Thursday, June 30, 2011

June 2011 Portfolio Summary and Review

June 2011 was one of those months where there was a lot of economic and political news – that of Greece (almost daily), USA, China and India; but not even a whisper of corporate news. So I guess I spent most of the days relaxing and catching up on precious family time as well as digging deeper into work (yes, my workload has increased). My previous post had mentioned that my daughter was admitted to hospital, and this also consumed my time somewhat. Fortunately, she has been discharged and I am now more wary of bacteria and viruses which could potentially infect my poor child again. Call it fatherly instinct if you will, but now every time she sneezes or coughs I almost have a fit. Thankfully, I have very helpful in-laws as well as my own parents who spend a lot of time fussing over my daughter to make sure she gets the best possible care.

On the property front, the release of a massive supply of housing (as mentioned in my last blog post) and the (in)famous $880,000 (reduced to $778,00 later on) Sim Lian DBSS had the whole internet community abuzz, though mostly with decidedly negative reactions. While it remains to be seen if the measures will have any effect, countries like China are still seeing real estate prices go UP. Only when the hot money stops flowing from the West to the East will this inflation finally subside.

To avoid being overly long-winded (again), let me dive right into my portfolio and corporate summaries. My portfolio and comments for June 2011 are as follows:-

1) Boustead Holdings Limited – Boustead had a relatively slower month in June 2011 as there was only one announcement of contract win. On June 16, 2011, Boustead announced that its Energy-Related Engineering Division had secured S$23 million worth of contracts for downstream oil refineries and gas processing plants in Australia, Singapore and Turkmenistan. Adding these contracts to the S$25 million announced in April 2011, Boustead’s order book for this Division stands at over S$55 million in just the first three months of the financial year, and represents a good start for Boustead. Since I am already planning an analysis of their FY 2011 financials to continue into Parts 2 and 3, I shall say no more here.

A piece of disappointing news announced on June 24, 2011 was that of Corporate Guarantees demanding from it from Bank of Commerce and Development for about US$18.8 million. These were related to the Libyan Township project which was now put on indefinite hold due to the ongoing crisis. Boustead had not made provisions for this amount in its FY 2011 results as it was advised by its legal counsel that there was no necessity for it at the time. So it looks as though Boustead may be exposed to another potential S$23.3 million in losses for FY 2012 which would impact its financial performance.

2) Suntec REIT – There was no news for Suntec REIT for June 2011.

3) MTQ Corporation Limited– There were no corporate announcements from MTQ for June 2011 per se, but Neptune Marine Services (“NMS”) did announce that Blossomvale (a 100% subsidiary of MTQ) had increased its stake in the Company from June 8 to June 27, 2011. Please refer to the table above for the stake changes. Over a period of 11 trading days, MTQ had taken the opportunity to average down on their original purchase of NMS shares (200 million shares at A$0.05 per share) by purchasing an additional 68,455,000 shares at prices ranges of A$0.035 to A$0.0387. This had the effect of increasing their stake in NMS to 268,455,000 shares (or 15.31% of the total issued share capital) and lowered their average cost in NMS from A$0.05 to A$0.0467.

I am also expecting MTQ’s FY 2011 Annual Report in July 2011, as well as news on the location and timing of the AGM.

4) GRP Limited – Predictable, there was no news for GRP for June 2011.

5) Kingsmen Creatives Holdings Limited – There was no news from Kingsmen Creatives for June 2011.

6) SIA Engineering Company Limited – On June 28, 2011, SIA Engineering announced the renewal of an MRO Agreement with SIA Cargo valued at $385 million over 3 years, to be extended by two more years if conditions are fulfilled. Since this is a renewal agreement, there is no material impact on FY 2012’s financials. SIAEC’s AGM will be held on July 22, 2011 11 a.m. at Marina Mandarin Ballroom.

Portfolio Review – June 2011

Realized gains have remained at S$59.2K due to the absence of any shares going ex-dividend (SIAEC will go ex-dividend in July while Boustead on August 3, 2011).

For the month of June 2011, the portfolio has dropped by -2.2% (using XIRR in MS Excel to compute) against a -2.2% fall in the STI; thus my portfolio performance is on par with the STI. This was 0.4% better than May 2011’s under-performance of -0.4 percentage points. Cost of investment remained at S$210K and unrealized gains stand at +12.2% (Portfolio Market Value of S$235.5K).

For this month at least, I managed to blog about some topics on valuations and also relate some of my experience along my investment journey. I guess July 2011 should see some interesting AGMs coming up – that of MTQ, Boustead and SIAEC. However, as I am bogged down with work commitments, I guess I have to be selective with regards to which AGM I decide to attend. Boustead’s analysis will also continue this month, and I may also have time to squeeze in a post on Porter’s Five-Forces and perhaps wrap up my long-overdue Kingsmen Comprehensive Analysis Part 5.

If you think June 2011 was amazingly dry in terms of corporate news (just see the above summary and you will know what I mean), July 2011 might just beat it as it is also well-known for having very little corporate news (at least, this applies to the companies I own). Some companies seem to release news almost daily, like Olam for example. Only Suntec REIT will announce results in July 2011, and since I own such a pathetic amount of shares I don’t even see reason to comment on it! I will have to wait till August 2011 to see Kingsmen release their 1H FY 2011 results. UPDATE: SIA Engineering will release their 1Q FY 2012 results on July 26, 2011 (Tuesday).

My next portfolio review will be on July 31, 2011 (Sunday).

Sunday, June 26, 2011

Property – Expectation Theory and The Perfect Storm

It’s been a while since I wrote something on property, since there was nothing really new or ground-breaking for me to comment on since Mr. Khaw Boon Wan (KBW) took over from the reins of Mr. Mah Bow Tan after 11 years at the helm of the Ministry of National Development. However, on June 10, 2011, Mr. KBW blogged about a possible “perfect storm” which may brew in 1-2 years time, and which may either cause the property market to cool significantly, or, in the worst-case scenario, crash resoundingly. He said that housing prices could not go up indefinitely, and cautioned many speculators and investors to do their sums carefully and to make prudent purchases to ensure they could hold in case of falling prices. The perfect storm consisted of three aspects: record-high land supply, possible drop in influx of foreigners (demand-side) and the rising of interest rates. I shall tackle each of these points separately, then offer a summary of my thoughts and comments.

Record Supply of Land

In response to runaway property prices and the frustrations of young couples yearning to purchase their first HDB BTO property, Mr. KBW has released an unprecedented number of sites for development of residential units. For 2010, there were 13,945 units for private homes but for 2011, it is planned that 17,510 units will be released to cater for the strong demand. This bumper supply is supposed to assuage the fears of Singaporeans who constantly complain that there are insufficient HDB flats for application. Their complaints are not unfounded though – some of the recent BTOs have seen over-subscriptions by up to 6 to 7 times the number of flats offered. With the injection of such a massive supply of land in such a short time, the Minister’s aim is that an equilibrium will be reached in terms of prices as demand will then be balanced by adequate supply.

However, some experts and veterans have been quick to point out that as a result of KBW’s zealousness in solving the problem of under-supply, he may have inadvertently pushed the property market into an over-supply situation. Keeping in mind that property cycles are longer than stock market cycles and that a lot of the price determination depends on Government policies (especially those relating to % loan quantum), the effects of such a significant supply of land coming onstream probably will only be felt in 1-2 years.

Falling Demand

With Greece facing problems once again and the USA’s economy stagnating after the effects of QE2 have worn off, it looks as though the world in general may face another prolonged and painful slowdown. The usual suspects embroiled in economic hell are Europe, UK and the USA; and it looks as though the problems will get much worse before they get better. If printing cheap money is the way to solve problems, then the USA would have solved their problems long ago! As it is, inflation and the falling value of the USD may precipitate another crisis in terms of lowered consumer spending; coupled with a stagnant housing market, this means the projected US recovery may falter and splutter for the next few years at least. Even China and India are not spared from economic problems, as they seek to tame runaway inflation and soaring property prices (in China and Hong Kong). China recently raised its banks’ reserve ratio to curb bank loans for property speculation, while Hong Kong has reduced the amount which can be borrowed for property from 60% to 50%, in desperate but vain attempts to rein in prices.

Assuming the troubles persist in Greece, USA and other areas of the West, this would have a spillover effect over in Asia as less foreigners will be sent over here for work attachments or seconded here for jobs. This will lead to a fall in demand for foreigners renting apartments. A sharp fall in demand may also be the result of a combination of the above-mentioned, coupled with a tighter immigration policy, especially after it was made known that the foreigner influx has been continuing unabated for the last 5 years; and which has resulted in a lot of discontent and dissatisfaction amongst Singaporeans.

Rising Interest Rates

Probably the worst whammy of them all – rising interest rates will hit property investors hard, as though they had been pummelled by Thor’s hammer. The problem, of course, is that interest rates have been hovering around historical lows for more than 2 years (since late 2008), so there is not much fear or trepidation among the masses that it may rise. This may explain the somewhat gung-ho and cavalier attitude taken by investors who are rushing to leverage and lock in the low rates for the next 2-3 years. The flood of liquidity has also further exacerbated the problem and 4 rounds of cooling measures have failed to dampen the demand for loans and property. This is because the measures have only tweaked the loan quantum % but have not affected the interest rates charged by banks, as this is by and large pegged to USA Federal Reserve rates.

Problems will most likely arise only after most of the current crop of investors’ lock-in periods have expired, which will probably be in 2012 or 2013 (assuming most loans were taken up in 2009-2011 and have a lock-in fixed period of 1-3 years). Once interest rates start to float, and with banks charging their usual 125 to 150 basis points spread, the rates charged by then could be significantly higher than what they are presently. If an investor only has to cough up say $2,000 in instalments at 1.5%, then this will more than double when interest rates hit above 3% once the world economy normalizes, and there is reversion to the mean in terms of long-term interest rates.

The Perfect Storm

Yes, I know the title sounds like a bad Hollywood movie on tornadoes, but remember that if this potent cauldron of three factors comes into play almost at the same time, it most likely will result in a crash in the property market. Though it is unlikely that all three factors will converge at the same time, what we do know is that supply will most definitely come on-stream, while demand may or may not taper off in 2012 and 2013. Interest rates in Singapore are unlikely to rise in the near future, but it is very hard to see past 2012 as the economic picture looks very murky and uncertain at the moment.

Expectation Theory

Expectation theory ties in with markets in general (not just property), and is rooted in psychology. In brief, it simply means that if market players anticipate and expect changes to the macro-economy which may impact their investments or their decision-making process, they would take immediate action to mitigate their exposure and minimize their risks. This means that technically, prices could begin to fall even way before any of the above ingredients which constitute the perfect storm actually come to pass; because people are anticipating the storm in advance and are simply reacting to it as quick as they can. Hence, pessimism and risk aversion can set in suddenly and without warning, and like a disease, can spread like wildfire within a short span of time and “infect” more and more people, resulting in either a slump or a mini-crash. We see this occur in fast motion in the equity markets, when a sudden turn of events or a change in mood can precipitate a sudden crash in stock prices. For the property market, I will liken it more to a slow-motion train wreck instead.

Another Sign of A Bubble - New players in Property Scene

In a further sign of possible exuberance in the property market, there have been a rash of new players entering the property scene, some of whom have had no prior experience. It is generally acknowledged that many new entrants flooding into property is a tell-tale sign of a possible market top, and so one should view such signs with immediacy and a sense of trepidation that things may go downhill soon. For starters, Ron Sim of OSIM has, in his personal capacity, bid for commercially zoned land in Paya Lebar and Punggol. JL Asia Resources (owner of K-Box) teamed up with Mary Chia to open Porcelain Hotel in Mosque Street; while Thakral Corp, an electronic goods distributor, has taken stakes in several property projects in Sydney and Melbourne. All these were recently reported in the news barely a month ago, and most property booms have led to companies jumping into the deep end to capture a slice of (seemingly) lucrative money-making opportunities. Whether or not this will end in pain and misery, I guess only time will tell.


So the perfect storm may indeed come to pass, and for those who are willing to wait till 2013, the answer may turn out to surprise everyone, as such trends are difficult if not impossible to predict accurately. With recent news that a new DBSS flat was being offered (by Sim Lian Group, no doubt) at $880,000 (Centrale 8 in Tampines), I too am beginning to wonder if the market is getting way too frothy for my own comfort!

Tuesday, June 21, 2011

Investment Thoughts Four Years On

OK, I know this is probably another lousy title, but it was tough for me to think of what to call this post, which basically sums up my reflections and thoughts as an investor after blogging for 4 years. I guess you can call it an “investment style update”, one of many which I have over the months (the last one was in Nov 2010 in this post). Every now and then, I take the opportunity to crystallize my thoughts on investments, businesses and personal finance as part of my journey (the blog is, after all, “Musicwhiz’s Journey”) towards financial freedom. For now, it remains decidedly elusive, but that does not detract me from my eventual goal of reaching this summit. Many will remark that goalposts may change as you age and your personal circumstances change, and I do agree; but as times change, my investment style and knowledge has also evolved to prepare myself for the next 10-20 years, and hopefully my experience, reading, analysis and research can put me in good standing to tackle these challenges in life.

This blog actually acts as an investment diary and journal, as I use it to collect my thoughts and opinions in one central location. I formally started blogging back in 2006, though that was an on “immature” basis if you check out the posts back then. I only started blogging about investing and personal finance more seriously in May 2007. Since then, it has been four years and I never would have expected (back then) to be able to achieve the level of portfolio that I had achieved now, or the passive income generation. It is indeed a pleasant surprise to me to know that even though I may not be hugely successful (i.e. joining the ranks of a millionaire or the financially free), I had indeed improved my passive income generation ability and also greatly matured as an investor. This alone gives me a profound sense of satisfaction, even though it may not translate into tangible financial results. Remember: it is the process as much as the results which I enjoy, so for detractors who may remark that I am spending way too much time generating way too little returns, I must emphasize that investing is more than just a hobby – it is the passion of discovering how companies are run, what makes them tick and also how fascinating it can be to dissect numbers and make sense of them.

I usually must stop myself before I get too carried away and end up being long-winded again, so here are some of the lessons learnt since my post last November. Note that this list is far from exhaustive:-

1) Avoiding dud and mediocre companies is as important as finding undervalued gems – Interestingly, many people tend to talk about finding “The Next Google” or “The Next Facebook”, symbolic of the next great investment idea which could reap them tons of (seemingly effortless) money. Much attention is focused on finding great companies even before they become great, and funds tend to flow towards the next big idea (Artivision, it seems, as I type this). But the true essence of investing is not just about finding a great undervalued company with all the right characteristics for investment; it is also about learning to avoid the mediocre companies and the dud companies. Over these 4 years, it has become somewhat easier to identify the duds almost immediately, as I have developed automatic mental screens when I look at the financials of a company and study its business model. The greater danger, however, is in finding so-called “Value Traps”, companies which seem great but turn out to be painfully mediocre. These companies attempt to “ensnare” you with good numbers and a (seemingly) strong business model and competitive moat, but if one is not careful, they may see these “strengths” being rapidly eroded away as competitors flood in, regulations change and the industry evolves. Therefore, one has to be ever vigilant on the risks such companies may harbor, in the knowledge that it is better to avoid such companies before they turn out be a major pain in the ass.

2) The Erosion of Gross Margins – This was meant to take up a whole separate post, but I thought there would probably not be enough content so decided to slot it in here instead. While thinking through various companies’ business models, operating environment and unique characteristics, one metric which stood out is how often the gross margin can foretell things to come. Gross margin, for the uninitiated, simply means the gross profit (revenues less cost to acquire these goods) divided by revenue; and this measures how much profit you obtain from each dollar of sales, before factoring in expenses such as depreciation, staff costs and marketing/distribution costs. A careful study of gross margins for the last 5-8 years of any company can throw up some very interesting insights, and this is what I have been doing for quite a while on my investment journey. Erosion of gross margin is often the first tell-tale sign that something bad is going to happen, sort of like the first sign of trouble before the true rot causes a massive cave-in. Companies in industries which compete on prices normally experience a steady decline in gross margin, while other companies may suffer from stronger competitive forces which push down gross margins. One recent example was Tat Hong (which I divested about 3 months back). Their gross margins were steadily declining over the years, and this signaled that competitive forces were making it difficult for the Company to price its products as profitably as before, resulting in not just lower gross profits but also a lower market share over time. Companies which suffer from constant and chronic gross margin erosion should be avoided or sold off because it is often an early sign of deteriorating fundamentals. Well, seeing that I do have quite a bit to say on this, perhaps in future (if readers request it) I may do a full posting (along with examples) on this topic.

3) The importance of Purchasing Insurance – I know this is unrelated to investing per se, but since insurance is an important aspect of personal finance, I have decided to talk a bit about this. Recently, my daughter was admitted to hospital for about 17 days, and the significance of purchasing not just insurance, but the right insurance with the proper coverage, hit me hard. Fortunately for me, I had my daughter fully covered for all classes of wards up to private hospitals, which meant I could let her stay in a single room in a private hospital. The bill came up to close to $20,000 including medications, procedures and doctors’ visits; and fortunately this was fully reimbursable (though you have to pay upfront first then claim back later from Great Eastern – my insurer). In addition, there is also a clause which says that any hospital stay past 8 days entitles me to an additional claim of $500. If I had not purchased insurance, I would be staring at a massive financial hole of $20,000 which would seriously drain my reserves. So for all readers out there, do review your family’s insurance plans and coverage and make sure you are adequately covered for H&S and other emergencies (including Accident, Disability Income if necessary).

4) The Curious Case of the Disappearing Cash (for S-Chips) – I guess enough has probably been said in the newspapers about the status and reputation of S-Chips in general, so I will try to be brief. You would think that cash was one of the harder things to fake on a Balance Sheet, but so many S-Chips have done a “Satyam” that it really seems as if Chinese companies have an inherent knack for doctoring the cash numbers. After a particularly damning report issued by KPMG for China Milk Products (which has been suspended since 2009), it has brought to light exactly how onerous it is for special auditors (and forensic auditors) to gather sufficient relevant information on the financial activities of such dubious companies. Past cases with China Sun Bio-Chem and Sino-Environment have been equally daunting for the auditors, and shareholders can more or less kiss their entire investment goodbye as the Management and associated rogues have probably absconded with the money a long time ago! While the most recent cases still fresh in people’s minds were those of China Hongxing, Hongwei Technologies and Sino Techfibre (all still suspended pending further news and updates), there have been other suspicious S-Chips which seem to be sending out signals that something is wrong, yet no full-blown investigation has been conducted into their affairs. A case in point is Dapai Holdings, a backpack and luggage manufacturer. Despite having RMB 539 million (S$102.87 million) cash in its books as at March 31, 2011, the Company has announced a rights issue of 1 for 4 shares at $0.08 per share (a heavy discount to last done share price of 14 cents) to raise a paltry sum of S$19.3 million. This is purportedly for an acquisition but if the acquisition does not go through then the money will be used for “general working capital purposes”. It is quite inconceivable for a Company to raise such little money using such an EPS-dilutive method when it has a large cash hoard sitting around. Unless they have massive capex plans for that S$102.87 million which I am unaware of, I would say this exercise seems highly suspicious.

5) Reading up on Bond Investing – This is one of the more interesting major topics which I have been reading up on, and at the same time, I am also studying and observing what is happening in the real world of bond issues. Bonds are fixed income instruments which has a role to play in balancing one’s portfolio as one ages, and from my readings on portfolio re-balancing, I know that bonds are a security which one should start to introduce into one’s portfolio as one gets older. Though equities are known to trump bonds hands down in terms of long-term returns, the issue here is whether one can outlast a long bear market if one is at a more advanced age. Bonds (especially blue-chip, high-quality ones) provide good protection against downside as coupons are a compulsory feature, unlike dividends which can be (severely) cut in times of recession or economic upheaval. There is some argument over whether bonds should be a staple in an investors’ portfolio, it’s just the percentage allocation which should be tweaked. The Intelligent Investor by Benjamin Graham recommends that when one is young, it should be 25% bonds to 75% equities; but he also mentions that this proportion can be adjusted according to bullish or bearish markets, though it’s far from easy to be able to do it with ease. Considering the amount of information on bonds alone, I guess I will have to dedicate a separate post on this as well another time. In the meantime, I will continue to look for sources of reliable and dependable information on bonds and how to invest in them, in order to broaden my investment sphere.

That about summarizes my thoughts on investing at the moment, and covers some of the more current topics on my mind as I seek to better myself as an investor. It takes a lot more knowledge, reading and experience before I can say I am an all-rounded, confident investor. Considering my investment history is only about 6.5 years old (since Dec 2004), and the fact that I have not had a very consistent track record until I embraced value investing in late 2007, I think there is a ton more to learn and absorb in order to improve myself. Keeping humble is also an important attribute as I feel humility lets you have a better feel of your mistakes and prevents you from getting swell-headed and complacent. A ten-year track record of consistent returns would be something I can look forward to, and if you take end-2007 as the starting point, then I am not even halfway there!

Friday, June 17, 2011

Boustead – FY 2011 Financial Analysis Part 1

Boustead released their FY 2011 results on May 26, 2011, and this was followed by the usual live audiocast where Management would take questions on the phone, as well as through the internet. These results were interesting because they illustrated Boustead’s first major crisis since I started investing in the Company in 2006 – and this was in the form of civil unrest in Libya, which is where Boustead are building a township in. The numbers were predictably bad, but surprisingly the overall performance remained resilient and the Company continued to generate healthy amounts of FCF in spite of this setback. Upon closer inspection, the impairment loss was merely a book entry (including provisions) and did not significantly affect cash flows during the period. I will elaborate more in the following sections.

This analysis is split into the usual 3 major sections. Part 1 will focus on the numbers, chiefly the Income Statement, Balance Sheet and Cash Flow Statement, as well as dividends. I will also include a special section on my investment in Boustead to date, as well as dividends received over the years; as this is my 5th-year Anniversary of being a Boustead shareholder (OK, 4.75 years but close enough). Part 2 will concentrate on the divisional analysis; and since Boustead has 4 main divisions this discussion may take up significant space and contain quite a bit of content (I am estimating this since I have not written it yet). Part 3 will include a full transcript of Boustead’s audiocast as well as my comments on certain relevant sections of the transcript. I will also outline Boustead’s plans and prospects for FY 2012, and comment on the strategies the Group is taking to grow its footprint further in South-East Asia.

Profit & Loss Statement

Boustead was expected to go through a rough patch for 4Q 2011, as it was evident from their announcements and press releases that Libya was going through a civil war and that all foreigners had to be evacuated from the country. While the impairment and provisions took up about $17.6 million in total, note that this was merely an accounting entry and had no impact on cash flows. The cash flow statement analysis section will demonstrate that cash flows continued to be very strong for the Group. If we look at revenue alone, 4Q 2011 saw an 8.4% rise in revenues compared to 4Q 2010, to $110 million from $102 million. Gross margin hit a high of 38.9% versus 36% a year ago; and if not for the provisions made for Libya, Boustead would have recorded a very strong 4Q and also a record FY 2011 net profit attributable to shareholders.

The thing which still continually amazes me about Boustead’s Income Statement is how the Group manages to grow revenues, yet keep costs manageable. If we look at FY 2011 numbers, revenues increased by 28%, gross margin increased from 30.3% to 31.8% and selling/distribution expenses only grew 27%. Administrative expenses, which consist of staff salaries, hardly budged and only grew a small 3%. Considering business activities had increased significantly leading to record revenues of $560.5 million for Boustead, their ability to keep staff costs low has been nothing short of remarkable!

Finance costs continue to remain low as Boustead has about $25 million debt in its books. For the entire FY 2011, finance costs were only $613,000, down 38% from last year’s $995,000. Share of results from associates has now been removed because of the sale of property by GBI Realty.

Balance Sheet Review

Boustead’s Balance Sheet continues to remain rock-solid, thanks to FF Wong’s constant emphasis on cash flow generation and his conservative stance on debt. PPE fell while investment properties increased, largely due to the increase in the portfolio size for the Real-Estate Solutions Division (more on this in Part 2). AFS investments also increased from $5.55 million to $9.684 million, probably as a result of Boustead’s $4 million investment in Bio-Treat (now known as Hankore – more on this in Part 3). Current assets stood at $435.9 million, out of which $209.8 million (48.1%) consisted of cash and bank balances. Trade Receivables dropped by 13.2% to $96.8 million in spite of a 28% increase in revenues, signalling that cash collection was healthy and improving. If we compare the level of cash to current assets, FY 2010’s level stood at 47.2% ($223.3/$473.3); therefore the level of 48.1% is impressive considering Boustead paid out a 2.5c final dividend, 1.5c special dividend (both for FY 2010) and another 2c interim dividend (for FY 2011). This is another indication of healthy cash flow generation.

Total bank loans remained fairly constant over the two years, with the level increasing from $24.0 million in FY 2010 to $25.2 million (+5%). This increase in 5% should not result in such a drastic drop in finance costs; therefore I suspect the loans may have been refinanced at much lower interest rates as SIBOR rates were at all-time lows during FY 2011. Current liabilities stood at $223 million for FY 2011, and current ratio for FY 2011 was 1.95, against 1.78 in FY 2010. The improvement was due to a combination of higher total current assets due to contracts work-in-progress, as well as lower current liabilities due to payments to trade and other creditors.

ROE improved to 22.8% from 20.2% a year ago, and this was achieved with minimal debt and a large cash position.

Cash Flow Statement Analysis

Operating cash flows for Boustead remained strong, hitting $52.1 million compared to $52.6 million last year. This was in spite of slower orders for both Real Estate and Oil & Gas Divisions for FY 2011, with momentum only picking up in 4Q 2011. Cash flow for investing activities was negative for FY 2011 mainly due to the purchase of the remaining interest in Boustead Projects for $19 million. The inflow of $27.4 million and outflow of $33.1 million represented movements for the Cash Management Reserve which Boustead are maintaining. This reserve was basically created to invest excess cash for higher returns, and they are mainly invested in corporate bonds. It is not very relevant to compare with FY 2010, actually, as cash flows then were affected by the sale and receipt of cash from GBI Realty of $41 million. So, if we strip out all the “one-off” cash inflows and outflows, then basically this section consists of just capex. And capex for FY 2011 was lower than FY 2010 at $3.3 million against $4.4 million.

As always, the bulk of financing cash outflows consisted of payment of dividends, and I foresee this trend continuing into the mid-term as Boustead continues to generate healthy free cash flows. For both years, FCF levels were almost the same at $48+ million.


Dividends at Boustead have an interesting way of increasing over the years, not that I am complaining! If we take a simple look at the dividend history of Boustead, they paid out 3.3 cents in FY 2007, and increased this to 5 cents in FY 2008 (inclusive of 1c special dividend), 4 cents in FY 2009, 5.5 cents in FY 2010 (last year); and now for FY 2011 they declared 7 cents. Revenues had actually doubled in 5 years and dividends have more than doubled (3.3 cents versus 7 cents). I have FF Wong and his team to thank for focusing more on slow and steady growth than explosive but unsustainable growth.

Investment Returns on Boustead and True Cost

This special section is devoted to analyzing my return from Boustead over the years and to compute the true cost of my investment after factoring in dividends received over the years. Please see below:-

According to the table above, my true cost for Boustead is about 40.2 cents/share. This takes into account my total investment cost in Boustead to date, minus all dividends received from Boustead to date. This does not, however, include the most recently announced final cum special dividend of 5c per share. If this was factored in, then true cost would be further reduced to 35.2 cents.

Part 2 of Boustead’s analysis shall cover Boustead’s business divisional analysis, and will delve into the prospects and aspects of each division, its order book as well as margins.

Update: Boustead's Energy-Related Engineering Division had just announced $23 Million worth of contracts yesterday (June 16, 2011). Together with $25 million secured in early FY 2012, this brings total order book for this division to >$55 million.

Sunday, June 12, 2011

Period of Contemplation

The title of this post was actually meant to reflect my thoughts on the time required to mull over and consider a potential investment. It is also meant to be a “break” from the heavy analyses going on in prior posts on MTQ and SIA Engineering. There is another analysis coming up and planned for Boustead’s FY 2011 results. This post is to summarize some of the thoughts I have gone through while taking bus/MRT recently, and follows closely on my previous post on “Pace of Research”. I guess you can say that I would recommend reading both posts back to back, as this post is sort of a “follow-up” to the previous one.

So what exactly does the title mean? While pace of research was meant to assess how dedicated one should be while researching a company, to the extent of whether he can allocate sufficient time to dig deep into a company’s financials, stakeholders and business model; period of contemplation addresses the issue of how long one should study a company before deciding if sufficient research and study had been taken. This would naturally translate into a reasoned decision to purchase shares in the Company. The problem is that different companies have different characteristics, and I admit that some do require a lot more monitoring and following up than others, purely due to not just the nature of the business but also the way the company is run. Add to that strategic management decisions, varied management styles and an evolving business model and you get some very subjective views on how long one should evaluate a company before committing. I will now attempt to state, broadly, how much time one should adequately devote before making an informed decision.

Note that the default conditions for investment will be required, such as good margins, good and consistent free cash flow, steady earnings and decent ROE. What differs is the nature of the business and the type of industry the Company is in, as I shall elaborate.

Cyclical Companies

For companies in cyclical industries, one has to at least observe one entire economic cycle relating to that industry before deciding when, or whether, to buy some shares. Examples would be companies in construction or property like Tat Hong or Capitaland, where the housing boom/bust cycle would determine if valuations are demanding or not. Therefore, the period one should take should stretch into years if one wishes to fully understand the business cycle and determine when to make a purchase. Of course, history can always serve as a guide but the future may not always repeat itself in the same way. I would think these companies are best avoided unless you can time the cycle very well and go in at the point of lowest valuation, and just before the economic uptick.

Cash-Rich Companies in declining industries

Companies such as GRP would qualify, as they are very cash-heavy but are mired in a business which is declining and competitive. One should observe such companies to the extent that they actually plan to do something with the cash hoard, or if they undertake actions (e.g. M&A) to improve the business model. Alternatively, the investor could also study the company as a yield play, with potential to generate good FCF even in a declining industry. The time period in this case could be anything from a few months (for research) to perhaps one or two years to observe and study Management’s decisions.

Companies in new industries with low barriers to entry (many new entrants)

These are companies which have had a first-mover advantage with respect to a new and emerging industry; and therefore are enjoying supernormal profits, margins and very good cash flow. Some examples may include palm oil, bio-fuels and solar panels which are at the cutting edge of technology. However, more time needs to be spent observing such companies as many new entrants, seeing the huge profits being made by the incumbent, may scramble to grab a piece of the pie as well. The ever-changing economics and dynamics within the industry would require a longer-term study before any commitment is made. In addition, there is also not much history to fall back on as these industries may be relatively new.

Fast Growth Companies

Fast growth companies are those which are aggressively expanding, conquering new territories, opening new offices in new countries, and generally engaging in active M&A or corporate actions. They usually do not pay a dividend as profits are reinvested to grow the business. For such companies, one should observe only as long as one should in order to gain comfort on their plans, and current growth strategy. Once an understanding is formed, a position could be taken up without waiting for too long. Of course, one should also watch out for valuations – growth companies usually trade at higher valuations as a lot of potential future growth is already factored in. Investors may wish to discount for this growth in order to maintain some margin of safety.

Stalwarts and Stable Conglomerates

The final category of companies which I would like to comment on are the stalwarts, or stable blue-chips, as well as conglomerates. These would include ST Engineering and SingTel for the former and Keppel Corporation for the latter. SIA Engineering would also probably fall into this category. This type of companies probably require the least amount of monitoring and observation, as they already have an entrenched market position, steady earnings and decent cash flows. One would simply need to understand the business and be comfortable with the financials and numbers before deciding to invest, and this should not take a whole lot of time.

To summarize, the length of time taken should not be inordinately long, otherwise one may miss out of very good opportunities to accumulate shares in well-run companies, as well as miss out on the compounding effects of their investments growing over the years. Yet, one should not be unduly hasty in committing to a purchase before one has done sufficient research, otherwise the consequences could be disastrous and detrimental to one’s wealth.

Tuesday, June 07, 2011

SIA Engineering – FY 2011 Results Analysis and Review

Since SIA Engineering (“SIAEC”) is a blue-chip company and has a strong operating history and business, I shall be covering it within one post and will not require splitting the analysis into several parts. I guess readers will probably also heave a huge sigh of relief as the frequent splitting up of analyses into sections does feel jarring and I do have the tendency to become long-winded, resulting in a tedious and (probably) boring read. Nevertheless, I shall endeavour to cover as much ground as I can and also to get my opinions across on what I feel about the business, while at the same time polishing my business analysis skills. Constructive comments would be useful for me to understand how I could improve on the analysis and if there is anything lacking thus far.

The analysis will be structured more or less solely on the numbers aspect, as SIAEC generally have been rather reticent in providing more details of its ground operations, fleet management and other MRO aspects within its SGXNet filing. These details will be provided in SIAEC’s Annual Report which is usually issued in July 2011.

Profit & Loss Analysis

Revenue increased by 10% to $1.1 billion while cost of goods sold increased a smaller 8.4% to $971 million. This, combined with lower expenses, caused operating profit to rise 22.9% to $135.7 million for FY 2011. The rise in revenue was attributed to increase in activity for airframe and mainframe overhaul, as well as fleet management and line maintenance. The higher COGS arose due to higher staff costs and sub-contractor costs. Operating margin improved to 12.3%, which is a 5-year high, and net profit attributable to shareholders increased 9.5% year on year to $258.5 million. This is actually close to SIAEC’s historical high with only FY 2009 ($260.6 million) registering a higher figure for net profit. With SIAEC’s prudent cost management and slow and steady growth of their JV and associated companies (more on that in a later section), revenues and profits look poised to grow further in the medium-term.

EPS is 23.89 cents/share and the company is valued at a historical PER of about 17x. ROE is higher at 19.8% compared to 18.7% a year ago, and this was largely achieved through the use of low and minimal debt on its Balance Sheet. To be frightfully honest, 17x PER does seem rather high even though SIAEC is a blue-chip and has very strong FCF generation, but the special dividend provides some support for this valuation, and also the strength of its joint ventures and related collaborations with its associated companies.

Balance Sheet Analysis

There is not really a lot to say about SIAEC’s Balance Sheet, as it has been traditionally “clean” and uncluttered. Debt levels did increase marginally to $1.7 million, but against current asset levels of $864.3 million I concluded this was largely insignificant! Shareholders’ equity has increased further to $1.3 billion (an 11-year high) due to strong profit generation, and working capital levels have also hit an 11-year high of $602.1 million through very strong and consistent cash flow generation. As a result of their strong working capital position, current ratio has also improved to an all-time high of 3.30 since listing. These reasons, coupled with the cash flow explanations to be provided in the next section, form the basis with which SIAEC is using to declare a special dividend this financial year.

Cash Flow Statement Review

If we observe the 10-year cash operational cash flow generation history of SIAEC, FY 2011 will stand out as the year which generated the most operational cash inflow – a total of $218.8 million. As capex remained low at just $44.6 million, this means that FCF also hit a 10-year high at $174.2 million, compared with just $70.4 million in FY 2010. Net investing cash flows is also strongly positive at $121.5 million, which was higher than last year’s $115.5 million. The reason for this was due to the gradual recovery of SIAEC’s many JV and associate companies, and so cash has flowed in from them through dividends declared (see next section). Moving forward, as long as these companies continue to generate decent cash flows for SIAEC, they would be able to continue to grow their cash pile and to pay out good dividends. Cash outflow from financing activities was about $180.7 million, and consisted mainly of the payment of dividends.

As a result of these movements, cash balances rose to a new record high of $581.4 million, which prompted SIAEC to declare a special dividend of 10 cents/share in addition to their 14 cents/share final dividend, bringing total dividend to 24 cents/share. With 1,082,195,600 shares in issue, this means the Company will fork out about $260 million in dividends, to be paid out on August 11, 2011 (2Q FY 2012). This will bring cash levels down to about $320 million, assuming no other cash movements in the interim between March 31, 2011 and August 11, 2011 (a simplistic assumption), which is still a tidy sum retained for expansion and working capital purposes. Depending how 1Q FY 2012 and the rest of FY 2012 fares, I would expect dividends to be maintained at the 20 cent/share level, translating to a yield of about 5% based on a $4.00 share price. My yield based on purchase price of $4.064 is about 7.4% for FY 2011.

Share of Profits and Cash Flows from JV and Associated Companies

I had mentioned before during last year’s due diligence analysis of purchase of SIAEC that their cash flows from investing activities was very strong, and is one of the few companies whereby this section of the cash flow statement is strongly positive. It was also previously pointed out by me that even though SIAEC’s net profit attributable to shareholders had dipped during bad years, their cash flows from dividends from these JV and associated companies had continue to grow all the way till (then) FY 2010. FY 2011 saw this trend continue further and a total of $144.4 million was recorded as share of profits from JV and associate companies. Though this is off the peak share of profits recognized in FY 2009 of $173 million, SIAEC did report that conditions were slowly improving as the economic recovery took hold and we can expect to see this contribution increase over time.

Interestingly, though, the cash flow from dividends provided by these JV and associate companies has continued to climb in spite of the fluctuations in profit contributions. For FY 2011 it hit another new high at $165.3 million, up 7.8% from FY 2010’s $153.4 million.


Dividends have been steadily increasing for SIAEC as well, as their business model does not hinge on heavy capex due to their collaborations with JV partners. Glancing at their 11-year dividend history, one can see that dividends have taken an upward trajectory, with three out of 11 years showing a special dividend declared. It would seem that SIAEC does not want its cash hoard to exceed $600 million and will declare a special dividend each time it threatens to exceed this mark. While this may signal to some that this blue-chip company is running out of ideas to grow its business and profits, I tend to see it from the point of view that the Management Team takes their time to negotiate for and align themselves with various initiatives (explained below), and these may take months or even years to fully pan out. As these initiatives are not capital-intensive, much of the cash can be returned back to shareholders even while retaining sufficient amounts for working capital and growing the business slowly but steadily.

The table shows that total ordinary dividend (i.e. interim + final) has been steadily increasing over the last eleven years. It started out with a total of 4 cents/share back in FY 2001, hit 10 cents/share in FY 2006 and for FY 2011, is now 20 cents/share. The only other time it hit 20 cents/share was in FY 2008 when the global economy peaked just before the onset of the sub-prime crisis in the USA. If nothing drastic occurs to the airline industry, we can reasonably assume dividends can continue to increase as SIAEC carries on with its strategy to grow through JV and collaborations.

Recap of Major Announcements during FY 2011

This is just a quick recap of the news bits throughout FY 2011 for SIAEC. Admittedly, news flow has been a lot slower for calendar year 2011, but I believe the Annual Report (to arrive in July 2011) will shed some light on Management’s plans for FY 2012 and beyond.

May 2010 – SIAEC adds Royal Brunei Airlines into its customer base.
October 2010 – SIAEC signs A340 MRO services contract with Airbus
November 2010 – SIAEC forms JV with Panasonic Avionics Corporation for MRO of in-flight entertainment and communications systems and components
November 2010 – SIAEC opens sixth (6th) overseas line maintenance joint venture in Vietnam, with line maintenance contracts with 9 airline customers.
December 2010 – SIAEC signs $300 million Services Agreement with Silkair
April 2011 (overlaps into FY 2012) – SIAEC opens Safran’s first avionics Centre of Excellence in Asia.

SIA – Setting up of low-cost long-haul airline

With the recent announcement that SIA will be setting up a low-cost airline which will fly long-haul within a year, this bodes well for SIAEC’s business as they may be able to snare more line maintenance contracts and MRO agreements with this new planned airline (as yet unnamed at time of writing).


While I am positive on the medium-term outlook of the business, it remains to be seen if SIAEC has any announcements up its sleeve for FY 2012 to show that they are committed to growing the business further. I shall be awaiting its Annual Report as well as its 1Q FY 2012 results in early July 2011.