cuff, I recall that Boustead had a cash hoard of about S$150 million as at 1Q 2009, and this will probably be boosted further by the sale of a property announced earlier in the calender year. All their projects are proceeding smoothly including the many projects Boustead Projects won in FY 2008, as well as the Al Marj township contract in Libya and the various O&G contracts too. With their strong net cash position, this is the company I'd worry about the least; and Boustead may also be on the quiet prowl for a suitable acquisition target which they can acquire cheaply as a result of the global turmoil. In addition, the company has been using its cash hoard to buy-back shares cheaply at prices which can be deemed under-valued, as a way of enhancing shareholder value.

4) Pacific Andes (PAH) and China Fishery (CFG) - It is true that these 2 companies are highly-geared, and are at risk in such a credit crunch. Of the 2, I would think Pacific Andes is more at risk than China Fishery because PAH operates on a very low net margin but with high gearing nonetheless. The good news is that most of the capex and financing is needed by CFG and not PAH, and many of PAH loans will not be due till late CY 2009. CFG has strong operating cash inflows and their balance sheet, though geared, has many assets (e.g. permits, fishing vessels) as collaterals to the banks so I don't see a problem where banks will pull the plug. Also, note that CFG, unlike Ferrochina, does not intend to incur significant capex to expand since they had already done this in FY 2007 with the acquisition of the Peruvian fishmeal operatons. In fact, Chairman Ng Joo Siang said in CFG's FY 2007 AGM that they intend to be prudent and keep cash. That was back in April 2008; so I don't think they will be reckless and over-extend. I trust in Management's capability as CFG, PAH and PAIH have been around for at least 10 years.
5) FSL Trust - After attending the EGM, I am of course not happy to learn that the DPU will probably have to be cut as a result of the dividend reinvestment scheme. But at least FSLT does not have a vessel pipeline coming up and they do not have to scramble for funds to pay for these vessels. Their aim now is to preserve cash and maintain their portfolio, rather than grow which is impossible as they cannot tap the frozen debt markets and the depressed equity markets. Hence, although FLST's yield will probably fall in the coming quarters, at least I can be assured of some cash flows and that there is no danger of them imploding. *Note too that the USD:SGD rate has actually risen to nearly 1.48 in recent weeks, therefore this may offset the effect of the lower USD DPU (recall the previous 2Q 2008 DPU was based on an exchange rate of 1.41+).

6) Suntec REIT - The recent collapse of a Japanese REIT has raised renewed fears of REITS being unable to refinance their huge borrowings to acquire real estate assets. Suntec had just secured financing for a bridging loan to acquire the 1/3 stake in ORQ, and this will be a 3-year loan at competitive spreads. The press release also states that Suntec REIT WILL NOT have any refinancing to be done in FY 2008 and FY 2009, thus only by FY 2010 will it need to refinance its loans. Thus, though DPU and yield may be affected, I do not see any further danger to the REIT as a going concern.

7) Tat Hong - I bought this company recently due to its strong operating cash flows from 12-18 month locked-in leases and its cash balance was S$79 million for 1Q 2009. The Company has also been buying-back shares from the market and I don't think the Management will be silly enough to buy back shares when they have loans to refinance. Their gearing is 0.38 and though they spend quite a bit on capex, note that they have FCF to back them up, and that the CEO Roland Ng has said that with the impending slowdown, they will build up their cash reserves by selling inventory. Note that when times are bad, people rent (they don't buy). Tat Hong's aim is to become a rental company and as computed in Part 2 of my analysis of Purchase for Tat Hong, gross margins for crawler crane rental can go as high as 60-65%.

After this objective review of my companies which has calmed my jangled nerves somewhat, it is time to comment on some of the remarks, suggestions and reponses I had on my blog (and through private messages on forums which I visit). These range from the good (encouraging), the bad (how could you have let all your profits evaporate and be in a net loss position ?) and the ugly ("I told you so !"). The thing to do, of course, is to ignore the callous and those who are in the position to gloat on my "failure". For at least I can hold my head high and say I invested with proper prudence, research and I had done my homework. Even if I were to lose money, I lose it with full knowledge that I had made an error and I will seek to modify my value investment style to accommodate the error. Moreover, my horizon is 3-5 years for the companies I own, and I see this recession as a setback to their growth, but it will not make them topple like bowling pins.

As the title of this post states, this vicious bear market is the ultimate test of a value investor's resolve and how he stands up to repeated criticisms on his style. Advocates of market timing suddenly pop up to point fingers and tell value investors that they should have timed the top to sell and then bought back at the bottom, not realizing that this is 100% hindsight investing, isn't it ? To have conviction is to be steady and not falter even when everyone around you is losing confidence in you, and is the most difficult test of all. Those who are more diplomatic have stated that I ought to be more "flexible" to accommodate the future (i.e. the credit crunch); but no one could have guessed it would have snowballed to this acute extent. I do concede, however, that I need to improve on my analysis in order to be a better investor, and that there are still more things to be learnt in order to be a more rigorous value investor. I still reject the idea of market timing as I don't think someone can get it right over and over consistently. My aim, I reiterate, is to own well-run companies which can give consistent returns, and I shall NOT deviate from this philosophy whether it is a raging bull market, or a depressing bear market.

Lastly, I would advise those who post comments to be diplomatic and tactful. I will not hesitate to delete comments which I think are rude, tactless, insulting or blatantly deragotory.