Mid-October 2007 Portfolio Review

I took the opportunity to avail myself of a non-performing company which was originally purchased based on the “turnaround” theme. The company in question is Global Voice and I am happy to report that it no longer takes a place in my portfolio as I had sold it off at 17 cents on October 3, 2007, incurring a loss of about 4.2%. This coincided with Global Voice’s announcement that they were issuing EURO 35 million worth of convertible bonds, and I had written in a separate posting how this was likely to adversely affect the cash flows for the company, thus making it the last straw for me to sell.

The STI continues to make new highs, even briefly touching the 3,900 point mark before retreating. SGX has unveiled a new set of 30 stocks comprising the new, revamped STI (in collaboration with FTSE) which will be implemented on January 1, 2008. In addition, there will also be new indices for China stocks, oil and gas and mid-cap, to name a few.

Below is the summary of my investments and related news as at October 15, 2007 (STI at 3,862.02 points):-

1) Ezra (Vested since October 6, 2005) - Buy Price $1.30 (bonus adjusted), Market Price $6.90, Gain 431%. On October 1 and 5, 2007, Ezra announced the successful sale of 51.1% of EOC Limited (including April 2007’s sale), leaving Ezra with only 48.9%. They will thus equity account for EOC’s results from FY 2008 onwards and this is in line with their practice of being asset-light. The proceeds from the sale will be used for vessel fleet expansion, working capital, acquisitions as well as a dividend to shareholders. Ezra are due to report their FY 2007 results on October 16, 2007 (Tuesday) after market close. I will be doing a review of their results about 2 to 3 days after the release, in order to compile the information and analyze the numbers.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.38, Gain 83.8%. There was no news from Boustead in the half-month ended October 15, 2007.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.80, Gain 276.2%. Swiber had announced more details of their sale and leaseback on October 1, 2007, in which US$95 million would be received in cash progressively and the company will book in a gain of US$33 million which represented the excess of proceeds over book value of US$62 million. The disposal needs to be approved at an EGM to be held at a future date. My previous posting also mentioned that the Group had purchased 4 new vessels (2 subsea and 2 10,000 bhp AHTS) in an effort to expand their capabilities into deep-water. The vessels will be delivered between 4Q FY 2009 and 1Q FY 2010.

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.91, Gain 72.1%. There was no further news on Suntec REIT besides the fact that the resolutions were approved at the EGM held on October 8, 2007.

5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.835, Gain 27.5%. On October 10, 2007, China Fishery announced the acquisition of a 7th fishmeal processing plant in Chimbote for US$15.3 million. This plant can process 60% steam-dried fishmeal and 40% flame-dried fishmeal and will increase the Group’s total fishmeal processing capacity to 549 tonnes per hour. The acquisition will be funded from the proceeds of the senior notes due 2013.

Overall Portfolio

My overall portfolio has increased by 146.9% from an adjusted cost of S$43.2K (less the cost of Global Voice) as at October 15, 2007. The market value of my portfolio is about S$106.7K and unrealized gains total S$63.5K. Realized gains have dropped slightly to S$3.94K to reflect the realized loss taken on Global Voice.

Comparison against STI

The STI was 3,037.74 on January 3, 2007. It is currently at 3,862.02 today, representing a gain of 27.1%.

Adjustment of cost to ensure consistency of comparison – My cost and market value were S$33.9K and S$46.0K respectively as at Jan 3, 2007 while my current adjusted cost (after selling Global Voice) is about S$43.2K. Thus, I will adjust the market value of my holdings as at Jan 3, 2007 according to the % difference in cost in order to ensure a fair comparison. After adjustment, the new market value will be about S$58.6K. The market value of my holdings as at today is S$106.7K. This represents an increase of about 82.1%.

Thus, as at Oct 15, 2007, my portfolio has risen by a gain of 55 percentage points higher than the STI.

My next portfolio review will be on Wednesday, October 31, 2007 after market close.

Swiber – Acquisition of 4 New Vessels for US$108 Million (An Analysis)

Swiber had, on October 11, 2007, announced the acquisition of 4 new vessels from Thaumas Marine Ltd through its wholly-owned subsidiary Kreuz Engineering Limited. Two of the vessels are subsea support vessels while the other two are deepwater 10,000 bhp AHTS. The total cost of the vessels comes up to US$108 million and the vessels are expected to be delivered between 4Q FY 2009 and 1Q FY 2010. The cost, however, does not include any equipment which Swiber may retrofit or install on to the vessels once they are delivered, which means the potential cost of getting the vessels ready for EPCIC projects will exceed the stated US$108 million.

The important thing to note about this latest corporate move by Swiber is that this acquisition cements their entry into a whole new market segment; one which is served by deeper waters and subsea activities. These support vessels can further complement and support Swiber’s EPCIC activities in order to perform hardware installation and inspection, repair as well as maintenance. Various enhancements and sophisticated technical aspects on the new subsea vessels such as SAT system, Class 2 DPS and a working monopool (heck, I don’t know what this all is, but it sounds impressive !) all are supposed to add value to the vessels and enable them to command a premium when used for EPCIC activities. This should enable the Group to bid for higher-value EPCIC projects and also to improve gross margins as they can reduce reliance on third-party chartering of subsea vessels. The deepwater vessels, on the other hand, will be available for oil and gas companies for use in their deep sea operations; but the company does not elaborate on what kind of operations this will entail. More clarification is needed on what the deep water AHTS are for, in terms of whether they are used to complement their EPCIC activities or used merely for charter income.

Mr. Raymond Goh succinctly captured Swiber’s prospects for the future by commenting that the expanded fleet (along with the associated new capabilities and enhancements) would give the Group a strong competitive edge as a leading, niche provider to the oil and gas industry. Recall that there is no direct competitor within the South-East Asian region doing EPCIC works and even though it is known that there is one player in India, they are not scaling up their vessel fleet significantly enough to pose a serious threat. Regarding his further comment about “revenue synergies and growth potential”, I would hazard a guess that he is referring to stronger revenues from bidding for higher-value EPCIC projects. It was previously communicated that Swiber is currently mulling over EPCIC projects in excess of US$500 million, but this was dismissed by myself in an earlier post as Swiber had neither the fleet nor technical capabilities to handle such a massive project. Now, it appears that they are gearing themselves up for this eventuality and it may be in FY 2009 that we see such a large project coming on board.

To give a quick recap, below is Swiber’s expanded vessel fleet consisting of their second (and sustained) fleet expansion intiative:-

One main concern which I have is how the Group plans to finance these purchases and whether they have raised enough cash. To give a quick rundown of the costs required in order to expand their vessel fleet, please see the following bullet points:-

a) August 30, 2007 – Acquisition of 4 vessels (1 submersible barge and 3 accommodation barges) for US$70.6 million;

b) September 6, 2007 – Purchase of Derrick Crane for US$53.13 million;

c) October 11, 2007 – Acquisition of 2 subsea vessels and 2 10,000 bhp AHTS for US$108.0 million.

The total consideration of these vessels amounts to US$231.73 million. Referring to my posting on September 5, 2007 on Swiber, I had computed that the first sale-and-leaseback, private placement of 55.35 million additional shares and the inaugural bond issue under their S$300 million MTN program would generate about US$238.1 million. The second round of sale-and-leaseback will bring in cash of US$95.0 million, thus the total cash inflow now from these 4 financing activities is around US$333.1 million, which is about US$101.37 million in excess of their current requirements. Under the MTN program, Swiber has already drawn down S$108.5 million, leaving another S$191.5 million (about US$130.7 million at 1 US$ = S$1.465) yet to be utilized. Thus, Swiber’s potential cash inflow could be a total of US$463.8 million. This would give them a an additional US$232.07 million more cash to place orders for further vessels, which implies that they are only 50% into their ordering of new vessels to scale up their fleet.

It must be noted that the above projections do not account for the fact that increasing gearing may also have further adverse effects such as higher interest expenses. Another point to note is that the US dollar is depreciating and this would affect the amount of US$ they can raise via the MTN program. Underpinning all this aggressive expansion is, of course, the hope that Swiber can clinch more and higher-value contracts in either Brunei, Vietnam or Indonesia (where they recently incorporated a new company PT Swiber Offshore). More sophisticated vessels and an expanded fleet also hint at better gross and net margins for the company which should crystallize in mid to late 2008 through FY 2010.

The company is expected to release its financials for 3Q 2007 in mid-November 2007. Catalysts for further growth would include new contract wins in countries which Swiber does not have a foothold and the order of new vessels to strengthen their fleet; as well as the hiring of more experienced senior management to helm the different business units of the Group.

China Fishery – Acquisition of Fishmeal Plant in Chimbote, Peru

On October 10, 2007, China Fishery (for which Pacific Andes now owns 63.9% of) announced the acquisition of their seventh (7th) fishmeal processing plant in Chimbote, Peru for US$15.3 million. The Group already has two other plants in Chimbote but this is the first plant which is capable of processing both steam-dried and flame-dried fishmeal within the same facility. This would prove beneficial in terms of efficiencies and economies of scale. The plant has a processing capability of 103 tonnes per hour, for which 60% is for steam-dried fishmeal and 40% is for flame-dried fishmeal.

Steam-dried fishmeal is considered a higher quality product than the flame-dried variant (this could be because of the way it is prepared ?); thus it can command a higher market price, which implies higher margins. The fact that the new plant is 60% dedicated to steam-dried fishmeal is comforting and shows that Management was looking out for this factor when considering the acquisition. According to the press release, producing steam-dried fishmeal is also more energy-efficient and thus will lead to better cost savings as well as environmental benefits. The acquisition will increase CFG’s fishmeal processing capability to 549 tonnes per hour, of which 220 tonnes will be exclusively for steam-dried fishmeal. Since these offer higher margins, I expect the Group to gradually shift production towards this higher margin product in order to boost earnings.

The plant also contains a cannery (for canning the fishmeal), an ice plant and 44,500 square metres of ocean-front land for future expansion. The last point is important as it allows the plant to be expanded and extended in future, in case the production volume for fishmeal needs to be ramped up. With this acquisition, the time taken for the fishmeal to be brought to the coast for unloading by trawlers and vessels can be reduced as CFG already has 6 fishmeal plants along the coast. This reduction in turnaround time means that the trawlers and fishing vessels can be put out to sea more quickly in order to improve their catch; and it will help to optimize the supply chain. Chimbote, being the largest fishing port in Peru, will help to aggregate and consolidate the Group’s resources and assist in achieving better economies of scale.

The Group is currently looking out for more plant acquisition opportunities and leasing opportunities in order to scale up their operations more effectively. Currently, CFG already owns over 5% of the total vessel capacity available to the industry. If the Group makes more meaningful acquisitions, it can serve to improve margins significantly, in addition to CFG’s current refurbishment of the super-trawlers to elongate them (so as to increase their hold capacity).

PAH is set to benefit directly from this acquisition as they now own 63.9% of CFG. The financial results for 1H FY 2008 should be out by mid-November 2007.

Knowing When To Sell

I have been asked to blog about the above, therefore I shall devote this entire posting to the perennial question asked by almost all investors and speculators: “When Do I Sell ?”

For value investors, the answer is of course radically different as compared to a speculator/punter. Value investors research into the business of the companies they invst in and their role is to be a business analyst. Speculators, on the other hand, observe purely price movements and the psychology of the market and try to make money by “outsmarting” the pack. The modus operandi of the value investor and the speculator are different, thus each has different cues which will tell him when to sell. For the speculator, it seems simple enough; sell when your gain or loss has hit a certain % above or below your cost (respectively). This may be 10%, 20% or even 50% depending on one’s personal preference. Taking profit and cutting loss have almost the same rules for punters because they are usually short-term by nature; and some even engage in risky contra trading which makes this cut loss or take profit rule all the more crucial.

That is all I will be commenting in terms of selling for speculators. On value investing, an article on The Motley Fool sums up pretty well the reasons when value investors should sell. The article states: “Value investors sell for four basic reasons. The first case is where the investor comes to the conclusion that the initial intrinsic value estimate is flawed. Value investing requires intellectual honesty, and errors must be acknowledged early. The second reason to sell is when another, even better value comes along that requires some capital to be freed up. The third case is when the business fundamentals upon which the initial purchase decision have deteriorated to the point where there is no margin of safety in the current price. The final reason to sell is when the stock price has moved up to a point to where the business is being fully valued and no longer offers a margin of safety.” I will now explain each point in turn and give my own views on them, and see if they are applicable to any investments which I had sold recently.

1) Flawed Intrinsic Value Estimate – This reason would imply that the value investor had made incorrect or flawed assumptions regarding the business which he studied, to the extent that those errors now have a material impact on the intrinsic value estimate. It could also be the case where certain factors were overlooked while doing a detailed study of the company in question, and these omitted factors seriously compromised the margin of safety for investing in the company. One example I can think of is Trek 2000 International which I sold some time back. I had incorrectly presumed that the company had a wide economic moat with its many patents for its Thumb Drive, but technology which can rival or replace this would easily erode their competitive edge. Thus, as a result, I purchased without the requisite margin of safety.

2) Better Value Comes Along – This reason to sell obviously correlates to a situation where a value investor sees one of their companies being severely over-valued, while at the same time one which is significantly under-valued comes along. Suffice to say that the right thing to do would be to sell the over-valued company and purchase the under-valued one as it would provide margin of safety and also guarantee a good expected rate of return (which the over-valued company now does not provide). However, in reality, such situations rarely if ever arise and one’s timing, luck and circumstance must be impeccable in order to take advantage of such an opportunity (because as a whole, over-valuation usually occurs on a broad market level and is seldom confined to certain companies only. The converse is true for under-valuation in a bear market).

3) Deterioration of Fundamentals – This reason to sell is fairly common and will surely be encountered at least once (I think) in a value investor’s lifetime. We can use history to show how once strong companies succumbed to competitive forces and lost their competitive edge, causing revenues, margins and hence profits to fall. A good example is Creative Technology, which was recently excluded from the revamped STI (as well as the mid-cap stock index). During its heyday in the dot.com boom, Creative traded at a high of S$65 per share and was garnering the lion’s share of revenues for its world-beating Sound Blaster Pro. Now, the company has made 4 consecutive quarters of losses and its products (the Zen player) cannot compete effectively against Apple’s iPod and Microsoft’s Zune. For a value investor, this deterioration should best be detected early, otherwise the investor would suffer a large fall in the value of his/her holdings. This is why I advocate keeping close watch on a company’s plans, strategies, margins, earnings and industry to monitor for possible sighs of decline.

4) Fully Valued Business – I do not fully agree with this given reason to sell. How does one know when a business is “fully valued” ? I guess the best answer to that would be to say that the business has no prospect of growing at a rate higher than the inflation rate. This means that the business may be stagnant or stagnating, and the products or services offered by the company may be close to a decline (due to obsolescence). So maybe we should modify the reason to make it read “sell if you feel the business cannot grow faster than the current inflation rate”. Unless you are a value investor who goes for dividend yield (i.e. your investment turns into a “cash cow”, dropping from a “star”; according to BCG’s matrix) , it is advisable to sell and look for another potential company with a good margin of safety.

Keeping these 4 reasons in mind, a value investor should continually monitor the companies he owns to see if any of them are in “danger”. This would fit Benjamin Graham’s idea of an active investor; one who knows his investments well and puts in time and effort to maximize his investment returns.

Personal Finance Part 3 – Property & Housing

Ok, first things first, I need to make a disclaimer: I am not an expert at property and am just a passive reader of news bits involving the current property cycle. My observations are purely from the perspective of a layman as I do not fully comprehend many aspects of the property market. The property boom is Singapore now is reminiscent of what happened back in 1994-1995 when prices were rising as well. Since value investing does not really incorporate real estate in its philosophy, I will attempt to discuss properties and housing more from a personal perspective.

I will concentrate my discussion more on HDB flats, as I own one myself. The broader aspects of financing and mortgage loan repayments is also applicable to other types of properties like freehold condominiums as well as landed property. Firstly, when one purchases a HDB flat, HDB will “wipe out” your entire OA balance as part of the down-payment for the flat. You can prevent the full wipe-out by channeling some of your funds into CPF-approved investments like unit trusts or equities; should you wish to retain some balance for future tiding over. This is something which many have to be wary about, because the sudden loss of your job or income generating ability (touch wood !) could hit one hard when the OA balance is swept clean.As for loan interest rates, HDB is granting a concessionary interest rate of 2.6% per annum, which is 0.1% above the prevailing interest rate on the OA. This has been kept constant ever since I obtained my flat in Jan 2004 and I hope they keep it that way for a long time to come ! It’s one of the cheapest loans you can get in Singapore, so for people who wish to opt out of the HDB loan and obtain a bank loan instead (for the lower first 2 years interest), please note that there is no way to “opt-back” into the HDB loan scheme (i.e. you are excluded forever !). Most local banks offer rates of up to 2-2.5% for the first two years, after which a floating interest rate applies which can go to as high as 4-4.5%.

The question of choosing one’s loan period is one of great importance. If you are just starting out to work and not earning a high salary, it would be advisable to take on a slightly longer loan (up to 25 years perhaps) to obtain a lower mortgage monthly payment. As you and your spouse’s salaries and income increase, the monthly repayment can be gradually increased in order to reduce the total loan period. I have found this to be a good method of reducing the loan period in a gradual manner, while saving on interest in future periods as well. Increasing the loan repayment amounts is much preferable to doing a lump sum repayment (on getting your bonus, for example). This can be shown using a loan amortization table (similar to a finance lease amortization table for those of you accounting-trained readers). This is illustrated as follows:-

Assuming a loan of S$250,000 with HDB concessionary rate of 2.6%. The husband and wife are both contributing S$500 each (S$1,000 in total) from their OA towards repayment of the monthly installment. Column A will represent the monthly interest on the principle (column D). Column B represents the repayment amount per month while column C is the net effect of the interest charged versus the repayment amount. Column D in the respective month will then show the new reduced principle amount of the loan for future periods, carried forward. I have only shown a sample of this table which can easily be produced using an MS Excel spreadsheet. If we extrapolate forward, it can be seen that this loan will only be fully repaid by July 2043 (which implies a total loan period of 36 years). Of course, this example is just illustrative as HDB only grants maximum of 30-year loans; but the idea is tweak the numbers to obtain the desired results. Just by changing the gal’s and guy’s contribution to S$1,000 each (S$2,000) in total, the loan period is drastically reduced to just 14 years (loan ending in October 2021).

One final point to note is to ensure you have sufficient balance in your OA to tide you over at least 6 months of installment payment (in case you are out of a job, for example). This means that bonuses (which increase your OA quickly as the full amount of CPF is credited to your OA, not limited to just 23% of S$4,500 per month).should be retained in order to tide one over for a rainy day, rather than being used as lump sum repayment. This is just a personal opinion though, one should tweak the spreadsheet according to his or her financial condition.

For more information on housing loan assistance, I would strongly recommend Mr. Dennis Ng of Leverage Holdings Pte Ltd. He has been giving financial advice and tips on Wallstraits forum for the past 5 years and has also been invited to write articles in BT and give talks on property loans. His website can be accessed here.

Ezra - Successful listing of EOC Limited on Oslo Bors

This evening, on October 5, 2007, Ezra announced that EOC Limited has successfully listed on the Main Board of Oslo Bors in Norway, becoming the first Singapore company to do so. Recall that on April 23, 2007, Ezra had initially sold off their 12% stake in EOC for US$43.3 million, trimming their stake from 100% (wholly-owned) to 88%. EOC was then admitted onto the OTC board of Oslo Bors at the time and plans were already underway to move EOC to the Main Board by the end of CY 2007. The intention of the sale of the 12% stake was to raise funds to expand Ezra's vessel fleet, and plans were already underway then to move the FPSO and the heavy lift accomodation barge to EOC.

On August 31, 2007, Ezra announced that they had obtained in-principle approval from Oslo Bors to upgrade EOC to the Main Board. At the time, Ezra had already expressed their intention to remain asset-light; thus hinting that they would reduce their stake in EOC to less than 50%. The purpose of the listing was to get a better valuation as Norway was the hub for oil and gas company listings. Also, being listed in Europe also allows EOC easy access to the capital markets there in order to raise funds for future expansion, and puts them closer to their target markets in North Sea, South America and West Africa. There were several requirements for EOC to move to the Main Board, which included drafting an approved prospectus as well as getting a suitable number of round lot holders who were retail investors (not institutional investors). All these conditions were easily fulfilled and on September 10, 2007, Ezra announced that it was planning to sell up to 40.1% of EOC in order to raise funds.

Subsequently, on September 20, 2007, Ezra sold off 36,413,500 shares in EOC (about 32.8%) at NOK 22 to instituional investors through a book-building process assisted by Pareto Securities. Another 7 million shares in EOC (about 6.3%) was to be sold to retail investors in order to satisfy the round lot holding requirement. This entire exercise raised proceeds of USD 177 million payable in cash. After this listing and vendor sale of shares, Ezra's stake in EOC will drop to 48.9%; thus in FY 2008 EOC will be accounted for as an associated company and no longer as a subsidiary.

The entire listing exercise from April 2007 till now raised a total of US$220.3 million (about S$323.8 million using 1 USD: 1.47 SGD). This is equivalent to about S$1.105 per share in cash and Ezra will deploy the funds for Ezra's fleet expansion, acquisitions, working capital as well as a dividend payout to shareholders. JP Morgan's report on Ezra on September 10, 2007 mentioned the possiblity of a dividend payout of up to S$0.48 per share assuming 50% of the proceeds from the listing were paid out, but this is purely an assumption was we do not yet know the working capital and capex requirements of Ezra as they move into FY 2008. When the CEO Lionel Lee mentioned acquisitions, I assume Ezra are on the lookout to acquire a company which has vessels and a presence in the North Sea, which is the market they are targeting to enter in order to compete with the larger players. However, also note that Management (comprising the Lee Family) currently hold about 35% of Ezra; thus a good dividend will also benefit them as it will be cash in their pockets. I strongly suspect that Ezra will make the dividend announcement during their upcoming FY 2007 financial results announcement due in mid to late October 2007.

One of the concerns regarding Ezra's listing of EOC and subsequent paring of their stake is that their earnings will suffer a drop, as EOC essentially is holding the major revenue-generating vessels such as the heavy lift accommodation barge and the FPSO 1. It is also uncertain as to whether the new vessels ordered by Ezra (the two 30,000 bhp AHTS and the 27,000 bhp MFSV) will be shifted over to EOC or retained by Ezra. If they are shifted over, then Ezra can only recognize 48.9% of the earnings from these state-of-the-art vessels. Once these questions are clarified (probably at the AGM), a clearer picture can then be formed of the earnings potential for Ezra moving into FY 2008 and FY 2009. I feel that short-term wise, we may see a dip in earnings but in the long-term, the earnings from the new vessels will catch up and still manage to outpace current earnings. Thus, it is more of a case of short-term pain in order to enjoy long-term gain. Readers who do not share my view are welcome to post their comments, I am happy to discuss it.

One last point about this whole listing exercise: EOC is now on the Main Board of Oslo Bors and this greatly enhances its ability to raise funds separately from Ezra (the parent company). Recall that on February 16, 2007, Ezra announced the placement of 15 million new shares of Ezra at a price of S$5.18 per share, effectively increasing the total issued share capital to 292.9 million shares and diluting existing shareholders such as myself. In order to avoid direct dilution to shareholders of Ezra in case more funds need to be raised via an equity offering, EOC can now raise the funds directly through the Norwegian market and it will be Ezra's stake in EOC which will be diluted; thus avoiding a direct further dilution for existing Ezra shareholders. EOC's successful listing in Norway's capital markets also significantly improves Ezra's profile and visibility in the international community and this is an added intangible benefit for the Group when it comes to bidding for charter contracts for its new vessels.

I will be providing a further update on Ezra when they release their FY 2007 financial results, as well as do a review and analysis of Ezra's numbers, prospects and future strategy for growing earnings.

P.S. - As of today, there is still no update on the proposed bonus issue. Perhaps Management is also waiting for the release of the financials to confirm the books closure date. Should there be any news, I will post it on my blog in a small column.

Global Voice - Issuance of 32 Million Euro Convertible Bonds

I read with some amazement and trepidation the latest announcement by GV relating to their business expansion. They are issuing 32 million Euro worth of convertible bonds (CB) to "accelerate rollout of metro networks and associated services in London, Berlin and Munich". The interest rate on the bonds is 3%. They also need the funds to complete the commissioning of a datacentre in Amsterdam and another next-generation long-haul network in Germany. The conversion price for the bonds is S$0.191 (19.1 Singapore Cents). Recall that in April 2006, GV had issued about 35 million Euro worth of convertible bonds as well, with an interest rate of 3% payable semi-annually.

The question which begs asking is: why does GV need to raise so much cash in order to operate ? Recall that in the RTO of Horizon.com, GV had already purchased the entire metropolitan fibre network at a fraction of the original cost. In fact, one can say that GV had ownership of these assets, which they can subsequently deploy to generate recurring revenues. Back then, utilization rate was very low at 1-2% and it was touted that if utilization increased, then shareholders would see a dramatic jump in revenues, and the company would turnaround from the red. There was intensive coverage of GV during FY 2005 by CIMB and DBSV which promoted the company and said that the metropolitan fibre was about to "take off". Apparently, nothing much came out of it eventually as the company managed to report a loss during each half-year reoprting season. This is despite the fact that it was snaring more and more contracts on a regular basis and building up their customer base. I had highlighted this point before in my review on GV some months back when I analyzed their 1H 2007 financial statements.

So if one glances at the income statement for 1H 2007, it is glaringly obvious that finance costs have increased significantly, up a whopping 630% from 1H FY 2006 ! The announcement of another 32 million Euro worth of convertible bonds only serves to exacerbate the problem of high interest expenses as the interest paid in future years will almost double as compared with FY 2007. Don't forget that being convertible bonds, they also carry the potential to be extremely dilutive once exercised, and the conversion price is not all that far away from the current market price of around 17 to 17.5 singapore cents. A discerning shareholder should then wonder: why does the company need to raise so much cash if it has secured enough contracts over the last 12 months to sustain its operational cash flows ?

The amount raised is not small by any standards and would further raise their interest-bearing borrowings under long-term liabilities in the Balance Sheet to about 61 million Euro. Take a quick glance at the Cash Flow Statement from 1H Fy 2007 and one can see that the operations are not generating sufficient operating cash flows to enable the business to sustain itself, which is probably why they are doing a "fund-raising exercise" every now and then. They already have a 35 million Euro cash outflow for 1H FY 2006; now they are going to have another 32 million Euro outflow for 2H FY 2007 ? When will it end ?

Assuming that even if GV DOES have the means to sustain its operations through the generation of recurring cash flows from their key customers, remember that they still need to service the interest payments, and try to gradually reduce borrowings as well. This all seems like an uphill task for the company as they struggle valiantly to return to the black.

Finally, why are GV undertaking to invest in more assets to bolster their current network ? As I recall, GV already has their fibre network in the regions indicated in the press release, so why are they purchasing another datacentre and another network ? There is insufficient information given to shareholders as to what are the nature of the assets to be purchased, and how these will contribute to improving their value proposition and competitive advantage. This factor, coupled with the opaque reporting for each of their contracts, means that shareholders have no inkling on whether the company is managing to improve revenues significantly or slightly.

The announcement of the new convertible bond issue was the proverbial straw that broke the camel's back. I divested myself of Global Voice once and for all, and incurred a loss of 4.2% (excluding brokerage) on this "long-term" investment. Suffice to say that if I had done my proper due diligence initially when I considered this company, I would probably not have bought it at all. This is my worst investment mistake thus far as I have incurred a huge opportunity cost in locking up my funds in a stagnant company. I will be providing details of this mistake in a future posting under "Investment Mistakes".

Thus, my portfolio now contains only 5 companies; Suntec REIT, Ezra, Boustead, Pacific Andes and Swiber.

Paying Too Much for the Future

Weird title eh ? Well, actually this title signifies a person who chooses to put in too much of his money into a company when valuations are rich, thus ending up "paying too much". The problem, of course, is in ascertaining how much you should actually pay and how to avoid over-paying.

Let's start off with the basics: say I offer you a cheeseburger. How much will you be willing to pay for it ? $2 ? $3 ? Maybe even $6 if it was from Carl's Jr ? But would you, in your right mind, pay $20 for a single burger ? Not unless it's justified, you might tell yourself. The same thing happens in the stock market on a daily basis. A company is offering $0.10 per dollar of earnings but people somehow pay $0.20 or even more, not realizing that they over-paid. But wait, you again say, perhaps these people are paying for what the company will be worth in future ! Good point, but then how will we know what the value of the company will be in say, 2 to 3 years time ?

This is where value investing and using valuation methods come in. If we want to pay for future growth, we have to be sure we are paying a good price for it. Even for a good company like DBS, SIA or Cosco, one should NOT pay too much for a certain rate of growth; otherwise you will find that it will take years for the company's earnings to catch up with the price you paid. This is also one of the reasons why people start lamenting that they are not making money even though the company is fundamentally strong; this is because they paid too much for it in the first place !

In today's bull market, where the STI has breached the 3,800 mark, this warning will ring very loudly and serve as an alarm bell for people who may think of purchasing part-ownership of a company. Please do note that many analysts are using FY 2008 valuations to justify their target prices (some even use FY 2009 so they can come up with a more inflated number), and the prices they come up with can be based on very optimistic, idealistic conditions. Thus, as an investor, we should be wary of such assumptions and challenge them assiduously so that we do not end up paying more than we should. Business conditions can sometimes be very rough and unpredictable, therefore investors should take note that in the most optimistic projections, there are bound to be some possible misses in terms of revenue targets, profit targets and margin growth. This is part of the normal business cycle which all investors should think about.

So to avoid over-paying, we have to assess if the sustainability of earnings can be continued through into the future. This depends largely on how a company recognizes revenues. Be acutely aware that property companies tend to use % of completion method, oil and has chartering companies recognize revenue on a time charter basis while retail companies like Hour Glass and Sincere recognize revenue on an immediate basis (at the point of sale). One has to do a simple forecast (using a conservative net margin) to see how earnings will turn out in future periods. This will give a fair value for the company. Add in synergies in terms of JV, tie-ups and other beneficial arrangements and you obtain a rough intrinsic value. Make sure you purchase with a reasonable discount to intrinsic value in order to maintain a margin of safety. This ensures you do not "overpay" for the transaction, using a forward-earnings projection.

All I can say is, in today's market, there is hardly any margin of safety for any company on SGX. Therefore, I will sit, wait and build up my cash hoard in anticipation of the next major crash or correction. Patience will always reward the value investor; most people cannot resist the temptation to constantly buy and sell.