Saturday, April 30, 2011

April 2011 Portfolio Summary and Review

April 2011 had nothing really eventful occurring, unless you count in the buzz due to the upcoming General Elections for Singapore. I spent most of my time reading, researching and paying attention to Election news and alternative views afforded by social media networks like Facebook and political blogs. My previous article on property highlights the issues I feel are important to Singaporeans and my stand on rising prices is clear – it is similar to a never-ending game of musical chairs. Since this is not a political blog, I shall not go too much into details regarding my political stance. In fact, I shall delve right into my portfolio and company summaries.

My portfolio and comments for April 2011 is as follows:-

1) Boustead Holdings Limited – For Boustead, early April 2011 saw the clinching of one contract for Geo-Spatial, and more oil and gas contracts. On April 4, 2011, Boustead’s 88.2% owned subsidiary ESRI South Asia Pte Ltd announced that it had been awarded a contract with SP Powergrid to design and implement a next generation geo-spatial platform. This is a five-year contract but the contract value was not specified. In an announcement on April 7, 2011, Boustead had secured S$25 million worth of contracts from the oil and gas industries. I look forward to the release of Boustead’s FY 2011 results some time in late May 2011. I shall be expecting a final dividend of at least 2 cents/share (FY 2010: 2.5 cents/share final dividend) due to the expected write-off of the Libyan township investment.

2) Suntec REIT – Suntec REIT released their 1Q 2011 results on April 21, 2011. A dividend of 2.388 cents/share was declared, and XD date was on April 28, 2011. The dividend will be paid out on May 30, 2011.

3) MTQ Corporation Limited – There was only a minor announcement by MTQ on April 19, 2011 to say that MTQ Investments Pte Ltd was placed under Member’s Voluntary Liquidation as the Company has already divested all of its investments. Surprisingly, MTQ released its FY 2011 results on the last day of April 2011, and revenue was up 12% year on year to S$91.7 million, gross margin dipped slightly to 40.9% from 41.1%; and net profit dropped 12% to S$10.6 million. Excluding one-off gains in FY 2010 and fair value changes, net profit would have increased by 18.6% as profit from operations for both divisions had improved. A final dividend of 2 cents/share was declared, and the option was given to accept in cash or scrip. I shall be doing a detailed analysis and review for MTQ in the coming weeks, as there are rather significant changes to the Balance Sheet and Cash Flow Statement.

4) GRP Limited – Predictably, there was no news for GRP for April 2011.

5) Kingsmen Creatives Holdings Limited – There was no news from Kingsmen for the month of April 2011. I attended Kingsmen’s AGM held on April 27, 2011 and will be doing a post on what transpired soon. Watch out for that.

6) SIA Engineering Company Limited – There was no news from the Company for April 2011, other than a minor announcement on April 6, 2011 that SIAEC had launched a state-of-the-art avionics facility in collaboration with Sagem of Safran Group. This JV is 49% owned by SIAEC and 51% owned by Sagem. SIAEC will release their FY 2011 results on May 10, 2011 after market close. I am expecting a decent final dividend from the Company in view of their strong and consistent free cash flows.

Portfolio Review – April 2011

Realized gains remained at S$55.4K as the amount of the Suntec REIT dividend was not significant enough to greatly increase realized gains for April 2011.

For the month of April 2011, the portfolio has dropped by -2.6% (using XIRR in MS Excel to compute) against a -0.3% fall in the STI; thus underperforming by 2.3 percentage points. This was slightly better than March 2011’s under-performance of -2.5 percentage points. Cost of investment remained at S$210K and unrealized gains stand at +13.4% (portfolio market value of S$238.1K).

May 2011 will be an intensive month as two more of my companies will be releasing results. They are SIA Engineering on May 10, 2011 and Boustead in late-May 2011.

I will be blogging more about my Kingsmen AGM experience, and will also find time to complete Part 5 of my Kingsmen Comprehensive Analysis. At the same time, I also have to allocate time to analyzing SIA Engineering, MTQ and Boustead’s FY 2011 results. It will be a very busy next two months!

My next portfolio review will be on May 31, 2011 (Tuesday).

Note: Edited Portfolio Review to include Cash Holdings. Emergency Funds are considered cash required for 12 months (at $2,500 per month) and are not to be touched unless there is a legitimate reason. Opportunity Funds are funds which are accumulated solely for the purpose of re-deploying to investments, and this acts as a cash stash to wait for suitable opportunities. Total Funds would include Market Value of Shares + Emergency Funds + Opportunity Funds. Both funds are earning interest at a rate of 0.8% per annum but these funds are very liquid and are readily drawn upon if necessary.

Tuesday, April 26, 2011

Property Prices Continue to Defy Gravity

In this case, it is financial gravity as dictated by the median income of most Singaporeans versus the value of homes being offered in the market. Recent news articles on our ever-hot property market has literally “forced” me to write once again on this pervasive yet intriguing phenomenon. With elections around the corner on May 7 and Nomination Day being tomorrow the 27 April, this hot-button topic would surely be fiercely debated over the nine days of campaigning, with most of the salvos being fired at our Minister of National Development Mr. Mah Bow Tan (“MBT”) who heads a GRC in Tampines. Let’s look at the facts and numbers and I will draw some conclusions from there.

On April 16, 2011, it was reported that the March 2011 numbers showed that sales of new private homes was up 25% to hit 1,386 units. If we add in EC sales, the number jumps to 1,543 units. There was also reportedly sustained demand from HDB upgraders, who ostensibly have the cash and asset backing to purchase investments in private property, even though the January 2011 cooling measures have limited the mortgage loan quantum to just 60% of home value, down from 70%. Quite a significant proportion of the sales was also driven by “Mickey Mouse” units less than 500 square feet, and most analysts are either bullish or feel that this is ordinary and that no bubble is forming, despite the persistence of historically ultra-low interest rates which has seen loan demand surging for local banks.

The most recent news was April 19, 2011 when it was reported that project launches were accelerating as developers feel that HDB upgraders had the appetite and propensity to purchase even more units. This started off with Eight Courtyards in Yishun reporting that 202 units out of 656 units were sold during its weekend preview. Its tenure is 99-year leasehold and it is selling at about $795 psf, which means a decent three-bedder (equivalent to a five-room HDB flat) would set you back by about $700,000 to $1 million. Quite shocking when you consider that you are essentially getting the same space for almost double the price, plus some amenities thrown in (which you ahem, have to pay for of course) and probably a perimeter wall and security guards thrown in. Other recent launches with healthy responses include Hedge Park in Flora Drive (Changi), Skysuites 17 and Centra Heights (Sims Avenue); all of which are selling at about the same price. It’s hard for me to imagine myself shelling out $1 million for a unit which is about 1,200 square feet, while a spacious 5-room HDB flat costs around $600,000. More on HDB flats later.

The problem with the news articles on Straits Times and Business Times is that they are all in-line with MBT’s “Asset Enhancement” long-term strategy. When recently queried by the Worker’s Party on the sustainability of high HDB prices, he retorted that all HDB flats are continually undergoing asset enhancements whereby upgrading and refurbishment is done every couple of years, and so Singaporeans can enjoy an asset which will continue to appreciate in value. While I can appreciate (no pun intended) his logic in giving Singaporeans an asset which is worth something, he fails to recognize that if this enhancement carries on for the next 10 years, we may see HDB flats being priced eventually in the millions of dollars, and already some “freak” transactions have resulted in HDB prices being transacted at $800,000 to $900,000 in prime areas, COV included. Unfortunately, on the other side of the equation are the yuppies, couples who recently graduated and found a job and have been working for less than 10 years; and who earnestly plan to settle down and (hopefully) arrest the ever-declining birth rate. With median income settling at $3,500 to $4,000 level, this means that couples have to take longer loans to cover the mortgage payments on these “enhanced” assets. Taking a 30 or 35-year loan is not my idea of “affordable”, as mentioned in a previous posting of mine on property. This effectively makes all Singaporean couples indentured “servants” for the rest of their working lives as they slavishly work to pay off their huge mortgage, ostensibly in the name of having an enhanced asset for their retirement. A classic case of “Asset Rich, Cash Poor”.

With the liberalization of the CPF OA to be used for housing, this has inadvertently and unavoidably caused housing prices to edge up, as Singaporeans’ retirement savings are being sucked away to pay for (over-priced) public housing. The newspapers frequently play up the dream of owning a private apartment by referring to “HDB Upgraders” and quoting residents making statements such as “It's a gold mine which will appreciate when more amenities like the Bedok Reservoir MRT station come up” (Article Reference: Prices on the Up and Up in Bedok Reservoir, Straits Times, April 7, 2011). The problem with such thinking is that everyone tries to sell out at the high and hopefully “downgrade” to a smaller apartment, thereby keeping the difference as cold, hard cash (after deducting the amount payable back to CPF OA + interest, of course). So it seems like a game of musical chairs as everyone continues to wait for higher prices, all fuelled by the media and its exhortations. An impending vicious cycle of epic proportions, perhaps?

Over now to HDB, it seems that an April 7, 2011 report stated that the HDB Upgrader’s dream is fast fading, with the gap between mass market condominiums and HDB flats growing wider as prices for private properties begin their ascent into the stratosphere. Prices of suburban homes are at historic highs, according to the article, and are fuelled by low interest rates too. Waterfront Isle in Bedok sold at $990 psf median, H2O Residences in Sengkang at $920 psf median and Canberra Residences at Sembawang at $830 psf, levels which are quite mind-bloggling considering a simple 1,000 square foot unit would cost close to $1 million! Over at Adora Green, a new DBSS project located in Yishun, prices for 3-room flats are in the range of $310,000 to $390,000 for a 720 sq ft unit, translating to about $430 to $540 psf. The 5-room flats are even scarier, being about 1,200 sq ft priced at $520,000 to $650,000. Considering DBSS has an income ceiling of $10,000 per couple, this still means the couple has to stretch their loan tenure in order to be able to afford the mortgage payments, a situation which saddens me greatly.

Interestingly, I do have friends out there who own two properties (one HDB and one private apartment) and are paying two mortgages. These were transacted before the new property rules came into play in January 2011. Most of the time, they are trying to play a risky game whereby they pay for their HDB using CPA OA, and then rent out the entire unit at 4-5% gross yield for cash in order to pay off the mortgage for the private apartment (using a very cheap bank loan with 3-year lock-in rates). The whole equation is quite sustainable until a few things start to happen:-

1. Rental Rates start to fall – When this happens, the cash flow from renting out the HDB will be unable or insufficient to fund the mortgage payments on the condo.

2. Lack of tenants due to increased supply of HDB and private property – It may become more difficult to find a tenant in the first place once the supply of flats increases and tenants are more spoilt for choice. Should this happen, the couple would have to cough up payments on two mortgage loans using their own CPF OA and cash reserves.

3. Falling Property Values – Negative equity may result and the banks may require a top-up on existing mortgage loan.

4. Interest Rates Rise – In the event that interest rates start to rise in 2012, the interest rate on bank loan for the condo which is pegged to SIBOR may also correspondingly rise, resulting in higher monthly interest payments which are unable to be fully covered by the rental of the HDB unit.

Assuming any or all of the above events occur at the same time, it would put a major squeeze on the couple in question and their cash flows would be severely disrupted, resulting in potential financial distress.

Hence, I always advocate a measured approach to property. Buy what you can afford, pay off the mortgage loan as soon as you can using only your CPF OA (as cash can be invested to yield 4-5%) and do not over-leverage as it is a risk to your cash flows. As to whether and when property prices will experience a significant correction, your guess is as good as mine; but note that the last major crash occurred in 1997 during the Asian Financial Crisis (2008-2009 does not really count as HDB Resale prices remained high, propped up by an steady influx of foreigners). With an event occurring 14 years ago, most of the current crop of couples in their 20’s and 30’s would not have recollection of the financial distress undergone by people at the time. Leverage can act as a double-edged sword so I feel compelled to thus sound a note of caution as euphoria and exuberance sets in.

Thursday, April 21, 2011

The Quest for Higher Yields

Originally, the title was intended to read “The Chase for Higher Yields”, but I thought that the word “chase” conveyed an element of desperation. Although “desperation” would adequately and concisely reflect the current ground sentiment in that everyone (i.e. the man on the street) is looking for higher yields than what pathetic bank deposits have to offer, I thought “quest” may be more appropriate to describe a large swath of educated, knowledgeable investors who have yet to find the Holy Grail of high yields – a stable bastion of companies or securities which can guarantee a (almost) lifetime of dividends and passive income. And so this post will discuss some of the more recent attempts by companies to not only shore up their Balance Sheet, but to raise funds using very opportunistic methods which attempt to not just capitalize on the public’s hunger for yield, but also to reduce their cost of raising such funds significantly.

Preference Shares

I think enough has been said on the most recent Hyflux issue of Cumulative, non-Convertible, Non-Voting Preference Shares at 6% yield (issued at S$100 per share, “CPS”). Many finance blogs have been abuzz with the CPS as the key characteristic of these CPS are that they are cumulative, which means dividends accrue over the periods if they are not paid out, so that they “accumulate” until they are eventually paid out. This does not, however, mean that they are guaranteed, a point which the corporate brochure took pains to highlight. Many other websites have pointed out the merits and demerits of the CPS, so I will not go into details on that as it has probably been debated to death.

What I would like to do is to highlight salient risks in investing in such securities, and whether an investor should have a much clearer understanding of the underlying risks before taking the plunge. For any firm which issues securities, whether it be equity-based or debt-linked, an investor should read through all prospectuses and comb through the financials of that company as if he were reviewing it to buy its common shares; as the process for screening is essentially the same even though the subordination of the security may be different when it comes to liquidation.

So in the case of securities such as CPS which are a hybrid between equity and debt, one should ask the following pertinent questions:-

1) Why is the company choosing to issue CPS instead of relying on debt financing or a secondary placement? Are there issues with issuance of debt due to existing high gearing and a weak Balance Sheet? For secondary placements, one has to question the attractiveness of a company selling more ordinary shares vis-à-vis the attractiveness of issuing CPS or some other form of preference shares.

2) What are the chances of the company being able to honour its dividend obligations? A close scrutiny of the Company’s Cash Flow Statement (over 5 years, no doubt), mode of business, business model, recent news, industry, competitiveness and market share/position, and future prospects and plans are required in order to make an informed decision. If a company has problems paying a good dividend yield to its ordinary shareholders, then it may likely default on its preference share dividend. Whether this is cumulative or not should not matter – if a company cannot pay then no amount of accumulation will mean anything to the shareholder.

3) Liquidity – Preference shares are usually less liquid as compared to ordinary shares, and therefore the bid-ask spread may be much wider. Poor liquidity is also a result of our stock exchange not being as sophisticated as that of the USA, and may hinder one’s ability to cash out quickly should one need to.

There is probably a longer laundry list of issues to be looked into when it comes to investing in preference shares, but I will leave those for the comments section and move on.

Corporate Bonds for Retail Investors

There has been a recent spate of issuance of corporate bonds catered to retail investors, and this is a surprising development considering bonds were previously reserved for either institutional investors, or accredited (i.e. high net-worth) investors. It all started with Singapore Airlines Limited (“SIA”) issuing S$300 million worth of 5-year bonds paying a coupon rate of 2.15% payable semi-annually back in September 2010. Investors would be able to purchase the bonds in denominations of S$1,000 and the minimum subscription amount is $10,000, which is generally affordable to the masses who are seeking stable, higher yields. At the time, however, the SIA bond was perceived to be paying too low a coupon rate as compared to other investment vehicles such as blue chip dividend yields (around 3-4%) and REITs (which pay on average 5-6%). The issue was a resounding success nonetheless due to SIA’s blue-chip status and paved the way for other companies to issue bonds for the retail public too.

Next up was an underwritten bond offering by another blue-chip company Fraser & Neave Limited (“F&N”); and this was announced on March 16, 2011. This consisted of S$150 million worth of 5-year bonds paying 2.48% per annum (out of which S$50 million was for the public tranche) and S$150 million worth of 7-year bonds paying 3.15% per annum (out of which S$50 million was for the public too). Notice here that the coupon rate for the 5-year bonds is 33 basis points (i.e. 0.33%) higher than those issued by SIA just six months ago, and reflects the fact that the public may require a higher coupon rate to incentivize them to subscribe for the bonds. It could also be due to the fact that more of such issuances were coming up and investors would then be “spoilt for choice”, hence the decision to price the bonds as such. Whatever the case, this still represented extremely cheap debt for both SIA and F&N as the cost of debt was still below 3%. By way of comparison, the dividend yield for F&N on its ordinary shares for FY 2010 was 2.58% (using 17 cents full-year dividend against S$6.58 closing price on November 12, 2010 when it announced its FY 2010 results), so this makes the 5-year bonds slightly cheaper than the cost of equity.

The crux of the issue here is that investors have become so sick of the ultra-low interest rates which banks are offering that they have even turned to such “safe” bonds issued by blue chip companies. These investments can be deemed to be secure enough as the companies involved most likely will be able to honour their coupon obligations, but the investor has to do himself a favour to look for better yields which can exceed inflation (around 4-5%) as the bonds paying less than 3% do not achieve this goal.

Real Estate Investment Trusts (REIT)

In an era of low interest rates such as the present (in fact, all-time low as the SIBOR recently hit 0.33%), investors will have a tendency to flock to REITs as a way of getting higher yield on their investments. These vehicles will traditionally use cheap debt to fund the purchase of properties which have a stable tenant base, thus generating stable (and arguably predictable) cash flows of which a high percentage (usually 80% to 90%) is paid out as dividends to unit-holders. Many REITs will also periodically revalue their properties and in an environment where real-estate prices are rising, this will make the Balance Sheet look good. This combination of low interest rates and rising property values makes REITs very attractive to those looking for high yield investing and many REITs have also issued rights and placed out shares in recent months to capitalize on the low interest rate environment to raise capital to refinance their loans. Other REITs have also proudly proclaimed that they have “locked in” higher tenancy rates for the next 2-3 years, thereby almost guaranteeing the distributions which they have forecast as the debt has no need to be refinanced and hence no extraneous expenses will be incurred.

The problems will, of course, start to pile up once interest rates head north (as they must surely do as part of the reversion to the long-term mean). When interest rates rise, REITs which have to refinance their debt will have to do so at higher interest rates, therefore there will be a need to retain more money to fund such interest payments, leading to lower payouts for unit-holders. Rising interest rates also impact property prices and companies will be more hesitant to borrow to purchase land and build property as the cost of borrowing will increase, and this leads to property values falling. Assuming a steady decrease in asset value, there is always a possibility of being in negative equity. REITs may then have to shore up their Balance Sheets through rights issues, but if their share price is languishing then the dilutive impact to DPU would be even more pronounced, and with tenancy rates falling in a falling market, this could exacerbate the problems.

Thus, while REITs are traditionally seen as “safe havens” for investors to park their money for high yield, do note that there are risks involved as well.


So the quest for higher yield often seems more elusive than attainable, especially in the light of risk factors which may derail the consistent and predictable payments which a security has to offer. As investors, we have to be constantly watchful and wary of where we place our money, for high yield most often does come with associated higher risks. For myself, I opt for decent yield which is sustainable through investing in companies which have a stable business model and a good history of increasing dividends on ordinary shares.

Friday, April 15, 2011

Kingsmen Creatives – FY 2010 Comprehensive Analysis Part 4

Part 4 of my comprehensive analysis touches on Kingsmen’s competitors Cityneon and Pico Far East (“Pico”), where I compare key ratios and numbers to see how they perform with respect to Kingsmen. Note that each company provides services which overlap one another and all three companies may be in the same industry but their core competence is different. I will give a brief introduction to each company, explain their plans and prospects and do a qualitative comparison between their business model and Kingsmen. After this has been done, I will provide a spreadsheet with the numbers and ratios as a way of comparing the three companies. Explanations and analyses will then follow.

Cityneon Holdings Limited

Brief Introduction

Cityneon was formed in 1956 when it was incorporated as Cityneon Electric and started trading domestic electrical appliances. It was not until the early 1970s when Cityneon first entered the professional exhibition services arena when the Company was commissioned by AUSTRADE to stage the first ever solo-country “Made In Australia” trade exhibition in Singapore. This began a series of other projects throughout the 1970’s and into the booming 1980’s which saw Cityneon organizing many events, exhibitions and trade shows. In 1993, a mammoth exhibition was organized in Bahrain entitled “REBUILD KUWAIT” in which Cityneon did so splendidly that a year later in 1994, they set up a permanent base in Bahrain.

In the 1990’s, Cityneon restructured its business operations and formed 4 business divisions, each specializing in a specific core competence. These were Cityneon Exhibition Services (exhibition rental), Cityneon Creations (custom built, high quality pavilions), Cityneon Concepts (event management services) and Cityneon Global Projects (Design and architecture for Interiors). The Group has its offices located in Singapore, Malaysia, China (Shanghai) and the Middle East (Bahrain).

The Company now provides image marketing solutions globally using the right mix of creativity and commercial acumen, including project management and event logistics capabilities (taken from their website

Prospects and Plans

According to the Company, FY 2011 will be a “challenging” year because customers from the MICE industry (including USA and Europe) are still recovering from the recession and thus will rein in spending on such activities, except for China and India. Another factor is escalating staff costs which are expected to crimp margins even further, and the Company is trying to extract maximum value per employee dollar as it possibly can. A third and very important factor is that the Group draws a significant percentage of its revenue and profit contribution from the Middle East (see figure below – for FY 2010 this proportion was a high 30.4%) and as a result of the serious unrest in countries like Tunisia, Yemen, Bahrain, Egypt and Libya, this can be expected to significantly impact its operations.

Cityneon’s plans are to target and look for opportunities in China and Vietnam, of which they do not have much of a foothold in. They also plan to target more MICE events at the two new IR and to work on their thematic division for USS Phase II and to bid for more regional theme park projects. Another area which they hope to capitalize on is sports events infrastructure business – and this could serve them well once the Sports Hub is completed in 2015.

Comparisons with Kingsmen and Comments

Cityneon seems to focus more on the MICE (exhibitions), thematic segment and event management, from the breakdown as provided in their FY 2010 financial statements. Thematics was involved with the USS projects and Kingsmen is also similarly involved with a huge parcel of work in FY 2009 for USS. Both companies are involved in Phase II of USS as well and will see some parcels of work coming from there. However, the main difference between the two companies is that Cityneon does not seem to do any Interiors and fitting out at all, while for Kingsmen this is a major revenue contributor. Cityneon completed four pavilions at the recent 2010 Shanghai World Expo and this comprised the bulk of their exhibition services revenue, while Kingsmen also did some work on Shanghai Expo but overall had more breadth in terms of its M&E business division, covering F1 and other major events as well. While Cityneon did also cover major events such as Youth Olympic Games, we will see later on that their revenues are not as high as Kingsmen even though they have a longer track record as a company (Kingsmen was started only in 1976).

In terms of geographical coverage, Kingsmen is more focused on Singapore (home base), China, India, Hong Kong, Japan and Taiwan as compared to Cityneon, which seems to be more focused on Middle East and Singapore. This means Kingsmen’s revenue is more diversified and less prone to country risks (as what Cityneon is facing now). Cityneon also seems to be scrambling to expand their business into China and Vietnam, while Kingsmen already had a foot in these countries several years ago. So what I can conclude is that though Cityneon is stronger in Middle East as compared to Kingsmen (Middle East contributes just 1% of revenues), Kingsmen has more diversified revenue streams and is also already entrenched in countries which show promising signs of long-term growth, such as China and India.

Pico Far East

Brief Introduction

Pico Far East (“Pico”) is one of the world’s leading experiential marketing service providers and is a market leader in the MICE industry. The Company has been in operation for more than 40 years, employs 2,200 staff in its sales offices, operates in 19 countries and has a global network of 34 offices worldwide. Pico was listed on the HKSE in 1992 and its Thai associated company was listed on MAI of Thailand in 2004.

Pico’s four main business segments are:-

1) Exhibition and Event Marketing Services – this accounts for the largest portion of the Group’s revenue at 77.9% for FY 2010 (FY 2009: 82.2%). The division organizes trade shows, provides direct services to MNC and Government Agencies and includes setting up of facilities for corporate events, national celebrations and branding and product promotion events.

2) Museum, themed environment, interior and retail – This segment accounts for 9.7% of Group turnover for FY 2010 (FY 2009: 6.5%). It mainly performs work for museum and theme park projects (similar to M&E thematic sub-division in Kingsmen) and interior and retail fitting out.

3) Brand Signage and Visual Communication – This segment accounted for 9.2% of Group revenue for FY 2010 (FY 2009: 9.0%). This division is involved in street planning, design, renovation and signage production.

4) Conference and Show Management – This is Pico’s smallest segment and accounted for 3.2% of group revenue for FY 2010 (FY 2009: 2.3%).

Prospects and Plans

Pico also contends that the fragile economic recovery may weigh on trading conditions and they are poised to capitalize on new opportunities even if recovery is gradual and slow. They have reduced their exposure to USA and Europe and thus will not be very much affected should these countries see slower than expected growth. A big mention was also made of China, where the Group derives 52.3% of its revenue in FY 2010 (See table above); the size and potential of the market was stressed which is similar to what Kingsmen had declared. However, Pico are focusing more on the exhibitions and events aspect of China, while Kingsmen are stressing more on international brands setting up outlets all over China as part of their expansion plans. The Group also plans to strengthen its position in the Middle East and India.

Comparisons with Kingsmen and Comments

Kingsmen and Pico have overlapping areas of business in the events, exhibitions and thematic/scenic divisions. However, Pico derives a large proportion of its revenues from exhibitions and events management, as compared to Kingsmen where M&E division and Interiors contribute roughly the same proportion to Group revenue. Admittedly, Pico covers a much larger breadth and scope of services when it comes to Exhibitions and Events as compared to Kingsmen, and after speaking to Andrew the General Manager he also mentioned that Pico is in a different league when it comes to bidding for mega-projects. The projects Pico undertake are much larger in scale and complexity and Kingsmen has yet to achieve such a level of proficiency to be able to compete on the same footing, so this is an area which Kingsmen has to work on; by benchmarking to the market leader they can also improve on their own capabilities and competencies. They had recently done so by winning the parcel of work at USS which enabled them to gain experience in managing a thematic/scenic project which Kingsmen had never undertaken before.

However, in the arena of Interiors and Fitting-Out, Kingsmen clearly has an edge and advantage as Pico’s revenue share for this division is less than 10%. Kingsmen has honed their Interiors business into one which includes roll-out Management as well, and their clientele is certainly impressive. Pico cannot boast such a clientele of international brands even though they are very well-entrenched in the exhibitions arena. I guess this is where both companies compete on different footing, and where Kingsmen can really shine as the contractors of choice to handle large, complex Interiors work which smaller companies cannot take on. Since Pico is not a contender for this business division, Kingsmen can go ahead to grow this division in Singapore and China.

Competitive Analysis – Key Ratios and Numbers

Note that I did not compare the historical price-earnings ratio at which the three companies are currently trading at, mainly because their businesses are not exactly similar even though they have some intersections and overlaps, and also because the scale, size and geographic spread of the revenue is also somewhat different, making direct comparisons of PER difficult.

Revenues-wise, it seems apparent that Kingsmen and Pico have a larger revenue base than Cityneon. This is in spite of Cityneon starting up around the same time or even earlier than Kingsmen. If we look at gross margin, however, it is interesting to note that Kingsmen’s gross margins lags behind the other two competitors, who have managed to hit 30+% for FY 2009. This may be just a temporary “blip” though, for gross margins seem to have begun to normalize for FY 2010 as Kingsmen was awarded the huge parcel of work for USS in FY 2009 (and which yielded lower gross margins).

In terms of net profit growth, Pico seems to be the most impressive of the pack with a 55% increase in net profit. Then again, they are doing mostly exhibitions and events and Asia has been booming with these over the last few years. It is therefore surprising that Kingsmen and Cityneon have yet to pick up on this boom and ride the wave to stronger profit growth. One reason could be the “lag” effect – note that Pico’s main revenue source comes from China while for Kingsmen, they are only just starting to recognize higher contributions from this region; while Cityneon has only started making plans to enter China and Vietnam. Assuming China continues to grow and its middle-class segment increases significantly, then the spill-over effects may also boost revenues and net profits for Kingsmen and Cityneon, though the extent of this is debatable as Pico is already an entrenched player. Logically, since Kingsmen is competing more in the area of Interiors rather than Exhibitions and Events, they should be likely to grab a significant slice of the pie.

Another surprising fact was that for net margins, Kingsmen seems to have the highest net margins amongst the three players! FY 2010 saw Kingsmen’s net margins hit 6.4%, while Pico hit 6.2% and Cityneon reported a net margin of 4.9%. This demonstrates good expense control on Kingsmen’s part as compared to peers, even though Part 1 did mention that expenses rose more than gross profits as a result of higher staff and administrative costs. Moving forward, Kingsmen should be able to at least maintain or raise their net profit margin as they move into lower cost countries and take on smaller parcels of work (which require less manpower to be mobilized).

Current ratio-wise, Kingsmen seems to have the worst current ratio among the 3 companies, but the 1.45 is not far from the 1.50 from Pico. Knowing that the business models of all three companies require relatively little working capital and inventory requirements, current ratio is thus not as important as other measures such as cash flow generation and ROE. As long as it does not dip below 1.20 (unless supported with good reasons), I will not get too worried.

Free cash flows for all three companies are healthy, and the fluctuations are mainly due to timing of payment of trade receivables and timing differences. Pico has the highest level of cash flows for FY 2010 but then again, it would greatly depend upon the projects size/type and clientele and credit terms given. Dividend yield is highest for Kingsmen, even if we strip out the 0.5 cent special dividend for FY 2010, at 6.5%. Pico’s dividend is also increasing and for FY 2010, the yield was 6.3% (all based on March 18, 2011 closing prices). It would appear at face value at least that Kingsmen has the greatest value in terms of dividend yield at this time, unless of course Pico continues to increase their dividend for FY 2011 (then again, its share price may rise to decrease the potential yield). For Kingsmen, the share price has not budged much so the yield remains above 6%.


So it would appear that Kingsmen does have some edge over its competitors, just by purely looking at the numbers alone. In terms of competitive edge and niche positioning, Kingsmen do have an edge in Interiors over Pico and Cityneon; but in the arena of Exhitibions, Museums and Events (i.e. MICE) they face stiff competition from the other two players. More often than not, I see Pico’s banner flying on some event which they had organized, but there is no sign of Kingsmen. I guess Kingsmen can do more to increase their visibility in Singapore and for events, and to create more awareness about what they do and how well they do it. Thus far, I only see their large banner flying on the stands for the Formula One race come September.

For Part 5, I will be looking at qualitative aspects of Kingsmen, and also delve into other pertinent aspects of the Company as a viable investment. Of course, this is all solely my opinion and I may suffer from selective perception as I am vested, so please also do your own research and independent and objective thinking on what I have posted.

Thursday, April 07, 2011

Personal Finance Part 22 – Filing Your Income Tax

It’s that time of the year again for all Singaporeans to file their income taxes, and always note that you are filing income taxes for the preceding year, but the year of assessment is always the year AFTER the year in question. Confused? YA 2011 refers to income drawn in calendar year 2010, and YA 2012 will refer to income drawn in calendar year 2011, and so on. I realized that some people get confused over this, so it’s better to clarify it early in this post. The rest of the post will deal with common issues with tax filing, some confusion over common deductions and also discuss the current tax regime and the changes introduced by Budget 2011.

Before I begin, here are some very important acronyms and terms:-

ECI = Estimated Chargeable Income (this represents the income subject to taxation after deduction of all reliefs from earned and business income)
NOA = Notice of Assessment (sent to all taxpayers to display the tax computation and to inform them of the tax payable and due date)

Reliefs = Deductions to ECI. There is a whole list of these and it can be daunting but IRAS has included a lot of assistance, explanations and help for each item. Just click on the “I” button beside each deduction for more information on whether you qualify.

Rebates = A direct deduction from tax payable. For YA 2011, there is a one-off 20% tax rebate for all taxpayers, meaning you only have to pay 80% of your computed tax payable. Some rebates, like Parenthood Tax Rebate, can be carried forward to future YA if there is an unutilized portion.

The deadline for filing your income tax this year is April 18, 2011, and this is an extension given by IRAS (Inland Revenue Authority of Singapore) for those who have problems filing or getting their IR8As together. Incidentally, an IR8A is a document which is issued by the Human Resource of each company to employees to state their gross salary, bonuses and CPF contributions in the preceding year. If one had changed jobs during the year, then you will need IR8A from all your employers in order to properly file your income tax. Some employers are included under IRAS’ auto-inclusion scheme, which means there is no need to manually key in the numbers – they are already updated when you login to file your income tax using your NRIC and Singpass. Below please see the tax brackets for YA 2011:-

Confusion sometime arises from the income section of the tax filing (I am referring to the e-filing screen and not the paper version). I will touch on the main sections of other income which I feel will impact some folk, that is rental income. Rental income has to be declared now that HDB has gazetted that ALL home owners have to register due to loan shark activity (I am not sure about private apartments, can someone clarify?). So simply take rental income for the year 2010 and minus out all mortgage loan interest paid during that year, and also less out any incidental expenses relating to the rental (you would need to retain proper documentation to prove this in case IRAS launches an audit) and the property taxes paid. Dividend income is NOT taxed any longer as all Singapore dividends are one-tier tax exempt, while interest income from deposits placed with approved banks like POSB are also exempted from income tax.

For deductions, please note that some deductions will be automatically computed, like donations to CDAC and SINDA, CPF Top-Ups, NS Man Relief and Earned Income Relief, while others like foreign maid levy, parent relief and Course Fee Relief have to be manually entered. Some important points to note on the following reliefs (I shall just touch on the more common and important ones):-

1. Donations – Donations to approved institutions (IRAS has a list) get a 250% relief. This means every dollar donated with result in a deduction of $2.50 from ECI, which is a benefit given to encourage more people to donate generously!

2. Qualifying Child Relief – All parents can claim this $4,000 deduction if their child is below 16 and earning less than $4,000 per annum. Note that if your child is handicapped the amount rises to $5,500.

3. Parent Relief – This part is kind of tricky, because note that for each parent, only ONE claim can be made on that parent by any child. To give an example, assuming you have two parents who are not working and earning less than $2,000 a year; and you have 2 siblings (total = 3 children claiming). If each of your siblings makes a parent relief claim on your mother and father, this means you CANNOT claim parent relief at all. I also found out that if your father claims wife relief on your mother, then the children are NOT allowed to claim parent relief on their mother as well. Silly rule, but IRAS has sent warning letters to me on this before, so I thought I should highlight this.

4. Course Fees Relief – This is an incentive given by the Government to get people to upgrade themselves. The total relief per year of assessment is $5,500 and one should retain all receipts of payments made as proof if IRAS demands an audit.

5. Foreign Maid Levy – Sadly, only working women who have children can claim this relief, and the relief is not available to men! You can claim twice the amount of levy paid, which is either $4,080 if you pay $170 per month (concessionary) or $6,360 if you pay $265 per month.

So after all that, it does not seem as daunting as before eh? Filing income tax is actually a breeze if you have all the relevant documents and numbers with you when you login, and can be done in less than 15 minutes (I e-filed on March 24 in less than 20 minutes for me and my wife).

Of course, in my case, since I have the Parenthood Tax Rebate of S$5,000 to play around with (and it can be distributed in any ratio between me and my wife), it is likely that I can avoid paying income tax again for YA 2011. For YA 2012, as a result of Budget 2011, the tax brackets were further lowered for low and middle-income groups, while keeping the top tier tax bracket constant at 20%. See table below for details:-

So, how much income tax do you think you will have to pay for YA 2011?

Friday, April 01, 2011

March 2011 Portfolio Summary and Review

I guess March 2011 will be very memorable because of one very striking event – the huge 9.0 magnitude earthquake in Japan which triggered a massive, deadly tsunami which wiped out more than 20,000 people and which left Japan in a state of paralysis and shock. My heart goes out to the victims and to those whose lives were irreparably shattered by this natural disaster, as Japan reels from the worst earthquake since records began. But the Japanese are a resilient people and rebuilding is due to commence once search and rescue have completed their grim tasks and the rubble is cleared away, which may take many long months. Such horrifying tragedies only serve to remind me every day of how lucky I am to be living in a disaster-free country (no volcanoes, earthquakes or typhoons), and I am thankful for that. The Nikkei plunged about 13% in 2 days as a result of this catastrophe, and the Singapore market also took its cue from Japan and started to plunge below the 3,000 mark, only to swiftly rebound when the panic and fear had subsided over the possible worldwide nuclear contamination.

The other “big” piece of news which needs no more mentioning is the war and violence in Libya, and I shall not go into details because the news is already reporting it to death. Other than this, other news included URA coming up with a new set of guidelines for property developers to make sure they do not deceive prospective buyers with misleading showflats (they are seeking public consultation on this till mid-April 2011). Inflation is once again rearing its ugly head in rising food prices (gosh, even school kids are not spared), and COE prices remained high at S$43,813 for small cars and S$59,073 for Open Category. I guess all this means that elections are coming soon, because there is definitely a lot to talk about and even more to contest over! (And also because all the parties are starting to “parade” their candidates publicly, thus heightening the already palpable tension in the air).

In the interest of brevity, and because I know I have a tendency to start to ramble on about news, economics, politics and other seemingly mundane issues, I shall forcibly stop myself here just in case.

My portfolio and comments for March 2011 is as follows:-

1) Boustead Holdings Limited – From the bad news in February 2011 comes a sudden turnaround in March 2011, with Boustead announcing contracts for Boustead Projects as well as a tie-up for ESRI Singapore. But first, the bad news – on February 28, 2011 Boustead quantified their potential financial exposure to the ongoing crisis in Libya, to the tune of S$15.5 million to S$39.6 million. This was omitted from my previous month-end portfolio review as the review had been prepared before the announcement came out late on the last day of February. With luck though, the Company can activate the “Force Majeure” clause and recoup some of the losses, but at this point in time it looks like the war may be a protracted one and is not likely to end soon, so I will take it that Boustead will write-off their entire investment in the Al Marj Township in Tripoli. And now for the good news – Boustead Projects announced a total of 3 contracts almost back-to-back; two were announced on March 16, 2011 and involved a S$55 million design and build contract for SDV Logistics to build a logistics facility, and a S$17 million design and build contract for a high-tech production facility (client not mentioned). The next day on March 17, 2011, Boustead Projects announced a design, build and lease (DBL) contract for Continental Automotive Singapore Pte Ltd, and this will be Boustead’s eighth DBL contract in their portfolio of leasehold properties. Then on March 22, 2011, Boustead announced that ESRI Singapore (their geo-spatial arm) had teamed up with Earthmine to deliver 3D panoramic street level imagery in Singapore.

2) Suntec REIT – There was no news from Suntec REIT for the month of March 2011.

3) MTQ Corporation Limited – MTQ announced on 4 March 2011 that they had subscribed for 200 million shares of Neptune Marine Services Limited (“NMS”), an oil and gas services company listed on the Australian Stock Exchange, at AUD 5 cents per share. NMS was undergoing a re-capitalization exercise and was offering 3.6 new shares for every ordinary share in order to raise money to clear off debts and to restructure the Company’s business divisions. As a result of many existing shareholders not taking up their rights entitlement, MTQ then moved in to purchase a nearly 12% stake in the Company for A$10 million (about S$12.93 million). The rationale for this investment was that MTQ viewed NMS as a strategic extension of its predominantly workshop-based operations in Singapore and Bahrain. MTQ wanted exposure to a complementary business which would bring about synergies with its current business and enhance long-term shareholder value. These quoted investments will appear under MTQ’s Balance Sheet as at March 31, 2011 when they release FY 2011 financial statements some time in May 2011. For info, the closing price of NMS on the ASX on March 31, 2011 was AUD 4.6 cents.

4) GRP Limited – There was no news for GRP for March 2011. The interim dividend of 1 cent/share was received on March 2, 2011.

5) Kingsmen Creatives Holdings Limited – There was no news from Kingsmen for the month of March 2011.

6) SIA Engineering Company Limited – There was no news from the Company for March 2011.

Portfolio Review – March 2011

Realized gains remained at S$55.4K in the absence of any divestment and also no dividends were declared for the month of March 2011.

Due to the Japan mega-earthquake and the turmoil in Libya, Mr. Market became rather manic-depressive and therefore I took the opportunity to increase my stakes in Kingsmen Creatives and SIA Engineering. A total of about S$16.8K was injected to purchase more shares in Kingsmen at 56 cents and 55.5 cents on March 1 and 2, 2011; while S$7.8K was injected to purchase more shares of SIA Engineering at S$3.91 on March 17, 2011. A total of S$24.6K was added to my cost which has now risen from S$185.3K as at end-February 2011 to S$210K as at end-March 2011. My cost for Kingsmen remains the same at 56 cents, while I have reduced my cost of investment in SIA Engineering to S$4.064 from S$4.087 previously.

For the month of March 2011, the portfolio has dropped by -5.1% (using XIRR in MS Excel to compute) against a -2.6% fall in the STI; thus underperforming by 2.5 percentage points. Cost of investment has increased to S$210K as explained earlier, and unrealized gains stand at +10.5% (portfolio market value of S$232.1K). Cost of investment now stands at its highest level ever, and I plan to continue to add on to my positions or to initiate new positions if opportunities arise.

April 2011 will be an interesting month to sit through as the crisis continues to unfold in many parts of the Middle East such as Yemen and Bahrain, and as turbulence continues to rock Libya, resulting in escalating oil prices. The earthquake relief efforts and containment of nuclear radiation in Japan’s Fukushima plant are still ongoing, and this will cast a pessimistic pall over sentiment in the short-term. Suffice to say that I am constantly building up my cash reserves month after month through regular savings, rental and dividends; and will not hesitate to deploy more cash should I see suitable opportunities.

Of course, monitoring the health of my companies is of utmost importance, as is reading news pertaining to their industries and businesses and reviewing any announcements or press releases which they may come up with. Such is the interesting journey of a value investor, and I seek to constantly learn more about how companies tick and what separates a great company from a mediocre one. April 2011 will not see many results released (in fact, only Suntec REIT), so it will be a time for reading, research and reflection as I polish my craft and enhance my knowledge base.

My next portfolio review will be on April 30, 2011 (Saturday).