End-November 2007 Portfolio Review

The half month from mid-Novembe 2007 to end-November 2007 was equally turbulent, with the resurgence of the sub-prime credit crisis sparking panic and fear in global markets. Many mortgage companies in the USA such as Wells Fargo have had to make large write-downs to reflect the losses for sub-prime debt. It did not help that Sears, a popular retailer in USA, also reported a 99% drop in 3Q 2007 net profit, which led economists to conclude that perhaps spending was dropping and USA is in greater danger of falling into a recession. On the Singapore front, inflation hit a 10-year high of 3.6%, while unemployment also fell. There was no particularly earth-shattering news about the companies I own, but the economic news was certainly interesting to follow !

I did take the opportunity to purchase shares in China Fishery Group Limited (CFG) as a result of Mr. Market’s manic-depressive mood swings. This was done on November 16 and subsequently again on November 20 to average down. With a historical annualized PER of less than 10, dividend yield of more than 5% and good growth prospects moving forward, this has made it an attractive purchase. CFG has a strong competitive advantage in that they are one of the few big seafood players in the world, and the Management has a good track record of growing the company for the last 8 years. I have thus included CFG in my current portfolio review.

Below is the summary of my investments and related news as at November 30, 2007 (STI at 3,521.27 points):-

1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $3.34, Gain 418%. Ezra has concluded their share buy-back scheme for now, it would seem. In total to date, they have repurchased 5.436 million shares from the open market to hold as treasury shares, at an average price of S$3.4603, costing them a total of S$18.8 million. On November 23, Ezra also announced the placement of 28.879 million shares in Ezion holding, in which they have 50 million shares, at a price of S$1.21 per share, thus netting a gross cash inflow of S$34.9 million. At this point, it is unsure if Ezion will issue Ezra with an equivalent number of shares to cover back this sale and at what price, as the announcement did not make it clear. I will be clarifying this as well at the AGM. Subsequently, on November 28, Ezra announced that EOC had snared its first major regional contract worth US$148 million, of which I had done a posting on just 2 days ago.

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 not much news from Boustead, except to announce on November 28 that they had incorporated a new subsidiary company known as Boustead Infrastructures (Labuan) Pte Ltd and that its principal activity would be building construction. This could possibly be a prelude to the Group snaring some construction contracts in Labuan, perhaps ? It remains to be seen if this will come to pass. On November 29, 2007, Boustead went ex-dividend for its interim dividend of 3 cents per share, representing a dividend yield of 2.3% based on my buy price. If annualized (using last year’s final dividend of 4.5 cents per share), the total dividend would be 7.5 cents per share for a yield of 5.8%.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $3.48, Gain 244.6%. There was no news from Swiber other than the announcement, on November 19, 2007, that it had incorporated a subsidiary company called Kreuz Offshore Marine Pte Ltd principally engaged in offshore marine support business. Recall that Kreuz International Pte Ltd is the renamed company after Swiber acquired North Shipyard Pte Ltd on August 6, 2007.

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.55, Gain 39.6%. There was no news for Suntec REIT during the half-month ended November 30, 2007. The dividend of 2.8268 cents per share was received on November 29, 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 $0.635, Loss 3.1%. There was no news from the company during the half-month ended November 30, 2007.

6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.58, Gain 5.3%. There was no news from the company during the half-month ended November 30, 2007. However, Pacific Andes did buy shares in CFG over a number of days. This totaled about 1.254 million shares through Golden Target Pacific Limited.

Overall Portfolio

My overall portfolio has increased by 95.2% from a new cost of S$58.3K as at November 30, 2007, as a result of the purchase of shares in China Fishery Group Limited. The market value of my portfolio is S$113.8K. Realized gains have increased slightly to S$4.3K as a result of the ex-dividend for Boustead.

Comparison against STI

The STI was 3,037.74 on January 3, 2007. It is currently at 3,521.27 today, representing a gain of 15.9%.

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 adjusted current cost is about S$58.3K. Therefore, my adjusted market value will be about S$79.1K. The market value of my holdings as at today is S$113.8K. This represents an increase of about 43.9%.

Thus, as at November 30, 2007, my portfolio has risen by a gain of 28 percentage points higher than the STI.

My next portfolio review will be on Friday, December 14, 2007 after market close.

Pacific Andes – 1H FY 2008 Results Review and Analysis (Part 2)

This is part 2 of my analysis of Pacific Andes’ 1H FY 2008 results. I will be analyzing and commenting on the Cash Flow Statement as well as the prospects and plans for the Group moving forward.

Cash Flow Statement Analysis

Pacific Andes generated a lot of cash inflows from operating activities for 2Q 2008, amounting to HK$856 million, as compared to a much lesser HK$255 million for 1Q 2008. This caused the net cash inflow for 1H 2008 to total HK$1.11 billion. However, this was still about 11.2% lower than the total 1H 2007 operating cash inflow of HK$1.25 billion. This was due mainly to the larger decrease in inventories for 1H 2007, lower trade receivables as well as an increase in bills receivable for 1H 2008 as compared to 1H 2007 which had a decrease (and hence recorded a cash inflow). As PAH scales up their operations in Peru, it is understandable that they have higher inventories and also higher trade receivables, thus causing a slightly lower net cash inflow. The interest paid was HK$173 million for 1H 2008 compared to HK$61.7 million for 1H 2007, a 180% increase; which was due largely to the increased amount of debt which PAH took on. Income taxes were also much higher at HK$33 million due to taxation on their Peruvian operations, all of which ate into cash flows. These 2 items alone accounted for nearly HK$144 million increase in cash outflows, which is more than the difference of HK$141 million between 1H 2008 and 1H 2007.

For investing activities, PAH had acquired property plant and equipment worth HK$364 million in 2Q 2008. However, the main cash outflow was the acquisition of additional interests in China Fishery Group Limited (CFG), effectively raising PAH’s stake from 28.8% to 63.9% currently. A total cash outlay of HK$2.22 billion was paid to acquire the additional interest in CFG. The goodwill recognized for this transaction was HK$2.11 billion, which will be reflected in the Balance Sheet. For 1H 2007, PAH had spent money acquiring PPE, investment properties and paying for charter hire of vessels. The total cash outflow for 1H 2008 was HK$3.32 billion, as compared to only HK$339 million for 1H 2007. I see this move as PAH crystallizing more value from CFG at a good price, thus the positive effects should only be felt some time in the future.

There was quite a lot of “action” within the cash flows from financing activities. For 1H 2008, PAH had a 1:1 rights issue at 52 cents per rights share, thus raising an amount of HK$1.78 billion. This resulted in the issued share capital doubling and caused dilution in earnings per share. However, the rationale for this exercise was to raise PAH’s effective stake in CFG so as to recognize more value from the fast-growing CFG. Thus, I do not expect the earnings dilution to be overcome so quickly. In fact, it will probably take at least half to one year before the increased earnings from their present 63.9% stake kick in to overcome the dilutive impact. Another positive note is that they have repaid more bank loans for 2Q 2008 amounting to HK$97 million. For 1H 2008, they had repaid a total of HK$255 million worth of bank loans, and I hope that their operating cash flows can continue to stay strong for them to gradually reduce their gearing, so as to also reduce their interest costs. A dividend was not declared for 1H 2008 as I believe the Group wishes to conserve cash; instead, a scrip dividend scheme was proposed to allow shareholders to choose between a share dividend or a cash dividend. More details on this scheme should be out in due course.

Prospects and Plans

PAH has plans to grow their fishing division through CFG, as this is the division which shows the fastest growth and most promise. In the fishing industry, getting access to more supply of fish is critical, as the industry is more or less dominated by a few major players and there are also quotas set on the amount of fishing allowed. By purchasing more purse seine vessels and securing more VOA, CFG and hence PAH can increase its fishing fleet and get access to more supplies of fish in order to expand the business. From what I read, PAH and PAIH have a leading position within the global seafood industry, and PAIH’s supply chain management provides fish for about 20% of China’s market, thus this makes PAIH one of the dominant players in the industry. With greater access to fishing vessels and by obtaining their third and fourth VOA, PAH and CFG can then grow their business further. Management should be on the lookout for more earnings-accretive acquisitions of vessels or fishmeal plants, as well as attractive VOA opportunities. These will be the catalyst to further grow the business.

Another aspect which PAH intends to improve on are its margins. CFG is currently upgrading its super-trawlers to increase hold capacity, and this can help to bring back more fish to process at fishmeal plants using the same vessel, thus PAH will benefit as well as it provides the supply chain management services for the fishing division. The upgraded vessels will also be used to hunt for Chilean Jack Mackerel, which is a new species PAH has not utilized yet. Other improvements on operational efficiency will also help to improve margins, and Management is actively working on this.

For 1H 2008, the Group acquired 16 vessels and 3 fishmeal plants in Peru. Another was recently acquired in Chimbote and was announced on October 10, 2007. This gives the vessels greater access to fishmeal plants to unload their catch so that they can be re-deployed to catch more fish.

For their frozen fish SCM business, PAH is working towards reducing chartering expenses by growing their own fleet of reefer vessels. PAIH is also working towards harvesting under-utilized species of fish in order to grow the Group’s product lines, and to avoid over-fishing for the more “popular” species. As such, the Group has also engaged a qualified international audit firm to audit its practices with regards to over-fishing, and so far the report has been positive on all aspects.

Note that PAIH has constructed a new processing complex in Qingdao, China which will be operational by December 2007. This is a 333,000 square metre sprawling complex with state of the art facilities and equipment, built at a cost of US$85 million (about HK$663 million). Once operational, it can greatly enhance the Group’s seafood processing capabilities and help the Group to attain new levels of efficiency and quality.

The future looks positive for PAH and CFG, assuming they can scale up the business and also maintain or improve their margins. The key risk is if they cannot secure more VOA or acquire more vessels in future, thus limiting their ability to grow their supply side. I will be awaiting PAH’s 3Q 2008 as well as CFG’s FY 2007 results, after which I will do another review.

Ezra - EOC Clinches Contract Worth US$148 Million

This evening, on November 28, 2007, Ezra announced that its 48.9%-owned associated company, EOC Limited, had clinched a milestone first major regional contract worth US$148 million to jointly provide transportation and installation services for the Malaysian-Thailand Joint Development Area (MTJDA). The contract was awarded by Carigali-PTTEPI Operating Co. Sdn Bhd (CPOC), which is a joint operating company between PTTEP International Limited and Petronas Carigali (JDA) Sdn Bhd. Thus, the contract value will be jointly shared between EOC and CPOC, which means EOC will recognize US$74 million from it.

This contract will involve the provision of various offshore support vessels including Lewek Champion (heavy lift accommodation pipe-lay barge) in order to transport and install platforms. Actually, it is EOC's 100% owned subsidiary, EMAS Offshore and Construction, which had won the contract from CPOC and CPOC is acting as the main contractor; thus EMAS is the sub-contractor for this project. The project is slated to being in 3Q 2008 (from July to Sep 2008) and end a year later (i.e. around July to Sep 2009), thus impacting the financials for FY 2009.

A quick computation shows that the profits accruing back to Ezra Group are not that significant after all, due to the fact that they now own only 48.9% of EOC Limited (and thus can only recognize that portion of profits attributable to associated company). EOC will recognize US$74 million from the contract over a period of about 12 months, but since Ezra holds 48.9% of EOC, this means that only US$36.2 million of the contract will be recognized in the Group's books. Assuming a net profit margin of 15% (to be conservative), this works out to be about US$5.43 milliion or S$7.87 million; which will appear as part of "Share of Profits of Associated Company" in Ezra's consolidated accounts. Profit attributable to shareholders ex-gains for FY 2007 was S$34.5 million (from my earlier analysis), thus this contract does represent about 22.8% of the recurring earnings for Ezra. It remains to be seen if the Group can scale up their core net profits for FY 2008 significantly, with the delivery of the FPSO Kitty Knutsen. We shall find out on January 9, 2008 when the 1Q FY 2008 results are released.

Regarding the prospects of the Group now that this contract has been clinched, I would say that Ezra also wishes to cover their home base of Asia instead of merely looking for contracts in other parts of the world, which is a good thing. But if the vessels are utilized for such contracts in Asia, will this mean that they will not be available for charter to other parties during the whole FY 2009 ? Will this negatively impact financials and "tie up" their capacity ? For FY 2009, there should be more new vessels coming in to ease this lack of supply, and Ezra should see more contracts coming in as they had ordered the vessels based on customer demand in the first place. It will be good to enquire this of the Management during the upcoming AGM, which should be held in the later part of December 2007.

Preservation of Capital – A Central Tenet of Value Investing

With Mr. Market currently being so manic-depressive and seeing only bad days ahead, it is important to remember that he is there to serve you, not to instruct you. The pervasiveness of his mood swings has the ability to affect all but those who inherently understand the true value of a business. Market watchers and pundits who are paid to say something about the market everyday will come up with a myriad of reasons why Mr. Market is pessimistic, and a dearth of bad news will continually stream in to reinforce this perception. Thus, the resultant effect is a massive sell off by hedge funds and mutual funds because they too are affected by the fear and panic which is spread by Mr. Market. Oh, what mischief this man can do ! Sometimes, when I glance at the market, I can almost see Mr. Market’s evil face grinning at me as he waves his hands over the market, causing millions to panic and dump their holdings at the lowest possible price (no, I am not schizophrenic, I am just using a metaphor !). This hardens my resolve not to listen to him but to focus on the true worth of the companies I hold.

A falling market is the ultimate test for a value investor. It is mentioned in value investing books that you never know if the companies you pick have the ability to survive Mr. Market’s manic mood swings, and there is no way to know if your portfolio is sound until it is tested by fire. Thus, when I view the current market situation, I see myself facing the “exam” which I have been “studying” for these past 18 months. All the research, reading, analysis and thinking has gone into identifying good companies selling at a fraction of their true worth; but now the time has come to see if the buy-and-hold strategy will ultimately win over the “fast profit” strategy of churning your portfolio.

With this in mind, I would like to reiterate to readers that the goal of sound and intelligent investing is not for quick gains or huge profits. If you want those, please go to the nearest 4-D or Toto booth, put down a few dollars; then hope and pray for yourself to strike the lottery ! In fact, the most important tenet for value investing should be capital preservation. With this, I mean that one should invest with such a wide margin of safety that losses are largely minimized, while gains are almost certainly assured. Too many people throw their money into the market with only the upside in mind; they never think of the potential LOSS they may face, and always end up shocked and stunned when the market turns against them.

It is also prudent to note that one can actually make a lot of money by avoiding losses. What do I mean by this ? It simply means you don’t go out there and take unnecessary risks, like buying into a company you don’t understand, subscribing for IPOs (which subsequently tank) or chasing a company’s share price just because it has just rallied. Please note that avoiding such mistakes can actually make you much richer even if you do NOT know a thing about value investing; as compared to people who keep chasing the next hot tip, or buy at the peak of a bull market, or simply buy indiscriminately. This may sound quite incredible, but one can actually compound their money better in a bank (earning a paltry 0.25% interest per annum for POSB) than letting the market eat up their money through poor judgement and bad decisions.

To conclude, I would say that for one to really practice value investing or go down the path of value investing, one has to change one’s mindset radically. Most investment professionals or fund managers will preach about how their fund has generated the highest returns or how a particular sector is “hot” or “growing at an exponential rate”. Just try asking them about capital preservation and they will become evasive and uncomfortable, and tell you that “in investing, there are always risks, so we must assess if you are high, medium or low risk; so that we can tailor the portfolio to suit your needs”. What I say is: investing is only risky if you do not have capital preservation in mind, and fund managers who invest only thinking of gains are not doing their clients a favour. In order for an investor to do well in the long-run (yes, not short-term !), one has to make capital preservation the central concept in one’s investment philosophy.

Boustead – 1H FY 2008 Financial Review and Analysis (Part 2)

This is part 2 of Boustead’s 1H FY 2008 results review, and I will be concentrating on the Cash Flow Statement and also discussing the prospects and strategies for the Group.

Cash Flow Statement Review

Boustead’s cash flow from operations has traditionally been very strong, as they have an established set of core businesses which generate good cash inflows consistently. Their geo-spatial technology arm, for example, is a cash cow for the Group even though it has limited growth, as it is used by government agencies and researchers. Engineering services and real estate solutions also rakes in the cash by completing projects in a timely manner and ensuring they contract only with reputable clients who have lower risk of default. Part of the net operating cash inflows of S$18.5 million was also due to the stronger deal flow for 1H 2008, as compared to 1H 2007, as the Industrial Real-Estate Solutions Division headed by Boustead Projects had snared a record number of contracts. This is evident from the increase in receivables resulting in cash outflows of S$32.8 million and consequent increase in payables resulting in a cash inflow of S$40.2 million (again, this uses the indirect method of cash flow statement preparation). The result was a significant increase (more than 400%) in cash inflows from operating activities from S$4.1 million in 1H 2007 to S$18.5 million in 1H 2008.

For investing activities, the company had purchased a higher amount of fixed assets (at S$9.5 million, presumably for use in their engineering contracts) as compared to the same period last year (at S$4.9 million). However, the major cash outflows in 1H 2007 was from the consideration paid to minority shareholders in order to acquire more of Boustead Projects (55% to 95%) and Controls and Electrics (from 60% to 75%). For 1H 2008, the acquisition of shares from minority shareholders will include the remaining 10% stake in Boustead International Heaters Limited (payable in 4 installments on June 23, 2007 onwards). There was a net cash inflow of S$10.4 million from Boustead disposing of assets held for sale, and recognizing the S$6.5 million as gain on disposal in the Income Statement as well. All these transactions helped to lower the net cash outflows from investing activities to only S$1.4 million, as compared to S$28.7 million in the previous period.

Looking at financing activities, the Group had mainly spent cash on giving out dividends (4.5 cents per share less 18% tax in the previous announcement). Some cash was also used to pay off bank loans and dividends to minority shareholders, resulting in a net cash outflow of S$9.4 million. The lack of activity within this section shows that Boustead need not rely on financing activities to generate cash, implying that most of the cash is generated from operating activities and this is enough to keep the Group going. Of course, the argument is that too much cash is not a good thing unless the cash is properly utilized, which is why I am curious to see how the Group is planning to use its cash hoard of S$127.5 million in the months to come.

Prospects for the Group

Since Boustead has three main core divisions, I will comment on the prospects and plans for each and give my views accordingly.For the Energy-related Engineering division, prospects continue to look very positive as the world grapples with record oil prices (as at the time of writing, oil prices have hit an intra-day peak of US$99.29 per barrel, just a whisker away from US$100 per barrel) and a higher demand for energy due to the growth of China and India. Alternative energy systems developed by Boustead to convert waste-to-energy should continue to be highly sought after. With oil prices predicted to surpass the US$100 mark and continue their climb, Boustead’s expertise will continue to provide the Group with contracts and opportunities. Mr. FF Wong had mentioned that the Group was in the midst of negotiating several mid to large contracts in the coming months, so shareholders can sit back and wait for some good new to flow in.

For their water and waste-water division, Management is candid enough to admit that the division can hardly manage to expect to turn around this financial year (FY 2008) as competition has been stiff and margins have been low. During the AGM, Mr. Wong had already indicated that he was approached for many BOT water projects in China, but had rejected all of them due to low margins which made the projects unattractive. This is one aspect I highly admire about Management, which is their ability to say “no” if a project does not add value to shareholders and also their honesty in admitting that things are not going well. I hold integrity and honesty in high regard and Boustead has not disappointed me on these aspects thus far. Salcon’s eventual turnaround will definitely take some time and shareholders should be prepared for this, as Management turns their attention to the Middle East to try to secure contracts with better margins. It was also reported in their press release that they would continue to work on cutting-edge technologies to keep themselves one step ahead of the competition, and hopefully, these measures will churn up some worthwhile contracts for Salcon in the coming months.

Boustead Projects has been on a roll, and this division should continue to do well for the foreseeable future, as the construction industry in Singapore takes an upswing from the IR and the BFC. Property rates are rising and this will bode well for Boustead Projects in future as they plan to build and develop a few properties per financial year for sale. They still have several plots of land remaining for development and this presents untapped potential in this division. Their focus has shifted to building high-end tech buildings for multi-national clients and this has paid off for them, as Boustead Project’s order book swells to a new record high. Moving forward, the division looks very promising indeed as they continue to seek out opportunities to expand their order book.

For geo-spatial technology, the growth rate may not be impressive (only 5% per annum) but it can remain as Boustead’s “cash cow”, generating good cash for possible use in investing in other ventures or even to be used for a potential acquisition.

All in all, the prospects look bright for Boustead as their continue their sixth year of increased revenues and profits; possibly culminating into a very good dividend for FY 2008 as next year will be Boustead’s 180th anniversary celebrations.

Swiber - 3Q 2007 Financial Review and Analysis (Part 2)


Part 2 of my analysis is continued here, and it will focus on the cash flow statement as well as discuss the strategies, prospects and plans for the Group moving forward

Cash Flow Statement Review

Due to the scaling up of operations and the completion of several contracts, Swiber has generate a healthy operating cash inflow of US$14.5 million for the 3Q 2007. This is up almost 300% from last year’s 3Q 2006 amount of US$5.3 million. It can be seen that the increase in trade receivables of US$20.7 million (due to expanded operations) was more than offset by the cash generated from an increase in payables of US$25.1 million, using the indirect method of cash flow statement. Other payables had also increased by US$10.4 million which helped to provide support as well. For Swiber, having a healthy operating cash inflow is integral as it operates in a capital intensive environment and is also increasing its gearing through the issuance of notes and taking up of bank loans. Thus, in time to come, interest expenses will be higher and will eat into their cash flows. As more projects are anticipated to flow in, operating cash flows should remain healthy for the foreseeable future.

Most of the cash outflows belonged to investing activities, as the Company scaled up its vessel fleet aggressively during 3Q 2007. Proceeds from the sale of vessels came up to US$47.1 million, but this was offset by purchases of more assets and additions to non-current assets amounting to US$73 million. A further US$5.2 million was spent in acquiring the interest in a subsidiary (I would suspect this is their 100%-stake in North Shipyard, now renamed as Kreuz Engineering and Shipbuilding Pte Ltd). All these transactions led to a net cash outflow of US$30.4 million.

The Group had sought to raise cash through financing activities during 3Q 2007, and it shows in this portion of the cash flow statement. US$71.1 million was raised through a bond offering as part of their S$300 million multi-currency medium-term note facility with CitiCorp Investment Bank (S) Ltd. Another US$78.6 million was raised as proceeds from the issue of 55.35 million new shares at S$2.1748 per share, as part of a placement to institutional investors back in June/July 2007. A further US$6.7 million was raised through additional bank loans obtained, while US$13.9 million was used to repay other bank loans. Moving forward, Swiber has indicated that they will resort to more debt funding for the purchase of their new drilling vessels and support vessels (derrick crane, subsea support vessels and Equatorial Driller).

Prospects and Future Plans

For Swiber, prospects look positive as they have recently recruited veterans such as Mr. Glen Olivera to helm their deepwater drilling unit, and also conducted a very successful notes issue. The Group’s move into subsea and deepwater signifies their commitment to grow the business beyond what it is today, and shows the Management’s drive to stay abreast of changing trends and to adapt and react accordingly. Swiber’s core strength is in EPCIC activities for the offshore oil and gas industry, and they are leveraging on this to extend their capabilities to the deepwater segment as well.

Swiber’s strategy for the future remains a three-prong approach: build up their vessel fleet capabilities, extend their presence into new, untapped markets; and hire experienced and capable Management to lead the business and take it to new heights. Thus far, they have been very aggressive on the vessel acquisition front, with many announcements and press releases detailing the extent of their plans for purchasing; and committing a lot of funds in the process. The key risks here are the demand and supply cycle of the EPCIC and deepwater drilling market. It is one thing to make forecasts and predictions about how things will pan out in the future, but another matter when it comes to the actual scenario and whether good value can be capitalized upon to grow revenues and profits. There would be uncertainty at this point over the level of competition present in the industry and also the margins to be enjoyed in new segments such as deepwater drilling. You can summarize by saying that Management are taking a calculated risk by expanding their fleet, and much of their future success still depends on uncertain future events.

As for entering new markets, thus far Swiber has demonstrated that they are able to forge strategic alliances to extend their footprint within South-East Asia, with JVs in India and Brunei as well as a co-operative agreement inked in Vietnam. As mentioned in my previous posts, whether these alliances will translate into actual dollars and cents will depend on whether Swiber can leverage on their network of contacts to secure more contracts and LOI. Much of their anticipated success comes from building their “brand name” and the CEP Mr. Raymond Goh personally flying over to engage in negotiations. The progress thus far is encouraging and it is hoped that the Company can continue to forge ties with other countries where Swiber has yet to establish a presence, in order to build up the Group’s reputation in South-East Asia.

The hiring of experienced Management has been a key factor in Swiber’s growth; good Management has the expertise and experience to ensure projects are executed on time and with no cost overruns, and it is critical to put someone experienced in charge so as to create goodwill as the Group is expanding. Delays and hiccups are not only financially costly, but also reflect badly on the capabilities of the service provider and may hamper future business. Swiber understands this aspect very well and knows that timely project execution is not merely about financial numbers, but also about reputation and recognized skill. I see this year (FY 2007) as Swiber’s year of building their reputation and credibility, in order to bid for more projects of higher value. Thus far, they have placed bids for US$800 million worth of projects to be carried out in FY 2008 and FY 2009.

In summary, things look bright for the Group but there are also significant risks moving forward as mentioned above. I will be closely monitoring developments within the industry as well as on the Company level, and will report such news here from time to time.

Pacific Andes – 1H FY 2008 Results Review and Analysis (Part 1)

On November 14, 2007, Pacific Andes released their 2Q and 1H FY 2008 results (the company has a March 31 year-end). Suffice to say that growth was not as impressive as I had expected, and my fears about the high interest expenses on the covertible bonds and senior notes came true as finance costs had soared as compared to the same period last year. This could possibly be a major source of headache for the company moving forward as it drains a lot of cashflow. On the positive side though, the recent acquisitions and move into the fishmeal industry has helped to smooth revenues somewhat, as can be seen that 2Q, which is traditioally a weak fishing season, showed better revenues as compared to a year ago. What Pacific Andes (PAH) needs to do is to better control costs and improve efficiency of operations, otherwise the company will not be able to add value to shareholders in the long-run.

My review will be in the usual two parts, the first concentrating mainly on the Income Statement and Balance Sheet, while the latter part will be on the Cash Flow Statement and future prospects:-

Income Statement Review (note: all figures quoted within are for 2Q 2008, not 1H 2008)

Revenues increased 111.1% from HKD 751.9 million to HKD 1.59 billion, which was mainly due to their increase in fishmeal and fishing activities through CFG (China Fishery Group) as well as their recent stake increase from 28.8% to 63.9%. However, cost of goods sold remained high, rising 116.1% to HKD 1.25 billion, thus leaving a gross profit of HKD 337 million (margin about 21.2%). Comparatively, for 2Q FY 2007, gross margins were slightly higher at 23.0%. Sadly, the momentum generated in the revenue increases could not be brought to bear on the net profits, as most of the increase was absorbed by higher selling and distribution expenses and finance costs. Selling and distribution expenses increased 4-fold (up 427%) to HKD 32.5 million, while finance costs ballooned 218% to HKD 101.5 million. These two expenses make up 8.44% of revenues already and play a big part in “shrinking” net margins for 2Q 2008, as compared to 2Q 2007. Net margin for 2Q 2008 was low at 10% compared to 15.9% a year back, largely due to these two costs. Selling and distribution costs have increased in line with the increase in operations for the Group, which I can understand, but 400+% seems a little surprising nonetheless. Finance costs are a major drain on cash and though the debt is used to fund expansion, it has not really translated into much earnings accretion (yet !). Fortunately, PAH has mitigated the risk of interest rate increases by “locking in” the interest rate on the senior notes and convertible bonds. Hopefully, in the next few quarters, there will be more margin improvement as a result of better streamlining of operations and better efficiencies resulting from economies of scale.

Profit attributable to shareholders increased 46.2% for 2Q 2008 and for 1H 2008, the increase was 41.5% to HKD 182 million. According to Note 6, EPS is now HKD 18.83 cents based on a weighted average share capital of 966 million shares; but the fully diluted EPS (taking into account full conversion of all convertible bonds) drops to HKD 17.63 cents. This is not even counting in the full effects of the 1:1 rights issue which has doubled the share capital base, thus I forsee more earnings dilution as a result of this. I will give an estimate of about 80% of fully-diluted EPS to be conservative, which is about HKD 14.1 cents. This translates to about 2.82 Singapore cents per share, or 5.64 cents per share annualized. At Friday’s closing market price of 71 cents, this values the company at about 12.6 times PER. At my current buy price of 65.5 cents, the PER I purchased at is about 11.6 times. If profit worsens or drops unexpectedly and causes my margin of safety to narrow, I will not hesitate to dispose of this investment. My concerns relate to the high gearing for PAH and I need to see Management do more to improve margins and lower costs in future periods. That said, 2Q did see a major cash outflow due to the acquisition of the additional stake in CFG, which may have distorted the results a little (the acquisition was only completed on July 23, 2007). I shall wait for the 3Q 2008 report to see if things have improved.

Balance Sheet Review

PAH’s balance sheet has traditionally held a lot of debt, which I am not particularly comfortable with. I acknowledge that it might be a necessary evil if the company has to resort to debt to expand its operations quickly and gain a stronger foothold in the fishmeal industry in Peru. Compare PAH’s method with Ezra and Swiber, where both companies also rely heavily on debt financing to boost their fleet of vessels. In PAH’s case, they need to increase their reefer vessels to cope with better SCM, purse seine vessels to catch more fish and put their super-trawlers for elongation and enhancement in order to fish in new waters. All this costs money and the non-current liabilities has seen an increase of about HKD 548 million for convertible bonds. Current ratio is 1.58 for Sep 30 compared to 1.91 for March 31. Quick ratio is 1.32 against March 31’s 1.51, as a result of an increase in current liabilities and a drop in current assets (lower inventories). Their interest-bearing bank borrowings together with senior notes forms HKD 3.1 billion, which is almost equivalent to their total current assets. I see this as a potential risk area for the Group moving forward, and hope that Management can find ways to bring down this high debt. Otherwise, PAH as an investment would not seem very attractive in the long-run.

Part 2 will be continued on a later date, do stay tuned and feel free to comment and give your opinions on the Company and Group.

Inflation Hitting 5% in 2008 ?

It is with considerable horror and trepidation that I picked up today’s edition of “Weekend Today” newspaper and saw the headline on the front page stating that Trade and Industry Minister Mr. Lim Hng Kiang had commented (in Parliament) that inflation is expected to hit a historical 25-year high of 5% next year ! As the paper mentioned, it was only on October 30, 2007 that MAS mentioned that inflation would hit 4%; his comment on 5% would mean a 25% increase over the 4% forecast, which is shocking to say the least. This would mean that an item costing S$10 would cost S$10.50 by next year (5% increase) if this scenario came to pass.

As readers may know, the concept of inflation has been around for the last couple of hundred years, but it only came to greater prominence with the development of economic theory by the great Nobel Prize Winners John Maynard Keynes and some other important people (of which I will not bother dredging the names of !). Simply put, inflation is what happens when the prices of goods and services increase; meaning that the same dollar can buy less goods over time. This has a lot to do with aggregate demand and aggregate supply, but since this is not an economics 101 class I will spare readers the details and dive straight into the implications.

Inflation is part and parcel of the growth of an economy and cannot be distinctly separate from it. As long as there is economic growth and GDP growth, there is bound to be some measure of inflation. In fact, economists believe that steady inflation is actually healthy for an economy, as it shows that the entire economy is becoming more healthy and that people have a greater propensity to spend. Chronically high inflation or the opposite of inflation (i.e. deflation) is not healthy as the former situation signals the fact that price is increasing too quickly for the common man to cope with, resulting in decreased consumption and hence slower growth; while the latter scenario has occurred in Japan over the last decade, and caused businesses to suffer a result of decreased prices. So the general argument would be that inflation is necessary and healthy, so why is there such a hue and cry over the recent 5% announcement? Perhaps it is because 5% is seen as a threshold which is bordering on “high” instead of “healthy”. Traditionally, for Singapore, inflation has held steady at between 2.5% to 3% per annum, and most of the time real wages have also increased by between 3-5% (including in the civil service) to keep pace with this inflation. If inflation really hits 5%, then real wages may not increase enough to compensate this increase in inflation, even though nominal wages are increasing (real wages are what economists refer to as “inflation-adjusted wages”, while nominal wages are the simple dollar value of wages without accounting for inflation). This would inevitably cause hardship to the lower income families and retirees who may find the cost of basic necessities like rice, bread and water rising.

In fact, some recent personal examples I can quote of evidently rising prices include a trip to Old Chang Kee (who, incidentally, are considering a listing on SESDAQ). A normal curry puff there used to cost S$1, but now it’s S$1.10. When quizzed about this apparent 10% increase in price, the staff just gave me a blank look as if I were an idiot asking obvious questions. Another lunch visit to a nearby café close to my office made me discover that my favourite curry chicken rice had “inflated” from S$4.50 to S$5.00. A quick query on the sudden price increase of 11.1% was met with “my boss told me to adjust the price, go ask him !”. I have not been to the supermarket recently but I am sure the same might be happening in NTUC Fairprice, Cold Storage, Carrefour and Giant. I would appreciate if readers can give their feedback on whether this is happening (i.e. rising prices of basic goods).

So what can the common man on the street do to counteract the effects of this inflation ? Putting your money in a bank is obviously the worst way of growing it, as most banks give interest rates ranging from 0.25% per annum (POSBank) to 1.68% per annum (Maybank iSavvy account). Even fixed deposit rates do not get more attractive than 2.25 to 2.5% per annum unless it is a foreign currency time deposit (which will then be subjected to currency risk as well). The most logical solution would be to purchase a high yielding equity such as a REIT, some of which promise yields as high as 7% (e.g. Saizen REIT) or to purchase equities in companies at a decent margin of safety. Thus far, I have a REIT which yields about 7.5% dividend yield at my 2004 purchase price, as well as some companies which are paying a 5% dividend yield at my purchase price. Other suggestions from readers on how to combat inflation will be most welcome !

Note: Just yesterday, on November 16, 2007, I saw value emerging in China Fishery Group (CFG) and purchased a couple of lots at a price of S$1.54, which I feel offered a decent margin of safety. I will detail the reasons and rationale for purchase as well as computations of expected growth and risks of my investment in a subsequent posting.