Friday, August 31, 2018

August 2018 Portfolio Review

As was the style with my blog previously, I would always do a month-end review and summary of all portfolio positions. The display would only include my purchase price, market price and capital gain/(loss). Please note that the portfolio review is simply to catalogue all corporate announcements and associated news flow relating to my positions - it is NOT to be construed as an attempt to "brag" about portfolio size or to sound arrogant over specific security choices. If there is any indication of this occurring, then I apologize in advance.

1) Suntec REIT - There was no news from the REIT for the month.

2) Boustead Singapore Limited ("BSL") - BSL released its 1Q FY 2019 earnings on August 13, 2018. Revenue was up +18% yoy to $107m, while GP was up +26% from $33m to $41.4m. NPAT was up +315% to $12.2m, mainly due to a one-off gain of $5.9m from the disposal of a property held for sale (25 Changi North Rise - see BPL) and forex gains of $1.5m. Balance Sheet continued to remain robust with cash of $$280.5m against total debt of $72m (net cash of around $208.5m). OCF was $22m and capex excluding the purchase of WhiteRock Medical was just $161k, so FCF was ~$20m. Acquisition of WhiteRock Medical announced in June 2018 amounted to $19m (as announced), but net of cash the purchase consideration was less at $15.5m. Divisional performance saw improvements across all divisions, with revenue rising on a yoy basis (for Geo-Spatial, the change was due to the change in revenue recognition policy from the adoption of SFRS(I) 15). The change front-loads more of the revenue from the maintenance portion of the contracts early on, and less revenue is thus recognized at the back-end of the contract.

PBT for all divisions also improved but note that energy-related engineering was impacted by exchange gains, while real estate solutions was helped by the disposal of a property (more in BPL below). The good news is that order book backlog improved to $304m as at end of 1Q FY 2019 (consisting of $102m under Energy-Related Engineering and $202m under Real Estate Solutions). Comparative numbers for 1Q FY 2018 were $209m total order backlog (of which $72m was for Energy-Related Engineering and $137m for Real Estate Solutions). So to summarize:-

Total Order Backlog: $304m (+45.5% yoy)
Energy-Related Engineering Order Book: $102m (+41.7% yoy)
Real Estate Solutions: $202m (+47.4% yoy)

I am planning for a comprehensive review of BSL and this should come in due course (slated for perhaps October if I am still blogging by then), and hopefully it will come out before the release of the 1H FY 2019 earnings (which should include the new "Healthcare" division by then).

3) Boustead Projects Limited ("BPL") - BPL released its 1Q FY 2019 earnings on 10 August, 2018. Revenue was up +7% yoy to $48.7m, while GP was up slightly more at +8% yoy to $15.7m. NPAT was up +73% yoy to $10m, mainly due to the one-off gain mentioned earlier under BSL. Cash on Balance Sheet increased further to $129m from $111m 3 months ago, and total debt remained fairly constant at $69.1m. FCF continued to be very healthy, with 1Q FY 2019 registering an OCF of $12.8m and capex of just $31,000; and overall cash inflow from the three sources came to $17.6m.

On a divisional level, design and build revenue was up +9% yoy while leasing revenue was down -5% yoy, and this was mainly due to lease expiry at 85 Tuas South Avenue 1 in January 2018, which was partially offset by fees from BDP. PBT for leasing dropped more significantly, by -30% yoy, due to higher overhead expenses, investment in new capabilities and additional professional fees. While this is a cause for concern, I will treat it as an investment in BPL's future and will continue to monitor this for now.

One piece of positive news is that BPL has managed to secure a new tenant on a long-term lease for 85 Tuas South Avenue 1 (which has been vacant since January 2018). However, as there are A&A works ongoing to prepare this property for the new tenant, rental cash flow will only commence from FY 2020 onwards (i.e. April 2019 onwards). Pre-committed space at ALICE @ Mediapolis and the first phase of marketing of the Boustead Industrial Park in Vietnam are proceeding well, and should bear fruit in the next 12-18 months.

4) Design Studio Group ("DSG") - There was no news from DSG for August 2018. The Group had just released their 2Q 2018 earnings on July 19, 2018; the numbers showed some improvement with revenue increasing +44% and NPAT rising +340% (albeit off a low base). $109.5m worth of new orders was secured in 1H 2018 alone (for an average of around $18m per month), compared to just $13.5m in the whole of 1H 2017. Order book as at end-June 2018 stood at $157.1m (+10.8% yoy), which was $141.8m as at end-June 2017. With the arrival of the new CEO Edgar Ramani last year, DSG is undergoing a slow, steady but painful transformation to wipe the slate clean of old inventories and also to better prepare the firm for more consistent, sustainable growth. The AGM slides had also demonstrated that the new Management (along with newly-appointed CFO Ronald Kurniadi) has garnered some momentum is securing more contract wins; now they have to demonstrate that they can deliver, collect on receivables and also earn a decent margin. I will have to closely watch DSG in future quarters as it is currently my worst-performing position.

5) Kingsmen Creatives - I must admit I am puzzled on Kingsmen. No doubt the last 2-3 years has seen earnings fall off a cliff and net margins contracting from a once-healthy 6% to 7% to the current 2% to 3%, but recent news and announcements on contract wins and also the tie-up with Hasbro for the NERF FEC (Family Entertainment Centres) did not seem to spark any buying interest at all, thereby keeping the stock at depressed trough valuations. This is actually a blessing in disguise as I managed to accumulate more shares in Kingsmen for my CPF IA at an average price of 55c/share, and this comes with a 4.6% yield paid twice-yearly (1c interim, 1.5c final).

August corporate announcements would include the incorporation of a wholly-owned subsidiary in Singapore called NAX (Singapore) Pte Ltd with a paid up capital of SGD 1.6m, as well as the Group's 1H 2018 earnings announcement. More will be shared on this in my detailed Kingsmen review and report coming up next month, but in a nutshell, revenue was up +8.9% yoy while GP was up a smaller +2.8%. NPAT was up +6.1% and an interim dividend of 1c/share was declared, unchanged from last year. On August 21, 2018, Kingsmen also announced that they had increased the paid-up capital in their K-Fix (Nantong) subsidiary from zero to USD 3 million, demonstrating their commitment to the fixtures business and possibly also in anticipation of more contracts due for JEWEL and NERF FEC construction.

6) VICOM - VICOM announced its 2Q 2018 earnings on August 6, 2018. For the second quarter, revenue increased by +2.4% from $24.1m to $24.7m. EBIT increased by a higher +5.1% from $7m to $7.36m but NPAT only increased by +2.9% yoy mainly due to higher tax expenses. The balance sheet remains clean with no debt and cash balance of $97.9m, and FCF generated in 2Q 2018 was $4.4m versus $5.2m in 2Q 2017. An interim dividend of 13.46c was declared, against 13.12c a year ago. This represents a pay-out ratio of exactly 90% based on the 1H 2018 EPS of 14.95c/share. I am very happy to continue owning this Company as it is providing me with a yield of almost 10.6% (at 36c/year) based on my purchase price of $3.408.

7) Straco Corporation - Straco announced its 2Q 2018 earnings on August 14, 2018. Revenue fell by -6.4% yoy from $30.2m to $28.2m, and this was mainly due to a slight dip in visitor numbers (~1.2% lower yoy at 1.22 million visitors) and also a tax waiver not being issued yet for ticket revenue collected for SOA. NPAT fell by -5.1% yoy $10.8m, and 1H 2018 NPAT stood at $14.4m, a drop of -29.3% yoy mainly due to the operational issues at the Singapore Flyer which caused a shutdown from mid-January till end-March 2018. The Balance Sheet remains very healthy with $180.5m of cash and debt of $44m (note that Straco pays down $12m worth of debt every year - or $1m per month). FCF also remained strong at $12.2m, though down compared to 2Q 2017 with $16.4m of FCF. Currently, there is no cause for undue worry as cash continues to build up on the Balance Sheet despite the payment of a 2.5c/share final dividend for FY 2017. Potential catalysts would include the redevelopment of the Singapore Flyer (Flyer 2.0) as well as higher ticket prices for both SOA and UWX (subject to the Chinese Government's approval).

8) iFast Financial - iFast had just released their 2Q 2018 financials in late-July 2018. I will avoid giving a run-down of the numbers as the Company has many numbers to run through - gross revenue, net revenue and also NPAT split by territories and recurring / non-recurring revenue. AUA (assets under administration) hit a new record high of S$8.33b as at June 30, 2018, revenue was up +25.4% yoy and NPAT was up +40.4% yoy. Balance Sheet remains debt-free with cash of $25.8m and very strong FCF of $9m was generated (these are two factors which determine why I like this Company). The Group declared a 2Q interim dividend of 0.75c/share, up from 0.68c/share a year ago.

Also, on August 21, 2018, iFast announced that it had appointed PwC Corporate Finance as the lead financial advisor in relation to a potential capital injection for their Greater China business. iFast's intention was to enlarge the share capital of their Hong Kong and China holdings by about 15%. Assuming the dilutive effect kicked in, it would improve the Group's NPAT for FY 2017 by around S$0.34m (as the China business had incurred a loss for FY 2017).

9) Keppel DC REIT - The REIT announced, on August 7, 2018, that it will be expanding its footprint in Sydney, Australia with a new shell and core data centre. This will be built on vacant land and will cost between A$26m to A$36m (final costs yet to be determined) and will be backed by a 20-year triple-net master lease when completed. It will feature a minimum NLA of 86,000 sq feet and is expected to be completed between 2019 and 2020. This transaction will increase the WALE of the portfolio from 8.8 years to 9.9 years assuming the transaction had occurred on June 30, 2018, and the portfolio aggregate NLA will increase to 1.198m sq feet.

10) Frasers Logistics & Industrial Trust ("FLT") - FLT had a slew of announcements in August 2018, which I will try to summarize. Earnings-wise, revenue for 3Q FY 2018 (the REIT has a Sep year-end) increased by +22.6% yoy from $40.2m to $49.3m, adjusted NPI was up +27.4% and income available for distribution was up +22.4%. This was mainly due to the acquisition of German and Dutch properties as announced by FLT some time back; but though income rose a lot, a rights issue also enlarged the issued share capital base and therefore DPU was up by just +2.9% from 1.75c to 1.80c.

Aggregate leverage at 36.3% meant that the REIT would have room for more borrowings for accretive M&A, and weighted average cost of borrowings was low at just 2.5% with average weighted debt maturity of 3.2 years (all as at June 30, 2018).

On August 6, 2018, FLT announced the divestment of Lot 102 Coghlan Road in South Australia for A$8.75m, which represented a +36.7% premium to book value. This is one of the smallest and oldest assets within the portfolio, representing just 0.2% of the total portfolio value. The divestment therefore allows FLT to recycle capital as this asset has limited future income growth potential.

On August 31, 2018, FLT announced the acquisition of two properties in Sydney and Brisbane for A$62.6 million. The average property age is 1.0 years with WALE of 5.7 years, and these acquisitions will be financed from the proceeds of the sale of the two properties 80 Hartley Street and Lot 102 Coghlan Road. The acquisition should be completed by September 2018 and FLT's portfolio will then contain 82 properties with GLA of approximately 1.9 million square metres with portfolio value of around ~A$2.9 billion.

11) NetLink NBN Trust ("NetLink") - NetLink released its 1Q FY 2019 earnings ended June 30, 2018 (it has a March 31 year-end, in line with SingTel). Revenue was up +2.8% against forecast and EBITDA margin was at 70.8%, while PAT was up +27% against projections at $19m. NAV per unit stands at 78.8c/share and there was a +2.1% increase in residential and non-residential fibre connections, while NBAP connections saw a +35.2% increase since March 31, 2018. The Trust is on track to deliver on FY 2019 projected distribution, and the distribution yield should be around 5.7%.

General investment blog trends and observations

As I had been away from the blogging scene for the last six and a half years, I thought it might be good for me to pen down my thoughts in general on how the blogging scene has evolved, the general tone and language used in investment blogs nowadays and also the overall sentiment I detected through others' portfolios and transactions. Please also note that I am not pointing fingers at any particular blog out there - these are just general observations I made and am putting down on paper for future reference.

More entrants, less details

The first general observation is that after I stopped blogging, the blogosphere has literally exploded with many new entrants. Some bloggers may just be starting out, while other veterans have continued blogging. This has undoubtedly expanded the investment blog universe and given readers a plethora of choices in order to enhance their knowledge on companies, industries, markets and trends. However, I also realized that many of the blogs contained less detail - namely on the investment thesis behind each purchase or sale, why the portfolio was being structured this way, a comprehensive review and assessment of risks versus rewards, and also an admission of mistakes made along the way. Some of the above attributes were either absent, or not fleshed out in sufficient detail to justify a particular action.

Many blogs simply provided an account of their portfolio structure (by % or monetary value per security), some in a pie chart, others in tabular format, their transactions (and associated gains or losses) and also a simple summary of their investment plan or philosophy. This is perfectly fine if you intend to keep a sort of "diary" for transactions online, but I feel it may fall short if the investor wants to studiously keep track of his rationale for buying/selling, his thought process behind mitigation of risks, and also his views on valuation and business prospects.

More trading, less investing

Obviously, I cannot expect everyone to be an investor, much less a value investor; but most of the "investment" blogs should probably be named "trading" blogs. This is due to the frequency of transactions, most of which are conducted at a frenetic pace - buy this, sell that, with not much justification as to why one should stop owning a good business and switch instead to another. Most of the blogs seem to focus more on "taking profit, locking in gains, setting a stop loss" rather than wanting to own more of a great business and to see it grow with time. This is something I find tough to comprehend.

Apparently, capturing "maximum upside" with frequent trades seem to be more the fashion than owning a stable, consistent portfolio of companies which grow over time and which contribute a steady stream of dividends to the patient investor. I see two reasons for this - the increasing ease with which one can gain access to trading apps contributes partly to the increasing trend with which people tend to "flip" stocks (or "stir-fry" stocks if you are aligned with the China way of thinking), making holding periods increasingly short. The other reason is because most of the newer investors have never ever experienced a bear market, thereby letting ebullience take over their senses and clouding their vision with a perpetually sanguine outlook. The requisite "buffer" which is essential to any portfolio seems to be conspicuously absent from most investors' portfolios or even if there was one, does not seem to be articulated in a detailed enough fashion for even the investor himself to gain comfort. If all they have seen thus far is a steady stream of rising prices, then why is there ever a need for a buffer?

More macro appeal, less corporate deep-dive

This is probably one of the most glaring observations I have made over the course of the last few years - where headlines get larger and more glaring in a world of never-ending news, and where media outlets continually spew a steady barrage of head-turning, gut-wrenching bad news. Amidst this roller-coaster of emotions, investors who follow this incessant flow would inevitably feel nervous and emotional about the world and their shareholdings. And this, in a nutshell, is going to be extremely detrimental to their long-term wealth.

Let me put it this way - there is ALWAYS some kind of bad news in this world. The job of the media is to highlight the bad news and to accentuate it as much as possible so that they can sell subscriptions and attract eyeballs. That is their job and objective and they perform it creditably and admirably. However, as an investor, we would do ourselves a favour by ignoring around 98% of the headlines, and just focusing on the few which matter (~2%) - and these should be the ones which tie in to corporate and industry news and which directly have an impact on the companies within our portfolio.

Deep-dive due diligence is by no means easy. It is tedious, frequently boring, time-consuming and also difficult. News flow can help in this regard - by zooming in on articles written on companies, one can immediately get a summary of the important points one needs with regards to any corporation, without needing to undertake a read of the latest annual report or (horrors!) the prospectus. But many blogs do not devote sufficient time to discussing corporations in deep detail, instead letting macro-factors dictate their buy and sell decisions with perhaps just a superficial, surface-level review of the business. It seems washing machines and refrigerators receive much more due diligence from buyers than shares in companies......

The next post (or series of posts) would be on Kingsmen Creatives, where I will do a comprehensive and deep review of the business and also talk about how I feel the shares are currently providing a lot of value, along with a respectable yield with limited downside.


Sillyinvestor said...

Hi MW,

Thank you for your update. Thank you for being transparent, not worry, your post never smell of click baits.

I have 2 questions.

1) portfolio sizing of each individual counter. Is there any criteria? E.g. equal tranches, according to risk reward profile, what is your risk management approach in terms of sizing etc?

Next, I am not sure the NERF collaboration has much info, the license fees to be paid, what scale and size are the centers etc... Because we already have TAG.

But if it works well, well will be the growth drivers

Anonymous said...

Hi MW - If you could include an additional column in your spreadsheet on the number of shares that you hold in each counter, that would be helpful for us to better understand your portfolio allocation strategy. Thanks.

Chris said...

Seems like your portfolio is related to dividend stocks.
What other columns should be added in your table to reflect dividend income performance, like dividend yield (past 5 year and 1 year), etc?

Musicwhiz said...

Hi Sillyinvestor,

Thanks for visiting and thanks too for the questions.

For portfolio sizing, I guess I should do a separate post on this some time soon. It is based mainly on risk-reward characteristics with some emphasis on yield. They are not equal-weighted positions. But obviously this way of sizing has resulted in some issues like for example the Design Studio position which was paying a very decent dividend until they....didn't. So perhaps it was the assessment of risk-reward and subsequent sizing which needs to be improved; then again everyone would be prone to making such errors and it's a continuous learning exercise to be able to properly size positions. I have spoken to many hedge fund managers and sizing is always an issue even for them, and cash position levels can vary widely according to the specific strategy of each Manager. The conclusion is I think my risk-reward framework can be further tweaked and improved, and this shall be reflected in subsequent posts in time to come and when all my companies release their next few sets of quarterly/annual earnings.

As for the Kingsmen NERF project, yes you are right not much information has been shared publicly through announcements on SGXNet, mainly because of competitive reasons and also because the whole project is still in the early stages of planning. However, I had gleaned quite a bit of information from my recent chat with the CEO of Kingsmen during the last AGM held at their old HQ in April 2018, and will be sharing this in my Kingsmen series of posts.

While things are obviously still at the gestation stage, I believe there is good potential for this initiative and that Kingsmen's Management Team would be prudent enough to assess all the risks and potential pitfalls before committing significant sums of money and amounts of manpower and resources towards this venture.

*For Tag, I believe you are referring to Combat Zone ( where NERF gun games are used. This is a very small scale area and the NERF FEC project is slated to be a much larger-scale facility with activity zones and RFID tagging to track time spent within the FEC. More details will be shared in due course, so watch this space.

Musicwhiz said...

Hi Anonymous (would be good to leave a nickname thanks),

I can compromise on this and disclose the % weight of each position within the portfolio, rather than disclose the exact number of shares. Savvy readers would be able to work out the number of shares from there anyway. I can do this starting September 2018.

Thanks for the suggestion.

Musicwhiz said...

Hi Chris,

Yes, some of the companies are more yield plays than others (which are a mixture of yield + growth).

What I can do is to indicate the yield on my cost and also the current yield (based on market price). Some REITs like Keppel DC REIT and FLT had just undergone a placement and preferential offering recently, so the next DPU has yet to be declared. For these, I will indicate yield once the information is available (i.e. first post-placement or offering DPU declared).

Hope this is useful. Alternatively, you can also rely on ARs of the respective companies to track the dividend payments over the last 5 years. Most of them have it in tabular format somewhere within the AR.

Sillyinvestor said...

Hi MW,

I am referring to laserquest by home teams, and also lasertag centers

Lasertag is by another company I think.

Musicwhiz said...

Hi Sillyinvestor,

Thanks, am aware of this but the Kingsmen FEC will be of a much larger scale and around 20,000 square feet, so it's not really directly competing with Laser Quest.

Will reveal more in due course.

Augustine said...


Tks for sharing! I hope you will continue blogging

The Boy Who Procrastinates said...

Hi Musicwhiz,

Looking forward to reading your insights on Kingsmen. I was surprised that it didnt take off despite securing various contracts and partnership with Hashbro. Perhaps investors are still wary of soft outlook on the retail sector.