Tuesday, November 30, 2010

November 2010 Portfolio Summary and Review

Make no mistake about it – November 2010 was a rather sensational month, not just buoyed by news of QE2 (Quantitative Easing) and Hong Kong’s more draconian property measures, but was also filled with financial results announcements from five of my companies. This of course got me in a minor frenzy and had me busy for the last few weeks as I sought to read through all the news and updates to keep myself abreast of developments within the companies in my portfolio. Thus far, I have posted up my analysis and review of MTQ and Part 1 of Boustead, and this is set to continue with Tat Hong in December as I delve further into the results. I have also taken the liberty to include brief summaries of the results within my portfolio review for those who are not keen to read the (boring) details of a full analysis.

I think enough has been said of QE2 and I will not dwell further on that. The more interesting regional news (besides the release of Aung Sang Suu Kyi in Myanmar) is that of China and Hong Kong doing their utmost to rein in runaway property prices. Hong Kong made a rather draconian move of implementing a stamp duty of 15% on the sale of property, split equally between buyer and seller. While analysts and economists have remarked that the Singapore government is unlikely to follow suit (for fear of “scaring off” genuine buyers), the government has grudgingly acknowledged that the measures implemented on August 30, 2010 have failed to sufficiently cool demand and lower prices. As a result, a record amount of land has been released in order to ramp up supply for 2011 in an effort to bring down prices. Even MAS acknowledged that the current environment of ultra-low interest rates (SIBOR being just 0.44%) and the aggressive tactics used by banks to encourage loan growth may result in imprudent borrowing by a large swath of the population. It remains to be seen if there will be further measures implemented to cool the market.

On the COE front, prices have just hit a 10-year high with COEs for small cars hitting S$39,000, and those from the “Open” category hitting S$49,890. This means that a 1.6L Toyota Corolla now costs about S$110,000, while a mere Audi costs in excess of S$300,000 (note that this is enough to buy most couples a flat in a distant, remote part of Singapore). At the same time, the media reported that inflation was creeping up in Singapore, and stood at 3.5%. Incidentally, savings accounts at most major banks continue to pay a measly 0.125%, which means a lot of money will flow into equities, bonds and property. Part of the reason for the inflation is due to higher car prices, as dealers jack up prices in anticipation of a further shrinkage in the COE supply come February 2011. It all seems to be contributing to a boiling cauldron of speculation, and should the bubble burst suddenly and inexplicably, it would seem many will inevitably get burnt the way speculators got burnt back in 1997.

Another observation of mine is that there seem to be many more IPOs these days, the most recent being Sabana REIT (Singapore’s first Sha’riah compliant REIT). With sentiment being hammered by Ireland’s woes and China’s cooling measures, these new aspirants are seeing their share prices debut below their offer price, the most recent being Sabana (listed at $1.05) closing at $1.02. Amtek Engineering is another company which is due for a listing (at $1.30 per share), and all the shares to be offered are vendor shares. With the prevailing sentiment (on forums) being that it is an almost effortless task to apply for any IPO, receive an allotment, and stag it to receive instant profits, there seems to exists a cavalier attitude amongst punters and speculators; not dissimilar to the unadulterated enthusiasm being displayed at the height of the bull market during the heady days of late 2007. I guess it takes some loss of money (and face) to demonstrate the making money from Mr. Market consistently is extremely difficult and is not to be taken as a given. After all, everyone understands the concept of there being “no free lunch” and the all-important mantra of “Caveat Emptor”.

Below is a snapshot of my portfolio and associated comments for November 2010:-

1) Boustead Holdings Limited – Boustead announced their results on November 9, 2010. Revenue for 2Q 2011 was up 14% to S$130 million, but net profit attributable to shareholders was down 25% due to higher operating expenses and lower gross margins. For 1H 2011, revenue was up 38% while net profit was up 98% (due in part to the disposal of a leasehold property). An interim dividend of 2 cents per share was declared, up from 1.5 cents per share a year ago. More details can be found in my separate posts on the analysis of Boustead’s results.

2) Suntec REIT – Suntec REIT’s EGM was held on November 25, 2010 at Suntec City Convention Centre Rooms 325 and 326 at 10:00 a.m. Basically the EGM was held to approve the acquisition of the 1/3 interest in Marina Bay Financial Centre (MBFC). There was a good crowd and some people raised very interesting questions; but since I was just a small shareholder since IPO, I didn’t raise any queries and was content to listen to others vociferously voicing their opinions (and displeasure haha). It was also amazingly well-organized, with a meal voucher being given to each shareholder so that there would be no rush for the food (and some people sweeping everything into their tumblers or plastic bags). A bento box set was given to each unit holder consisting of bee hoon, 2 buns, bottled water and a host of other cakes and snacks. Best of all, a free Suntec REIT EZ Link card worth S$5 was given to every registered unit-holder, and I took the liberty of handing it over to the ticket office at the nearest MRT station to exchange it for a cool S$5 note. I guess I can treat that as an early advance dividend! A placement was done yesterday at $1.37 per share to raise the S$428.8 million gross proceeds to fund the one-third stake in MBFC, and an early dividend will be declared for the currrent units.

3) Tat Hong Holdings Limited – Tat Hong released their 1H FY 2011 results on November 13, 2010. Revenue for 2Q 2011 was up 20% but COGS was up 25%, resulting in a 12% rise in gross profit. Net profit attributable to shareholders was just up 7%, and for 1H FY 2011 profit was just up by 2%, demonstrating that the recovery was actually slower than expected for the Company and those within the industry. An interim dividend of 1 cent per ordinary share and RCPS was declared, and is payable on December 17, 2010. I will be doing a review and analysis of Tat Hong’s results, but not in as great detail as the FY 2010 results. In a separate announcement on November 12, 2010, Tat Hong also announced the proposed acquisition of 70% of Hup Hin Transport Co Pte Ltd, which is a heavy transport solutions provider. The Company has a diversified fleet which includes 200 units of transportation equipment from lorry cranes, rough terrain, all terrain cranes, prime movers and trailers. The consideration for the shares is S$7.7 million (effectively valuing the entire company at S$11 million) and the NAV was S$6.8 million (meaning Tat Hong paid a slight premium to book value), while profit after tax as at Dec 31, 2009 was S$3.05 million. This means Tat Hong paid about 3.6x PER for their 70% stake in the Company. The rationale being that the acquisition can help the Group to leverage off each other’s strengths and capabilities and to broaden the Group’s customer base in the region.

4) MTQ Corporation Limited – MTQ released their 1H FY 2011 results on November 3, 2010, and I have provided a review and analysis of their financials and prospects in a previous post. On November 22, 2010, the Company also announced that the price of each scrip share under their Scrip Dividend scheme would be 83 cents per share. I have chosen to fully take up my proportionate share of scrip and will not be receiving any part of the dividend in cash, hence my realized gains for November 2010 will NOT reflect this dividend. MTQ also sent over its annual newsletter called Horizons which provided an update on the developments within Oilfield Engineering and Engine Systems.

5) GRP Limited – There was no news from GRP for the month of November 2010. The dividend of 1 cent per share was received on November 26, 2010.

6) Kingsmen Creatives Holdings Limited – The Company released their 3Q 2010 financials on November 10, 2010. Disappointingly, 3Q 2010 revenue rose 7.6% but COGS increased 9.5%, resulting in just a 1.2% increase in gross profit. As a result of higher other expenses, net profit for 3Q 2010 fell 17.7% to S$2.5 million. For 9M 2010, net profit rose by 5.2% to S$9.4 million. Cash flow generation for 9M 2010 from operations was S$15.2 million and FCF was about S$9 million, hence I was fairly confident that Kingsmen will be able to maintain their final dividend of 2 cents/share come February 2011 when they release their FY 2010 results.

7) SIA Engineering Company Limited – Things were fairly busy over at SIAEC. First, they released their 1H FY 2011 results on November 2, 2010; and declared an interim dividend of 6 cents per share, up from 5 cents per share last year. Revenue for 2Q 2011 was up from S$248 million to S$277 million, while profit attributable to shareholders climbed by S$5.4 million from S$61.1 million to S$66.5 million. For 1H 2011, profit rose from S$106.2 million to S$137.3 million year on year. The Balance Sheet remained strong with no debt and cash balances of about S$406 million. There was –ve FCF generated for 2Q 2011, due to a decrease in creditors of S$27.2 million, but for 1H 2011 there was positive FCF of about S$40 million. Overall, most of the cash outflows were due to the payment of the final dividend, and cash flow generation continues to be strong. I will NOT be doing a detailed review of SIAEC’s 1H FY 2011 financials as I had just posted up my 5-part analysis of purchase for SIAEC. On November 4, 2010, SIAEC announced their 25th Joint Venture (JV) with Panasonic Avionics to set up a Singapore-based MRO facility for in-flight entertainment and communications systems and components. For this JV, SIAEC will own 42.5% while Panasonic will own the remaining 57.5%. On November 26, 2010, SIAEC announced that their 6th line maintenance JV was up and running, with them partnering Southern Airports Corporation in a 49%:51% JV. The JV company is called Southern Airports Aircraft Maintenance Services Co., Ltd and is located at Ho Chi Minh City’s Tan Son Nhat International Airport. Both these transactions are expected to accrue long-term benefits for SIAEC as they slowly but surely grow their stable of JV companies and extend their presence around the world.

Portfolio Review – November 2010

Realized gains have jumped to S$49.1K from S$46.4K due to SIAEC, Boustead and Tat Hong going ex-dividend, but note that for MTQ, I have chosen to accept the scrip dividend (which was priced at 83 cents per ordinary share), therefore the value of the dividend is not included under “Realized Gains”.

For the month of November 2010, the portfolio has lost -4.5% against a +0.1% marginal rise in the STI. On an annualized basis, the portfolio has gained by +13.7% against the absolute gain of +8.5% for the STI. Cost of investment remains at S$202.4K, and unrealized gains stand at +19.6% (portfolio market value of S$242K).

December 2010 is set to slow down as companies have all but reported their 3Q results, and this is usually the time when corporate activity slows down as staff take leave for the holidays along with their families. I will not be expecting much corporate updates during the month, and can probably concentrate on analyzing the results from my companies; as well as thinking about issues such as property, personal finance and alternative investments.

My next portfolio review will be on December 31, 2010 (Friday). I will also be including a special year-end commentary and summary of my portfolio to discuss the rights and wrongs; and also to detail my investment strategy for the new calendar year 2011.

Saturday, November 27, 2010

Boustead – 1H FY 2011 Financial Analysis and Review Part 1

Boustead released their 1H FY 2011 financial statements on November 9, 2010. As has been the practice over the last few years, I will be reviewing just the half-yearly and full year results, and will post some comments and updates on the Company and its progress. Note that I will also include information from recent articles published in The Edge Singapore on Boustead, and present the information alongside the analysis and future prospects section to give a more balanced view of the Company and where it stands presently. Note that many plans are still sketchy and there are a number of initiatives which are stuck in “work-in-progress” mode, so readers should be mindful of them when making decisions about the Company (I will highlight these as I go along).

This review will be split into two parts (in order to keep each part manageable and readable). Part 1 will focus mainly on the financials (revenue and profit growth), margins, Balance Sheet and Cash Flows, and there will also be a little discussion on Boustead’s business divisions’ performance. Part 2 will continue with the business divisions’ margins and overall performance, and will also delve into the prospects and future plans for Boustead as we move into CY 2011.

Profit and Loss Analysis

For 2Q 2011, revenues rose 14% but this was offset by a rise in COGS of 20%, which resulted in gross profit falling by 2% to S$30.8 million. Gross margin for 2Q 2011 was just 23.6% against 27.5% for 2Q 2010. However, the problem arises when Boustead’s results are viewed on a quarter by quarter basis, as the Group has warned that revenues are lumpy due to the project flow nature of their work; hence it is better to use half-yearly or yearly comparisons. So if we view the 1H 2011 performance, revenues were up 38.4% while COGS increased a smaller 34%, resulting in gross profit improving by 50% to S$96.2 million. Gross margin actually improved year on year from 27.5% to 29.8%. 2Q 2011 saw higher expenses being incurred to expand BIH into Malaysia and China, and also for setting up a new office in Darwin for ESRI (Geo-Spatial). There was also a lack of contribution from share of results from associates. The good news was that admin expenses increased by just 16% due to Boustead’s consistent focus on cost-cutting, while finance costs remained negligible at S$194,000. The result was an increase in profit before tax of 79% to S$54.3 million for 1H 2011. With income taxes increasing just 35%, this led to an increase in profit attributable to shareholders of 98%. However, note that part of this included the revenue (of S$67.8 million) and profits from the sale of an industrial warehouse facility in 1Q 2011.

Balance Sheet Review

Boustead’s Balance Sheet has traditionally remained strong, and this time was no exception. Although cash balances dipped from S$223 million to S$208 million, debtors also dropped to S$99 million even though revenue improved. The reason for the cash dip was partly due to the drop in trade and other payables by about S$26 million to S$199 million. Current ratio stands at 1.97 as at Sep 30, 2010, compared with 1.78 as at March 31, 2010.

Debt levels are kept manageable, with short term loans standing at S$5.5 million and long-term debt at S$18.5 million (for a total of S$24 million). Net cash stood at S$174 million as at Sep 30, 2010 (net cash per share of 34.4 cents), and I believe they are keeping this cash hoard for potential deployment into either the Bio-Treat convertible bonds, or the Big Box project with TTI. More on this in Part 2 of this analysis.

Cash Flow Statement Review

Boustead’s operating cash flows for 1H 2011 are much healthier as compared to a year ago, when it was a negative S$12.7 million. For 1H 2011, there was positive operating cash flows of S$11.4 million, against capex of S$1.76 million, to yield free cash flows of S$9.64 million. For investing cash flows however, there was an acquisition of MI and purchase of AFS securities which drained cash of S$5.5 million. The net result was a cash outflow of S$6.4 million for 1H 2011, which was still lower in aggregate compared to operational cash inflows.

Most of the financing outflows were made up of payment of dividend, and the net cash outflow for the half-year was S$17.1 million. Boustead has still retained its war chest as it is expected to conclude the Heads of Agreement deal with TT International soon on Big Box (the agreement was extended till 1 December for signing, with the long-stop date set at April 11, 2011). Due diligence is also being conducted on the Bio-Treat deal and I would expect Boustead to make an announcement soon on whether they intend to proceed with this deal.

Divisional Revenues Analysis

Engineering services once again took the lion’s share of the revenue pie, contributing 85.6% as compared to last year’s 83.7%. Engineering service’s revenue also grew strongly, up 41.6% from S$195.1 million to S$276.2 million, largely boosted by real estate and energy-related solutions divisions. The difference this year is that the water and wastewater division is also making a meaningful contribution to revenue (and profits, as we shall see in Part 2). This had the overall effect of strengthening the rise in revenues, but of course the crux of the issue is the margins to be obtained from each division, as it is pointedly useless to discuss increases in revenues when profit before tax (PBT) does not budge at all. This will be well-covered in Part 2.

Interestingly, the mix is roughly the same for each division within Engineering Services. Boustead had been restructuring Boustead Maxitherm for some time now, and contributions should start flowing in from this FY onwards; while BIH and C&E made meaningful contributions to revenues. For 2Q 2011 alone, it was a slow quarter but Boustead sounded a note of optimism by saying that negotiations for small and medium contracts are expected to be facilitated.

Real Estate Solutions saw a slower quarter, as mentioned in the press release the value of enquiries had been going down even though this was balanced by an increase in enquiries. Another factor to consider is also the margins to be obtained on these design and build projects, and Boustead should also try to secure more design, build and lease contracts in order to fortify its recurrent revenue base. The township project in Libya is turning out to be more “pain” than “pleasure” as the progress has stalled repeatedly and FF Wong had mentioned problems regarding collecting of monies. Now, the Group is negotiating for a set of different terms to push forward, and to reduce their risks. Understandably, this also means that revenue contributions from Libya will be muted at best, non-existent at worst.

The surprise came from the 26% jump in the revenues for Geo-Spatial Division, as this has traditionally been a slow grower and more of a cash cow for Boustead. However, with the acquisition of Mapdata Pty Ltd back in Feb 2010, this has probably diversified its product range further and allowed the division (under ESRI) to bundle services to form a better package to customers (which are mainly corporations and government agencies).

Part 2 shall tackle the divisional margins and I will also be covering Boustead’s prospects and plans, along with the incorporation of some facts gleaned from a recent article in The Edge Singapore featuring Boustead and FF Wong.

Tuesday, November 23, 2010

Personal Finance Part 20 – The Curious Case of Financial Literacy in Singapore

Perhaps I’ve been harping too much on this issue in my monthly portfolio ramblings, but it just occurred to me that Singaporeans (the youth in particular) are either becoming more and more ignorant of financial matters, or that it has been the case all this time but no one bothered to bring it up to the forefront for discussion. After all, financial literacy can be considered a critical life skill which most young adults (and I dare say even teenagers) should grasp as early as possible, in order to cement their views on spending and saving and to inculcate positive values within them regarding money management. Yet, it seems that many schools are not teaching such topics to students, and many parents also neglect to talk to their children about proper money management. This has resulted in many Singaporeans not even grasping basic financial concepts such as interest rates, investments, savings and rates of return.

Our local newspaper has been highlighting the effects of the lack of financial literacy for quite some time now, and the evidence stems from the fact that such a large group of people have been conned into scams such as Oilpods and Sunshine Empire. It may sound amazing that people out there can promise returns of 10% to 20% per month, but it strikes me as even more amazing that there are people who can actually believe such tall tales! Another phenomenon which has been making its rounds recently are the myriad “investment” seminars out there which can purportedly teach you how to generate unlimited and consistent passive income and to make huge percentage profits using just a small capital base. Simple common sense and logic should tell one that if such schemes were really true, then the operators would have resorted to using it themselves to get filthy rich, instead of “altruistically” wanting to share it with the general public for a “low fee”. Sadly, common sense is becoming less and less common these days.

But what is the cause of this seemingly pervasive lack of financial literacy and common sense? For one, schools are ill equipped to discuss and teach this topic as they claim that each individual is different and so will need to be taught differently on how to handle money in their own way. While this is true, I argue that there are many general principles out there which are applicable to every man on the street, regardless of his social status or wealth level. Simple concepts include the effects of interest rates, paying yourself first and compounding of one’s money; and these can be effectively introduced in schools at primary level to inculcate the right values and practices in children. As they progress on to secondary and tertiary education, more emphasis can be placed on broadening their understanding of financial concepts such as investments, equities, bonds and fixed deposits, to name a few. In other words, the Government should take a pro-active stance to introduce this curriculum into the mainstream so as to dispel the cloud of ignorance currently hanging over every child. It is not enough to just have initiatives such as MoneySense or IM$avvy, as these are targeted mainly at adults who may already have ingrained ideas which are difficult to alter.

Another area which needs to be worked on (and is admittedly tougher) is that of the family unit. Families are somehow reticent when it comes to discussing financial matters in detail, and most parents do not wish for their children to know their true financial situation. This could stem from a conservative belief that if a child knew how much their parents were worth, they would, at best, become lazy and corpulent (knowing that their future would be paid for); or at worst, start plotting to siphon off the family’s fortunes to be used for his own selfish reasons. Hence, talking about family finances and the proper handling of money is somewhat of a taboo subject in Singapore, and remains so even as the Government and society tries to open people up to being more financially savvy. It is therefore not surprising that those families which discuss money matters with their children at a young age and educate them on the importance of the value of money usually result in offspring which are not just savvy about money, but who are also aware of the importance of saving and investing instead of going on a bling-filled binge.

By chance, I have come across blogs written by late teenagers and young adults ranging in age from about 18 to 24. Most of them smack of materialism and peer pressure and talk a lot about material possessions and being “hip and trendy”. It is a sad facet of our society if these young adults grow up to be spoilt brats who cannot manage money, and who may end up with huge debts as their ideas on money are flawed. I am not exaggerating when I opine that this may turn out to be a major social problem two to three decades down the road, as such a cavalier attitude towards money may result in dysfunctional families and broken homes as many struggle to save for retirement.

What can be done for financial literacy? All is not bleak, as there are many instances where help is rendered for those who wish to know more. As previously mentioned, there are schemes such as IM$avvy and MoneySense by MAS which provide a wealth of information on financial matters. SIAS also regularly organizes free seminars to educate the general public on money matters and investments, and these are truly helpful and informative. New families should also be aware of financial matters and educate the next generation accordingly, and there are numerous websites which offer practical suggestions on how to slowly introduce the topic of personal finance for young kids.

Perhaps the battle for financial literacy may still be won, but it would take considerable effort on the part of educators, the Government and the individual. Still, this is a key life skill and therefore, it is best that it not be compromised or else the consequences would be devastating.

Friday, November 19, 2010

MTQ – Analysis of 1H FY 2011 Financial Statements

For MTQ, which releases its financial statements only half-yearly and not quarterly, it is important for me to review them each time they are published, as the next chance will only come six months later. The Company will publish a newsletter around this time to update shareholders of material developments within the Group, and also to provide a summary of key financials. I had enquired before on the frequency of this newsletter and was told it would only be printed once a year to supplement the half-yearly results, and to provide updates which would otherwise not be available through SGXNet (or rather, considered not materially important enough to warrant an SGXNet disclosure). So here we are again staring at the latest set of results from MTQ, for the period ended September 30, 2010 (which I will refer to as “1H FY 2011” from now on). I shall NOT be presenting any numbers in table format on Excel, as I assume investors and readers of this blog will be able to download and obtain the necessary numbers yourselves from SGXNet. Hence, I will focus on the analysis and commentary itself.

Profit and Loss Analysis

Disappointingly, there was no segmental breakdown provided for the 1H FY 2011 financials which showed the breakdown between revenues and profits for Oilfield Engineering Division and Engine Systems Division. Hence, this analysis will focus solely on the Profit and Loss Statement proper, and whatever insights can be gleaned from the numbers provided in the MD&A and press release will be used to substantiate certain points I wish to make.

Revenues increased by 12% year on year but cost of sales increased by a higher 15%, which resulted in gross profit rising by just 9%. Cost of sales includes depreciation on PPE and the increase in PPE due to the Bahrain expansion as well as the sprucing up of Bosch Superstores may have resulted in higher COGS, which impacted gross margin negatively. Gross margins fell from 41.4% in 1H FY 2010 to 40% in 1H FY 2011. Other Income for 1H FY 2010 was made up of S$1.9 million gain on sale of available for sale securities, which is why there was a drop of 91% for this item for 1H FY 2011. Staff costs rose 16% year on year, and I believe part of this can be attributed to hiring of staff for the soon to be completed Bahrain plant. Finance costs, thankfully, remained within control at just S$78,000 (+8%) but I foresee that this will rise significantly in the coming months as MTQ draws down on its loans to complete the construction of their facility. However, cash flow generation from operations should be healthy enough to offset any interest effects in the Cash Flow Statement.

Profit before tax was S$6.9 million compared to S$8.5 million a year ago. If we strip out the exceptional gain of S$1.9 million, profit before tax improved by about 5%. Net profit margin was 12% against 13.3% a year ago as there were higher taxation expenses incurred of S$1.5 million for 1H FY 2011. Overall, it was a relatively decent performance though I will be commenting on the problems faced based on an interview with Mr. Kuah Boon Wee as featured in The Edge Singapore (week ended November 15, 2010).

Balance Sheet Review

PPE increased by 22.3% from S$18.5 million to S$22.6 million, probably as a result of the Group buying and bringing in machinery for their new Bahrain workshop facility. This explains the increase in non-current assets, which also saw a slight decrease in investment securities amount due to mark to market accounting.

Inventories under current assets also increased 17.7% to S$19.6 million, and I should attribute this to the increase in stocking up required for the Bosch Superstore concept expansion, and also because of their acquisition of an outlet in Northern Territory back in March 2010, and also due to the subsequent purchase of Highway Diesel (a fuel injection business) in August 2010. Cash balances remained pretty much constant at S$20.6 million as at Sep 30, 2010 against S$20.3 million as at March 31, 2010. Bank borrowings did not really increase drastically (just +49.4%) as MTQ probably has yet to draw down fully on their UOB term loans, and I am guessing we will see the full impact only in 2H FY 2011. Total bank loans came up to about S$5 million as at Sep 30, 2010, compared to S$3.3 million as at March 31, 2010. Net cash therefore still stood at about S$15.6 million as at Sep 30, 2010 (about 17.7 cents per share). Current ratio stood at 2.98 for Sep 30, 2010 compared with 3.00 as at March 31, 2010.

Cash Flow Statement Review

It was heartening to see the operational cash flows were once again strongly positive at S$7.38 million, against S$5.75 million a year ago. Acquisition of PPE was very high for 1H FY 2011 at S$5.6 million due to the Bahrain expansion, which translated into a much lower FCF figure of about S$1.7 million. Coupled with the purchase of business by a subsidiary company (which I suspect is Highway Diesel because it was announced that it would cost about A$2 million). As a result of the payments for PPE and the purchase of a subsidiary company, investing cash flows was negative at S$7.3 million (there was a small offset of S$1.3 million cash from disposal of PPE).

Under Financing Cash Flows, the drawdown on bank loans has more than doubled from S$1.1 million last year to S$2.6 million this year, which is a sign that more cash is needed for the new facility. Still, this is way below the amount of operational cash flows generated from the core business, and should not cause too much concern to the shareholder.

2H FY 2011 results should be the one for me to intensely scrutinize as it will probably include some of the start-up losses from the new workshop in Bahrain, as well as the full impact of the loans drawdown for the building of the Phase I and part of the upcoming Phase II.

Prospects and Plans – A Discussion

Oilfield Engineering Division

For Oilfield Engineering, MTQ’s press release mentions that the momentum of rising oil prices should keep the division busy through the rest of the financial year, while the results in this division’s top line (+7% from S$18.6 million to S$19.8 million) show that there was indeed increased demand for the Group’s services. Since the new facility at Bahrain (Phase I) will be operational from CY 2011, I guess shareholders can expect some form of revenue contribution from 4Q FY 2011 onwards, though the start up losses from depreciation, utilities and staff costs may be substantial depending on operating conditions.

In the article from the Edge magazine, where CEO Kuah Boon Wee was interviewed, he mentioned that due to the BP disaster with Deepwater Horizon, there would be much more regulation and inspection required for Blow-Out Preventers (BOP) moving forward. This would probably translate to more work for MTQ as BOP made by MTQ’s customers, one of which is Cameron International, would have to be inspected and certified more frequently. Regulations are set to become more stringent in order to prevent a repeat of the massive disaster which spilled millions of gallons of crude oil into the oceans, making it one of the worst environmental disasters in history. He also mentions that there is a lot of (old) equipment in Saudi Arabia and Indonesia which needs to be inspected and re-certified.

As for the new facility in Bahrain, MTQ maintains that the construction is on schedule and that there is no cost overrun. Machinery is arriving and the training of workers has already begun. He expects the first job to arrive some time next year but warns that there may be start-up losses and “teething problems”. However, he does sound a positive note by saying that there is a lot of “activity” in the Middle East, possibly alluding to better deals and increased workload for this division in the coming quarters. I guess it is reasonable to expect some write-off for preliminary expenses incurred in getting the facility up and running; and as business activity picks up these will soon be a thing of the past, though how much it would contribute to the Group’s revenue and profits is still uncertain and cannot be reliably quantified at this point in time.

Engine Systems Division

For Engine Systems, the much talked-about Bosch superstore concept was actually slower to take off than anticipated, and Mr. Kuah talks about how Australia is such a large country and to be able to connect up the sales network was a challenge; and that they had over-estimated their ability to do so in a short period of time. Although the press release talks of organic growth (through partnering Bosch) and acquisitive growth (through the strategic purchases of Highway Diesel and expansion of MTQ’s network into Northern Territory), the top line improvement was just 13% for 1H FY 2011. Since segmental reporting was not done, I could not assess the impact of the growth on Engine System division’s margins, though of course I would expect an improvement since Mr. Kuah Kok Kim mentioned a while back that there would be no necessity to expend a lot of effort and money to revamp existing MTQ branches with Bosch products.

Mr. Kuah Boon Wee says that the Group is working on improving MTQ’s sales coverage in Australia and also to improve the sales package to customers. The Engine Systems division may also be looking out for potential M&A opportunities to expand their sales coverage, and also to acquire businesses selling complementary products which can help to increase MTQ’s existing customer base and allow them to cross-sell products and services.


An interim dividend of 2 cents/share was declared, which was double that of 1H FY 2010 (at 1 cent/share). However, for this dividend a choice was given for scrip or cash, and I suspect the Kuah family will choose to accept scrip to increase their stake in MTQ, while at the same time helping the Company to conserve cash. As for myself, I will wait for the issue price of the scrip shares to be announced in order to make my decision, but at this point in time most likely I will accept cash so that I can deploy to other opportunities should they come along.

My next update and review of MTQ will probably be in May 2011, when they release their FY 2011 results. In the meantime, I can expect their newsletter to arrive and I will also be keeping track of any corporate developments along the way.

Sunday, November 14, 2010

Can One Expand Their Circle of Competence?

This has always been a very intriguing question for me, more so since I started on my journey on value investing. It is well-known by now that Warren Buffett has strong knowledge of the insurance industry, which is why he focused his efforts on GEICO and this is also how Berkshire Hathaway is able to obtain so much insurance “float” with which to invest. Outside of insurance, it is useful to note too that Buffett had somehow acquired a keen insight into the businesses of furniture (Nebraska Furniture Mart), soft drinks (Coca-Cola) and credit cards (American Express). So the question now begs to be asked – how does one go about expanding his circle of competence on businesses he may not know or know well enough? Is this even possible and should an investor even attempt to do so?

Each individual has their own unique expertise and knowledge culled from years of either working in a particular industry, or because of his profession, has access to industry knowledge which others may not be privy to. To give an example, an oil rig engineer may understand the inner workings of oil rigs and the O&G industry very well, while an IT technician or software programmer would be more in tune with the rapid technological advancements in the realm of software design or hardware configuration. One’s profession and area of study also bestows knowledge of certain aspects of businesses; an engineer is more likely to understand an engineering company while a quantity surveyor would understand the property development process more intimately. As the above examples demonstrate, one can already have latent knowledge of a particular industry or business unit based on one’s education or work experience; and this will form the backbone of his understanding with respect to businesses when he embarks on his investing journey.

Armed with this knowledge, investors will then seek out investments which fall within their respective areas of comfort, suitably termed “circle of competence”. The fringes of this circle must be very clearly defined as there could possibly be overlaps in certain industries or companies which may cause unfamiliarity to the investor, so even though he may proclaim that he “knows” an industry, he may be unaware of the minute aspects which could escape his attention. I guess the worst feeling one could have is a false sense of security, which is why I keep stressing on the importance of really knowing an industry before committing your funds to it. If an investor can have intimate knowledge of an industry which not many people are familiar with, this is a distinct advantage as he can then invest with lower risk and higher certainty as compared to other investors who may not be equipped with such knowledge.

So can one expand this knowledge? The most obvious method would be through intensive reading of the said industry, for example for O&G industry, one could delve into articles written on the O&G industry, industry reports, brokerage reports compiled for that industry, as well as news articles and commentaries on the industry itself. One should start to familiarize with the terminology and jargon used in the O&G industry, such as E&P (Exploration and Production) and BOP (Blow-out preventers). Another method one could use is to speak to executives and management to find out more about the intricate business aspects of an industry and how a company within the industry works. Yet another method is to closely observe and study some of the companies within the industry over a couple of quarters, in order to build up the requisite knowledge and understanding of the business cycle present (if any) and the industry dynamics. In short, one needs to conduct intensive research, undergo diligent studying and have patience and perseverance to expand his circle of competence.

I myself started out as a novice investor who was not familiar with any particular industry. Over time, my reading and intensive research have enabled me to understand the O&G industry, MRO industry and the cranes and heavy equipment industry; though of course it is still not as well as I would like. But the knowledge was sufficient for me to feel confident enough to make an investment in MTQ, SIAEC and Tat Hong respectively. For Boustead’s case, I read up extensively on water and wastewater treatment and margins (including the CEO’s interviews), and also on real estate (as Boustead has a real estate solutions division headed by Boustead Projects). So to summarize, I would say I had managed to increase my circle of competence fairly significantly compared to when I first started out.

Of course, one should only expand the circle as far as one feels comfortable. I acknowledge that there may be certain industries which are difficult to understand for certain people, so one should prod and find your “resistance” level to such information, and to seek out information which best suits one’s character and temperament. To put it in another way, seek out what you feel comfortable with and feel confident on engaging, and you will find that you are able to slowly (but surely) expand that circle of competence.

So, in short, the answer is yes – you can expand the circle through reading, research and talking to people. But this will require time and patience and cannot simply be achieved in say, a couple of months. So if you are just starting out as an investor, take your time to read intensively and gather knowledge for at least 9 months to a year before you commit any money to companies trading on the Stock Exchange.

Tuesday, November 09, 2010

SIA Engineering – Analysis of Purchase Part 5

For this Part 5 and final part of my analysis of purchase, I take a look at the outlook for the global MRO industry based on some industry reports and comments, while at the same time commenting on the prospects and plans for growth for SIAEC. I will also a pros and cons analysis and finally, conclude about SIAEC.

Global MRO Industry Outlook

First of all, I have to say that it’s pretty disappointing that SIAEC had stopped their coverage of the global MRO market since FY 2009; wherein the annual reports for FY 2009 and FY 2010 do NOT contain any commentary on the global MRO industry or market outlook. If a reader traces back through ten years of Annual Reports, he would find that every year before FY 2008 (inclusive) had a pretty detailed commentary on the global MRO market, to the extent that it helped a reader to understand a lot about the industry without the need to do much more independent research.

In terms of air traffic and the airline industry, a recent news report on Channel News Asia on June 28, 2010 stated that Changi Airport registered highest passenger growth in May 2010. The airport handled 3.39 million passengers for May 2010, a 22.6% increase year on year. Globally, increases were also registered for air traffic and this bodes well for the airline industry; translating into more business for MRO providers and SIAEC as well. Importantly, the article stated that aircraft movements for the 5-months ended May 31, 2010 rose 9.6% to 106,177; increased aircraft movements will mean more maintenance and upkeep work to be performed and seems to indicate that the industry will bounce back to pre-crisis levels, though of course this would be gradual rather than a sudden spike.

I shall attempt to use the SIAEC FY 2008 Annual Report on the global MRO market and draw inferences from it (where relevant) to project to the future of the market. In the article on Page 24 of the Annual Report, it was mentioned that the Middle East is another centre of aviation buzz, and that Dubai (in 2008) serves 35 million passengers annually. According to the website, Middle East MRO will see steady growth of 4.4% annually to reach US$3.4 billion by 2018, compared to US$2.8 billion in 2008, while the Middle Eastern fleet has doubled since 2007. The long-term outlook for the MRO industry remains positive as global growth is expected to be maintained at 4.3% CAGR through 2018. This bodes well for the long-term growth of SIAEC.

Note: Information for this brief summary was taken from here and here.

Prospects and Future Plans

I shall use this section to discuss some of the plans and prospects for SIAEC, which are part of their strategy to ensure long-term growth and increased cash flows for the Group; and hopefully will translate into higher dividends for shareholders!

1. Tie-up with Vietnam’s Tan Son Nhat Airport to provide line maintenance services – On February 24, 2009, SIAEC announced that they had signed an agreement with Saigon Ground Services to form a line maintenance JV at Tan Son Nhat International Airport in Ho Chi Minh, Vietnam. SIAEC is supposed to hold a 49% equity shareholding in the JV, but to date this has not been reflected in the Annual Report under Joint Ventures or Associated Companies. Strangely though, it was mentioned in the FY 2010 on Page 4 but the exact details of the contribution and the scale of operations were only touched on nearly 1.5 years ago; and since then there was no announcement or press release on this. However, I am optimistic that SIAEC will be able to tie the details down soon and hopefully in FY 2011 there will be a more definitive announcement on this, and also whether the service offerings will be extended to include maintenance checks and component overhaul services.

2. Establishment of a facility in Bahrain (MOU with Gulf Technics) to service the Middle Eastern market, with potential inroads into Africa and Europe – On January 21, 2010, SIAEC announced the signing of an MOU with Gulf Technics to set up and operate a facility in Bahrain for the maintenance, repair and overhaul (MRO) of aircraft. As of this writing, 7 months later, SIAEC and Gulf Technics should still be hammering out details and working towards a definitive agreement to set up an MRO maintenance facility in Bahrain. Note that MOU signing phase is simply an expression of interest and does not constitute any contractual obligation; thus this is still a WIP and thus was not reflected in SIAEC’s FY 2010 Annual Report. Based on the MRO Industry review in my previous section, assuming SIAEC is able to successfully penetrate the Middle Eastern market, it will hold lots of potential for SIAEC to grow their earnings and cash flows.

3. Investment in Engine Developments with Pratt & Whitney – This is something which is relatively new for SIAEC, investing in aircraft engine technology through their long-time partner Pratt & Whitney (P&W). On January 18, 2010, SIAEC announced that they will co-share and participate in P&W’s Risk-Revenue Sharing Program (RRSP); with a 3% stake in the C-Series aircraft engine program and a 1% stake in the MRJ aircraft engine program. Two special purpose vehicles Nexgen I and II have been incorporated for this purpose and are wholly-owned by SIAEC; and it remains to be seen how lucrative this venture is as it is still pretty “virgin” to SIAEC and the benefits are neither obvious nor clear. Eagle Services Asia, a JV between SIAEC and P&W, will be used as the first engine centre in the global RRSP MRO network for the PW1500G engine, and it was mentioned that Eagle Services is poised to benefit from this arrangement as this was cutting-edge new technology which P&W was investing in. The press release goes on to say that “SIAEC is investing in the future of aviation technology”, which seems to imply that SIAEC is trying to get in at the front door when it comes to new technologies and capabilities. Whether this translates into tangible results such as increased customer base, higher revenues or more share or profits/dividends remains to be seen, but it will be interesting to keep up with this development in the next few quarters to note its contribution.

4. Leveraging on SIA for business (see later section for pros and cons of SIA as “anchor” customer) – With SIAEC leveraging on SIA for business, this means that there will be a steady inflow of revenue and orders for MRO from their biggest client. In fact, just six months back in March 2010, SIAEC renewed its comprehensive Services Agreement with SIA worth S$2.2 billion over 5 years; and which covers a broad spectrum of MRO and fleet management support services. The existing services agreement expires in 2010.

5. More Joint Ventures in the offering – SIAEC has a long history of aggressively pursuing and concluding joint venture arrangements with internationally renowned partners; with Safran Group being the latest addition, as well as Gulf Technics of Bahrain. It will be fair to assume that Management will continue to focus on developing and extending their reach through such lucrative arrangements into the mid-term, as it allows them to grow and expand without high capex requirements. In the near-term, I guess I can reasonably expect their marketing and business development efforts to pay off with at least 1 joint venture/associated company being formed every 2 years (this was the average over the last ten years, with some years having none and other years seeing two to three such arrangements). These will all add to their earnings base and ensure more cash flows in for them to increase dividends over the long-term.

6. More innovative investments into complementary businesses – With the recently concluded P&W Engine RRSP agreement, it is fair to say that SIAEC could be coming up with other innovative ideas on how to use their spare cash (a lot of their cash is free cash which is being churned out) to invest in complementary businesses or service offerings which are tied to their main line of business. Though there is a risk of “diworsifiction” as mentioned by Peter Lynch, SIAEC’s Management has thus far shown a tendency to be able to grow the business through astute investments; and the P&W investment may be a test for them to see if they can think “out of the box”. I concur that it remains to be seen if they can successfully invest in other complementary businesses as time is too short to evaluate the most recent P&W one, but my belief is that the quality of Management is an important factor which I am willing to bet my dollar on.

Other Salient Aspects of SIAEC (Worthy of Mention)

• Comprehensive training facilities and to impart knowledge of Kaizen (continuous improvement) costing to staff.
• Adoption of NTUC’s motto of “Cheaper, Better, Faster” to improve operating efficiencies and cut costs. Recently announced that the Group had given out S$600,000 in rewards to employees relating to this scheme; and eventually SIAEC plans to save up to S$10 million in productivity gains for Phase I initiatives (there was no mention of Phase 2).
• Investment in good IT systems  SAP as ERP software to integrate all divisions and departments together for streamlined process flows.

Pros and Cons Analysis for SIAEC


1. Very strong operating and free cash flows - As can be seen in the analysis in Part 1, SIAEC has very consistent and strong operating cash inflows for the last ten years; and in recent years there was also positive inflows coming from investing activities as its myriad of joint ventures and associated companies boosted its returns and cash. After subtracting capex for new machinery and for upgrades of fixed assets, there was free cash flow generated every year; hence the Group’s cash balance would continue to grow.

2. Growing list of JV and associated companies, with increasing dividends flowing in every financial year - SIAEC has continued to expand its list of JV and associated companies and has been increasing its dividends steadily over the years as a result of FCF generated; Part 3 has also shown how much cash has been flowing in from these alliances into SIAEC’s coffers, and there is thus a very high probability of dividends being sustained or even increased in the medium-term; and this provides a cushion of support for owning shares in the company in case growth tapers off. UPDATE: SIAEC just signed its 25th JV Agreement with Panasonic Avionics on November 4, 2010.
3. Symbiotic relationship with SIA which is a world-renowned brand and a leader in the airline industry - SIAEC has the backing of Singapore Airlines (SIA), which is a world-renowned airline and which is very profitable. Most of their MRO jobs come from SIA, but they are increasingly being less reliant on SIA for business as they diversify their revenue streams away from SIA and into other airlines.

4. Consistently high ROE with low capex requirements and an unleveraged Balance Sheet - SIAEC is able to generate consistently high ROE above 20% on average without debt at all in its Balance Sheet, which is very impressive considering the track record stretches all the way across ten years; and through recessions and busts as well. This demonstrates that Management is able to allocate capital efficiently to generate high returns on equity for its shareholders and the business model is able to sustain high returns without relying on either debt or equity issuance.

5. High barriers to entry industry - Although the MRO industry is admittedly fragmented and there are many players each servicing specific large airlines, the barriers to entry are high in terms of equipment needed and expertise required (of technicians and engineers). SIAEC has built up a proven track record over the years in terms of high quality service to international clients and this reputation and branding also helps to create a moat which competitors will find difficult to assail.

6. Clear and Successful growth strategy with proven track record - SIAEC’s growth strategy had been clearly articulated right from the start (in FY 2001’s IPO year); and Management has consistently followed this strategy to grow the Group’s business and cash flows over the last ten years. As a shareholder, I have the confidence that this business model is a proven one (with a decade of history and track record as evidence), and will guide the Group forward to better results and performance over the medium-term. This is much better than other companies which are constantly seeking new (and unproven) avenues for tapping growth and expansion, all with a high risk of failure which will result in shareholders’ monies being burnt away.

1. High valuations and high price to book ratio 
- Valuations are not exactly cheap, coming in at 15x historical PER and about 14x ex-cash historical PER. Price to book is about 3x and is pretty demanding as well; so one can argue that SIAEC is fairly valued rather than under-valued, based on historical results of course. Still, I must add that I am investing for the future, and I am expecting profits and cash flows to improve as the years go by, through the measures undertaken as mentioned in the previous analyses. Also, do note that SIAEC is a “blue chip”; hence valuations are expected to be higher than companies such as Kingsmen which are much smaller. Valuations for SIAEC are comparable against its close competitors and are currently hovering at its 5-year average; so its days of being severely undervalued during the Global Financial Crisis (actually, almost every company was under-valued then, some trading way below book value) are most likely over. Its yield and consistent FCF can be used as a margin of safety in case the business falters. Interestingly, Teh Hooi Ling wrote an article dated August 15, 2010 in the Business Times titled “In Search of Super Returns in Stocks”; where she mentions that investors would be willing to pay a high premium over book value if the Company can generate earnings above its cost of capital. She argues that if a company can earn substantially above its cost of capital (by measuring ROE) over an extended period of time, then the stock should trade above book value. Price to book ratio will be higher as long as the Company is having “abnormal earnings”, which is defined as ROE minus the cost of capital, for an extended and sustained period of time. Please check out her article here.

2. SIAEC’s business is dependent upon the aviation and air travel industry (hence not so resilient in the face of recessions and busts) - Air travel is pretty cyclical and is affected by downturns and recessions, and since SIAEC is intricately linked to SIA in terms of business volume, one can expect industry doldrums to impact SIAEC’s earnings and cash flows as well. Thus far, the effects are not that obvious due to the diversified nature of SIAEC’s JVs and business alliances, but there have been years in which they paid less dividends and earnings took a dip. Hence, this is a minus point for SIAEC even though its cash flows are fairly resilient so far.

3. Major customer SIA can also be a bane if SIA’s fortunes suffer - Despite the obvious advantages of having SIA as their major and “anchor” customer, this can also backfire badly if SIA themselves get stuck in a rut, or are experiencing problems with their top and bottom lines.

4. Core revenue did not increase by much as compared to competitors - This should be viewed in the light of SIAEC’s strategy compared with other MRO players, as SIAEC focused more on joint ventures and alliances as compared with their competitors. As a result, one should note that core revenues did not increases as much on a CAGR basis as compared to its competitors. On the flip side, SIAEC does make up for it with higher share of profits from associated companies and joint ventures as well as higher cash dividends from these investing activities.

5. There is a need to continually invest in technical skills and human knowledge base in order to remain competitive - SIAEC is in the service industry, which means its main costs will be concentrated in staff costs. Even though capex is low as a proportion of revenues, one should note that skills upgrading is a constant requirement for this industry and nature of work; and funds have to be continually invested to train technicians to handle new technologies and aircraft. Sometimes, this training can be very costly as it entails sending engineers and technicians to Europe to learn from the companies domiciled there. This is therefore a minus as the high fixed staff costs structure (including training and development) would imply that SIAEC cannot easily cut costs during a severe recession/downturn (if not they may lose out to their competition).

6. Majority-held by SIA (80% or 870 million shares), hence SIAEC is effectively still controlled by SIA - Being an 80% major shareholder, SIA is effectively controlling SIAEC and thus minority shareholders may not have much say in terms of voting on resolutions and/or other such matters pertaining to divestments or investments which require shareholder approval. There is an inherent risk of being “overrun” by the majority shareholders when it comes to voting on critical matters relating to SIAEC.


After evaluating the risks and rewards, I proceeded to invest an amount of about S$49K into SIAEC, at an average price of S$4.087 per share. The pros are a lot stronger than the cons, in the sense that many of the point raised as cons had already been mitigated (for example, costs did increase during the downturn as per point 5 but not to the extent of wiping out too much cash flows, which is the lifeblood of a Company). As for Point 6, though the risk exists; thus far there have been no boardroom “brawls” with regards to unpopular policies being unilaterally passed by parent SIA. The justification for the high valuation and PTB is that SIAEC is able to maintain very high ROE>20% for the last ten years, while generating loads of FCF; hence it is accorded a high valuation due to the quality of the business (which, incidentally, is still growing). The high PTB was already explained earlier.

Furthermore, the yield for SIAEC at my purchase price stands at about 4.38% historical; and this yield based on healthy FCF should act as a buffer in case the earnings of SIAEC suffer or there is some impairment in the strong fundamentals of the Group. In other words, my margin of safety exists using the yield as a “cushion” and the track record and blue-chip status of SIAEC as my support basis.

Friday, November 05, 2010

Maturing as an Investor

As the months go by, our experience as a human being continues to build up; whether it be with work, relationships or, investing! Every now and then, I will take a step back and reflect on what I had learnt in the past few months as a result of either reading, observation, thinking or analysis. On this occasion, I realized with a start that I had matured a lot as an investor compared to the “Dark Ages” back in 2005 to 2006 when I was still fumbling around for directions. It turned out that value investing became the framework with which I would build my investing foundation, and over the years I have moulded this discipline to fit my own personal character and competence.

So to summarize the lessons learnt, here is a simple laundry list (not in order of significance):-

1) Understanding Valuations and Emotions – After reading many books on behavioural finance, I finally learnt the effects of over-confidence and loss aversion and how it could devastate one’s portfolio. Throw in patience and discipline and you would have a very robust philosophy on how one should approach investing, and I am currently putting that into practice. Value investing also would not be complete without an understanding of human psychology in the stock market and the factors which drive sentiment. At the same time, I was also refining my valuation techniques (still currently a work in progress) and striving to improve to become a better investor.

2) Avoidance of Scams – Not to sound too caustic or cynical here, but the recent proliferation of scams in the news has caused me to be extra wary of the numerous “get-rich quick” schemes out there. As a mature investor, one should be very aware of the long-term average which the stock market can return (roughly 8-10% including dividends) and how even the best investor in the world, Warren Buffett, achieved compounding of about 22% over 25 years. Yet, many of these so-called “seminars” promise quick and easy gains through forex trading, options trading and technical analysis. One may be quick to point out that these are not “scams” per se as they simply contain a promise and the participant is free to choose not to pay to attend. However, some of the claims are nothing short of preposterous! Any investor worth his salt would be quick to steer clear of such talks which promise fast and easy money. In my world, there’s only hard-earned money; and when one invests properly one has to put in the hard work, diligence and patience to sift out bargains. There are no short-cuts to becoming rich (unless you win the lottery!).

3) Absolute Returns versus Relative Returns – This was actually mentioned in Sham Gad’s book “The Business of Value Investing”, which I am currently still reading. In it, he mentions that value investing itself is a framework and philosophy which emphasizes on consistent and steady gains through both bull and bear markets, as one focuses on the business rather than the stock market. Therefore, it makes sense that returns should NOT be benchmarked to an index; as the main objective of an investor is to get a consistent return on investment, regardless of market conditions. If one uses relative returns as a yardstick, then one would have “out-performed” the index assuming one’s portfolio dipped 8% while the index dipped 15%, for example. But absolute returns focus on getting a steady and consistent return from investing in well-run companies with a stable business and competitive moat; hence one should not stress too much on relative performance.

4) The Importance of always having cash – OK, I guess this is more of a personal finance topic, but then again I have learnt that having constant opportunity fund means that one is poised to take advantage of favourable situations as and when they arise; for example when attractive valuations emerge all of a sudden due to an unjustified sell-down in the stock market. Therefore, it is important to have free cash flows in one’s personal life too, in that spending must always be less than earnings.

5) Avoiding Mistakes previously made by myself, as well as others’ mistakes – I have spent the last 12 months continually reading through the mistakes I had made with regards to China Fishery, Swiber and Ezra and sought to avoid making the same errors of judgment. At the same time, I have also studied mistakes made by other astute investors by reading books and noted down exactly what to look out for and what to avoid, as part of my continuous learning process to become a better investor. Moving forward, I am sure I will still make mistakes, as I am only human, but the aim to avoid major mistakes which will derail my wealth-growing path and to keep the mistakes small and manageable.

There is still much more room for me to grow and mature as a value investor; as my journey is still young at just slightly over 3 years. As I am constantly reading, observing, analyzing and learning, I can feel my knowledge base increasing as the months pass, and my analysis time is also lessened as I am more aware of what to look out for; and to ignore the irrelevant or unimportant. There is still so much more I have to learn as an investor, and I look forward to many more years ahead to hone my skills as an investor and to achieve much better returns.

Readers can expect another update perhaps 6 to 9 months later as part of my update on my investment journey.