September 2011 Portfolio Summary and Review

September 2011 reminded me of the September back in 2008, when the troubles brewing from the sub-prime crisis boiled over and turned into a major headache for developed economies in the world. The problems seem to be a repeat of the past, but it is merely the players in the pantomime which have changed – instead of USA sub-prime mortgages turning sour we now have European sovereign debt going bad, and whole economies such as Spain, Greece and Italy threatening to go belly up. So if one were to extrapolate on the situation into October, could the same blow-up occur similar to the sub-prime crisis back in 2008 which would cause valuations to fall off a cliff? This would be the golden opportunity for an investor to accumulate shares of companies which he has been eyeing for some time.

What has me puzzled is the amount of time and attention devoted to the word “volatility”, and how it has literally frazzled the nerves of even the most seasoned veterans from the numerous columns being penned in market commentaries. Many investment newsletters have also advocated the wisdom of “staying on the sidelines” to wait till “more clarity emerges” before committing money to equity investments. My view is that uncertainty will always be a part of the investment landscape, and this is something which investors have to deal with; and it will form part of one’s investment philosophy. So an investor should not be scared off by volatility and uncertainty, but instead make use of it to gain an edge in investing intelligently and prudently. Volatility does not equate to risk and uncertainty would open up opportunities for the astute investor, provided he does his homework and understands his investments.

As expected, September is traditionally not a month for news flow, and the companies within my portfolio have been their usual quiet self, which suits me just fine. There was only one dividend received from Kingsmen during the month, and I would not be receiving any dividends for October, which is traditionally also a “dry” month.

Below please find my portfolio as well as corporate summaries for September 2011:-

1) Boustead Holdings Limited – Interestingly, there were two contract announcements made by Boustead during the month of September 2011, and both were from the Real-Estate Solutions Division under Boustead Projects. On September 7, 2011, Boustead Projects announced that they had been awarded a S$11 million contract to build an Asia Pacific Regional Data Centre for a Fortune 100 healthcare corporation (the specific company was not named). This was their fourth industrial real estate contract secured since the beginning of FY 2012 which commenced April 1, 2011. With this contract, their order book has grown to $282 million. Then on September 15, 2011, Boustead Projects announced the award of an S$18 million contract from Shinko Plantech to design and build a Y&C chocolate processing factory (sounds yummy!). This fifth contract takes Boustead’s order book past the S$300 million mark as at end-September 2011. Note that these two contracts are design and build ones and thus there will be no recurring revenue or cash flow generated once the contracts are completed. Just to recap: Boustead’s current portfolio of Design, Build and Lease properties take up about 90,000 sq metres, and it is my hope that this can increase to 200,000 sq metres or more by 2013.

Separately, the Company also announced on September 28, 2011 that it was holding an EGM on October 14, 2011 (Thursday) at 3:30 p.m. to appoint Mr. John Lim as director (he was inadvertently left out during the AGM, apologies were given), and to vote on a Boustead Restricted Share Plan 2011 to replace the Employee Share Scheme. Depending on whether I am available, I may make it down for this EGM to enquire more about how the business is faring.

In addition, Boustead has initiated a series of share buy-backs beginning September 22, 2011 and continuing till today. A total of 410,000 shares were purchased over five trading days, and Boustead spent about $340,000 buying back the shares (average price of 83 cents/share). Total treasury shares as at September 30, 2011 stand at 12,427,000 shares.

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

3) MTQ Corporation Limited – There was no news from the Company during September 2011, except for the announcement of the issuance of scrip shares on September 19, 2011. I received my allotment of the final dividend of 2 cents/share entirely in scrip.

4) Kingsmen Creatives Holdings Limited – There was no news from Kingsmen during September 2011. There was, however, a news article announcing the opening of the new H&M store in Orchard Road, and how it was thronged by people queuing to enter on the first day of operations. Kingsmen was the company in charge of doing the fit-out for H&M, as well as the soon to be open Ambercrombie & Fitch store at Knightsbridge. The interim dividend of 1.5 cents/share was received on September 22, 2011.

5) SIA Engineering Company Limited – There was also no news from SIA Engineering for the month of September 2011, making it two consecutive months without any newsflow from the Company. I have, however, been reading up on the global aviation industry and how it may impact SIA Engineering to get an idea of the prospects of the Company should there be a sharp recession, and on its potential ability to continue paying its dividends. I believe this should form part of the ongoing “homework” which an investor must undertake.

6) VICOM Limited – There was no news from VICOM for September 2011.

Portfolio Review – September 2011

Realized gains have increased to S$67.4K due to dividends received from Kingsmen Creatives. A total of $2.2K was received in dividends for the month of September 2011.

For the month of September 2011, the portfolio has decreased by -4.5% (using XIRR in MS Excel to compute) against a -16.1% fall in the STI; thus my portfolio performance has outperformed the STI by +11.6 percentage points. This was an improved performance compared to August 2011, when the portfolio out-performed the STI by +7.1%, but I do not expect to be able to keep this up for long and the “gap” should close sooner rather than later on this seemingly good performance. Cost of investment has remained at S$238.7K and unrealized gains stand at +4.7% (Portfolio Market Value of S$249,900).

October 2011 is poised to be another slow and uneventful month as the companies in my portfolio will not be releasing results, with the possible exception of Suntec REIT (3Q 2011 results) and SIA Engineering (1H FY 2012 results). For SIA Engineering, I am keeping my fingers crossed for the same interim dividend as per 1H FY 2011 of 6 cents/share.

In the meantime, as can be seen from my portfolio review, I am busy accumulating cash for my opportunity fund in case Mr. Market throws up more opportunities for me to purchase companies at attractive valuations. At the same time, I am continuing my own personal “education” in terms of investing – re-reading Benjamin Graham’s “The Intelligent Investor” to dig up more gems regarding equity and (possibly) bond investing, and reinforcing my notions of investor psychology by browsing through other useful tomes on this subject. It is always good to refresh our understanding of how proper investing should be conducted and how we should conduct ourselves as investors, with steely determination and steadfast fortitude.

My next portfolio review will be on October 31, 2011 (Monday).

Personal Finance Part 24 – What Does Money Mean To You?

In the quest for financial freedom, I wonder how many of us have stopped to ask ourselves the above questions – what actually does money mean to us and what does it symbolize? What I mean is – how should one go about thinking about money and how it can enhance your life? After all, money acts as a medium of exchange for goods and services and is not a means to an end in itself. The problem is that many people like to worship money as a God, and would willingly prostrate themselves in front of the God of Fortune (and Chance) just to scrape a little more money.

Living a Life of Abundance

To many of those I see around me, money is a way of living a “full” life – one of abundance and filled with material goods and possessions. Money can buy you many items and having more of it means you can essentially have more control over what you purchase. A poor person may be forced to shop at NTUC for the best discounts and value for money products while a middle-class family may be able to shop at Jasons or Cold Storage. Money, viewed at from this angle, gives us more flexibility and choices in life and enables us to experience more of life, as compared to a person living hand to mouth. Thus, the pursuit of wealth and money in this case is to ensure one can live life to the fullest and enjoy all that life can offer.

For me, I certainly endorse this aspect of money as I believe that one should ensure one’s life and family can live comfortably, and be able to afford the little luxuries in life. While being frugal is important, there comes a point where excessive frugality (some may call it “miserliness”) makes one unhappy and restless; accumulating money for money’s sake defeats the purpose of living a life, because ultimately we cannot take the money with us when we die, and therefore some of it must be used to enhance our quality of life. The key is in moderation – it is no point depriving yourself of simple pleasures like a good movie, a nice meal or a relaxing spa session just to save a few extra dollars. As long as you have budgeted properly, loosen the purse strings and spend on the little things, while keeping the big picture (wealth accumulation) in mind.

Splurging and Flaunting Wealth

There are others who take money to extremes, and display ostentatious spending behaviour in order to portray a certain image of themselves to others. To them, money is meant for showing off and they therefore splurge on expensive designer and branded goods and “bling” (the term for material possessions which are more of Wants than Needs). As a result, money to them is simply used for flaunting and acts as an ego booster, rather than as a source of security.

People who splurge needlessly and flaunt their wealth in visible ways (designer goods, fancy cars) do not appreciate the value of money. Money should act as security and be a testament to the hard work which one puts in – spending without regard is like throwing caution to the wind and engaging in extremely risky activity without a suitable safety net (likened to bungee jumping without a safety cord). In Chinese lingo, it is the classic case of punching your face till it swells so that you resemble a fat (prosperous) person.

Freedom from Worry

I guess for me personally, having enough wealth would cause me to be free from worry, and it represents a freedom in itself. In Singapore, most people worry about money because they may be enslaved by their mortgages or car loans; but if one is debt free and better still, financially free, one can enjoy a freedom which many others have yet to taste. Charlie Munger once mentioned that he wanted to become rich not because he wanted wealth to flaunt – it was because he desired the independence which financial freedom brings; and that was something he desperately craved. I share his sentiments on this – money to me represents freedom and being lifted from the bondage which debt brings. Right now even with five years left on my HDB mortgage loan, I still feel invisible chains dragging me down; perhaps I am too old-fashioned and conservative but to me debt is something which can choke the life out of someone, though others may encourage the careful use of leverage to multiply returns.

Helping the Needy

One altruistic aspect of being rich also means I will have more time and means to do charity. Money means being able to help people and to make a difference to their lives, and to me this is really the most profound thing which we can do – help another fellow human being. I had always harboured a secret desire to help those less fortunate than me – but sad to say I have been procrastinating when it comes to doing more for them. Though I do donate to donation tins and support fund-raising efforts for the poor and sick, I always feel that I could do more to ease the suffering of the less fortunate. So if you are reading this and you are an extremely wealthy individual, please spare a thought for those who are mired in less appealing circumstances and donate generously to help their cause.

Conclusion

I have listed out some aspects of money which I think relate to people around me. So the important question to readers is – what does money mean to you? Perhaps you can provide further insights or refute some of my points by using the comments box.

The Annual General Meeting (AGM) Part 2

Part 2 of the AGM series will shed some light on the AGM itself, decorum to observe and who to approach. Please note that this is all narrated from a personal perspective, as I have been attending AGM for quite a few years now and have, over time, picked up some cues on who to approach and what to ask from experience. None of this is cast in stone, however, and therefore readers are free to modify any of the suggestions below to suit their own personal preferences.

For information, the experiences detailed below are a result of the compilation and culmination of attendances at the following AGM/EGMs: Ezra, MIIF, Swiber, Tat Hong, China Fishery, FSL Trust, Boustead, Kingsmen Creatives, MTQ and Suntec REIT. Since almost all AGMs are held on working days, be prepared to take leave in order to attend (unless you are a retiree with time to kill).

Mechanics of AGMs

An AGM is usually held at a hotel function room or if the Company is keen on saving money, then it will be held at the Company’s premises (for info: Boustead and Kingsmen AGMs are held at premises, while MTQ and SIA Engineering hold theirs at a hotel). You should bring along your identity card as well as a copy of the Annual Report and any documents which came along with it, as well as a pen and your prepared list of questions and notes. At the counter area, register your name with the staff and they will hand you a sticker (colour varies) to paste on your clothing. Some AGMs will hand you a poll slip stating the resolution to be voted on, and this will state your name, IC number and the number of shares held in the Company. These poll slips will be used for tallying in cases where voting is done by poll instead of a show of hands.

Assuming you are early, there will usually be time to find a good seat and to interact and mingle informally with Management (and other shareholders). The section below will focus on the proper behaviour and decorum to be observed at such meetings, in order to create a good impression and be able to gather the information required to make an informed assessment of the Company and its prospects.

The CEO will be in charge of reading through each resolution and asking for a proposer and seconder (a basic formality). There will usually be a pause before asking for a show of hands, as the BOD and Management would allow questions to be asked before putting the resolution to a vote. Once all questions have been posed and answered satisfactorily (and this includes both formal and informal questions), the resolution will be put to the vote. Unless there are violent objections, most resolutions will be passed without much fanfare.

Decorum, Etiquette and Behaviour

I can’t stress more on the importance of proper behaviour at the AGM proper. After all, it is a corporate meeting and therefore one is expected to at least dress presentably and behave in a civil and cordial manner. For myself, I treat the AGM as a business meeting and therefore I will usually dress up in corporate wear, with long/short-sleeve shirt, long pants and socks/shoes. I have seen retirees who are dressed much more casually, but no one comes in a singlet and sandles (obviously). Dressing well also gives a good impression to Management that you are a serious investor and assuming you approach them with the right attitude and armed with the requisite knowledge, you may leave a deep impression on them. There are reasons for this which I shall go into shortly.

In term of decorum, it is only polite to ensure one does not interrupt the proper proceedings of the meeting, and to save most of the questions till after the meeting proper (to be taken “offline” as it commonly referred to). When invited to formally ask questions (usually by standing in front of a microphone), one should be civil and polite when posing the question. I have personally witnessed cases where shareholders get agitated over some perceived grievance and decide to air their frustrations through the microphone for all to hear. Management may take quite a while to placate the incensed individual and normally, when one is caught up in that frame of mind, nothing useful ends up being discussed and everyone’s time is wasted. Indecorous behaviour is normally tolerated as the BOD and Management strive to be professional, but there have been cases where sarcasm is thinly veiled and where Management has been known to admonish the shareholder (so that they feel some measure of chagrin or mortification, hopefully).

My style is often a non-confrontational one – I will arm myself with the questions and approach Management after the meeting proper by asking if they are free for a discussion. They are usually quite pleased to engage shareholders, though what they say and proclaim is usually coloured by personal bias and unbridled optimism (most of them own part of the company, and are therefore loathe to admit anything bad about it). The personnel of importance to approach include the Chairman, CEO, CFO and any divisional heads; all others can only give a rather one-sided view of things which may not be useful; and they may literally rattle on and not give you the chance to extricate yourself from the idle chatter.

For accounting and finance –related matters (e.g. sales, revenues, margins, loans, debt, gearing and ROE), approach the CFO or the Finance Director. For strategy-related matters, industry prospects and plans for the future, it is better to speak directly to the CEO and/or Chairman. For the record, I have personally spoken to Benedict Soh (CEO) of Kingsmen Creatives, FF Wong of Boustead (Chairman and CEO) and Mr. Kuah Boon Wee (CEO) and Mr. Dominic Siu (CFO) of MTQ. For other matters pertaining to the Annual Report or other news-related queries, it will be useful to approach the IR contact, but make sure they are internal personnel and not staff from an IR company. Some examples would be Keith Chu from Boustead and Andrew Cheng of Kingsmen Creatives who are the designated IR spokesperson from their respective companies.

There are also no hard and fast rules as to how to approach each person. Generally, a smile and a warm handshake (coupled with an introduction) would suffice. The next section will discuss on how to ask the right questions (and also how to avoid potentially embarrassing ones) and to dig out the required information in order to make your personal trip worthwhile.

Fact-Finding and Questioning

An AGM is to be viewed as a fact-finding “mission” for the enterprising investor, and if one is well-prepared with a list of questions (see Part 1) and equipped with the requisite knowledge of the Company (e.g. divisions, margins, plans and other pertinent details), it will make the discussion much easier and more casual. If not, it can sometimes resemble an interrogation session whereby shareholders will ask inane and inappropriate questions and make Management wince and grimace. I have yet to see the BOD or CEO recoil in horror, but the way some shareholders ask questions (combative tone, threatening demeanour) makes me feel quite a measure of pity for the one being questioned.

It is usually good to start off with some casual and general remarks or questions before one digs deeper. Leading questions and statements could include commenting on the company’s excellent performance before delving into an aspect which requires attention, or to congratulate the CEO for a good financial year before questioning him on his plans and strategies. As part of human relations, it is important to blunt any impact of difficult questions and try to wrap your tongue around the question to make it sound more palatable. A good example might be querying the Management on why debts have increased by so much in the Balance Sheet. Instead of asking the question point-blank (which may elicit a defensive response), it may be better to para-phrase it to sound something like – I understand debt has gone up significantly, but was this for a planned acquisition or was it already part of Management’s budget? Phrasing a question to sound politically-correct may make it seem like you are being superficial, but unless you are on friendly terms with the Management, it is better not to put them on guard; for this may also frustrate further attempts at digging out important nuggets of information.

Also avoid asking loaded questions which “corner” the person and leave him with little room or choice to manoeuvre or reply. Examples of loaded questions would be “Do you think the company can only do better this year?” - this essentially forces a response in the positive, for no Management would like to paint the company in a bad light. Ask open-ended questions instead of those requiring a “Yes” or “No” absolute reply.

Another irksome area is that of vague questions. Some questions are so general that Management is given room to answer almost anything. There is the problem of not being focused enough to be able to obtain the answers you seek, and this wastes time and effort. Try to support each question with some facts of your own or numbers; this will give the impression that you know your stuff and Management will feel less inclined to hoodwink you. You could perhaps say – I heard that the oil and gas industry is poised to dip into the doldrums, what is your take on this? Or on a question on margins, you could say – I noted from my analysis that operating margins for XX division were only XX% compared to YY% a year ago, may I know the reason for this and what is Management doing to address this? Being focused and drilling into details also forces Management to ruminate and think on the problem in order to give you their best answer (though some answers may be spur of the moment types intended to cover their ignorance of the situation!).

The last area I must talk about is that of silly questions. These probably take the cake in terms of being not just irritating but also a complete waste of time. I can, offhand, quote two of the most common silly questions I have heard at almost every AGM/EGM. One of them is the classic “dividend” question – Will the BOD be paying higher dividends next year? I mean, hey, no one can even forecast their results in the next quarter, much less a year later! The second most irritating question would be – Why is the share price so low? Can Management do something about this? Obviously, the hapless shareholder should know better than to burden Management with something as trivial as the share price when he should be focusing his energy and effort on understanding the business better! These questions almost invariably draw a polite (sometimes forced) smile and the standard reply that it is not Management’s duty to track the share price and there is nothing they can do to manipulate it, other than (of course) running the business well and growing it. It’s about time that shareholders realize - if the business does well, the share price will naturally follow.

Conclusion

An AGM is a very rich source of information for investors and therefore, I feel it is a must for all investors to attend. After all, it is only once a year that you get the chance to rub shoulders with senior Management and the Board of Directors and also get to question them on various corporate actions and strategies. By sizing them up in person, an investor can also pick up subtle cues from their body language which may signal a lack of confidence, or at the opposite end of the spectrum, hubris. Face to face interaction is important as Management is less able to hide behind the computer screen to type away on a prepared email response, and they will be far less dismissive as compared to talking over the phone (where they may also be reading from a script). One can literally test how Management and the BOD react to “awkward” questions and accusations and to see how they (stoutly) defend themselves, or if they have a proper and reasonable response to a pointed question.

Part 3 will focus on the aftermath of the AGM – how one should organize their notes and thoughts, the impression which they take home after meeting the Management and BOD face to face, as well as the essential follow-up which must be done as part of the on-going due diligence as an enterprising investor.

Boustead – FY 2011 AGM Highlights

I attended Boustead’s AGM on July 29, 2011 held at the Company’s headquarters at Starhub Green. It was to be my fifth consecutive AGM for Boustead, and it was indeed amazing to realize how the Company had evolved over the years, since my very first attendance at the FY 2006 AGM. At the time, it was held on 6th floor of Boustead House and the Company was much smaller and less established. Now, the meeting was held at the second level of the new Starhub Green which Boustead Projects helped to construct, and the venue was a large and very beautiful-looking conference room. Since I was there very early (I like to be early for my AGMs as this means more chances to rub shoulders with key management executives in order to ask some questions before other shareholders arrive), I took some nice photos of the place. This would have been impossible later on as this year’s AGM was packed literally to the brim, with about double the number of attendees as compared to FY 2010’s AGM. More on that later.

General Comments on the AGM

Most of the AGM was, again, characterized by FF Wong (CEO and Chairman) giving his views on various aspects of the business, updating everyone on Libya and handling questions posed by shareholders and analysts on topics of interest. In his usual candid and casual way, he endeared himself to the crowd by being affable and approachable, coupled with a sense of humour to boot. His easy-going manner is definitely welcome as compared to some CEOs I had met who were a little too serious and uptight as they probably felt pressured to conform to market expectations of being a listed company, or possibly they were being “harassed” about why the Company was not doing better than it should be.

During the AGM, he was peppered with questions regarding each division of the business, which I shall elaborate on in the separate sections below. Some shareholders also bombarded him at length about the troubles in Libya, which caused him slight agitation as the questions were persistent and somehow one could detect a hint of blame behind the tone of the questioner, which put the CEO on the defensive. I will discuss my thoughts and opinions on the Libyan issue in a separate section as well.

The overall mood was one of satisfaction that the Company was well-managed even with the Libyan “blip”. Of course, the special dividend of 3 cents/share helped to sweeten the mood, even as shareholders deliberated on how the $200 million net cash on the Balance Sheet was to be utilized (incidentally, FF Wong did mention that this balance had ballooned to $228 million as at July 29, 2011).

Energy-Related Engineering Division

Boustead International Heaters (BIH) deals with detailed engineering processes and has a presence in many countries such as London and Malaysia. FF Wong said that BIH is in a niche industry and only has about four competitors. Their net margins are about 10%-13% and are under pressure currently due to competition, but volume has grown steadily since the recession ended. By comparison, Herte of France (which is one of the competitors of BIH) has only net margins of 3%.

For Boustead Maxitherm, an area of growth which Management is looking at is Green Energy. Boustead will be moving towards this direction in the years to come as it represents good potential. For power plants, the outlook is becoming more positive and buoyant and countries such as Indonesia require a lot of such plants to generate power to outlying areas. The country is too large to have a national grid in place, thus small power plants are required to cater to small pockets of the population; and this development represents good opportunities for Boustead Maxitherm to grow over the mid-term.

Water and Wastewater Engineering Division

Salcon will continue its focus on the niche water treatment industry and pitch itself for such projects. Even though it is up against global giants, it has still managed to clinch several high-profile contracts from reputable clients and has built up a respectable portfolio. Without the Libyan write-off, FY 2011 would have been another profitable year for the division.

Real-Estate Solutions Division

This division is easily Boustead’s largest revenue contributor and also its cash cow (aside from Geo-Spatial, of course). In Boustead’s AR, it was stated in the Chairman’s Statement that the aim was to build up an industrial leasehold property portfolio of 200,000 to 300,000 sqm. When I queried Management more on this, the reply was that this was the critical mass required for them to sell the entire portfolio to a REIT, thus unlocking value for shareholders. The rental revenue to be derived from Boustead’s current industrial leasehold property portfolio cannot be ascertained as it depends a lot on the type of building and the zoning (which affects the rental rates). As of this writing, the Design, Build and Lease portfolio has grown to about 90,000 sqm.

It is Boustead’s aim to grow their Design and Build portfolio as well, even though these contracts are sporadic and “lumpy”, in addition to focusing on their DB&L projects. It used to be the case where Boustead could sell at least one industrial leasehold property every financial year, but the problem with this strategy was that even though it brought in a lot of excess cash, it also meant that the Group would have to deduct one recurring income source. Boustead’s business model has to shift to one where the recurring income and cash flows from maintaining such a portfolio outstrip the benefits of selling the properties to clients for lump sum cash inflows. To do so, I reckon that Boustead’s other divisions have to ensure that they are all cash-flow positive and that the cash inflows more than cover the outflows to be made for progress payments to be made to contractors during construction of these leasehold properties. Once this “steady state” is reached, Boustead Projects can focus more of its attention on growing its leasehold portfolio, with the occasional Design and Build contract thrown in for good measure.

Geo-Spatial Division

Not much was discussed about this division as it is a pretty stable one with good and steady growth. FF Wong mentioned that in Australia, their market share was 85% while in Singapore it was 50%, with most of the clients being government agencies (hence, there exists a very low bad debt probability). There was already a good discussion on this during the recent audiocast, therefore I have nothing more to add.

Investments

With regards to Boustead’s most recent investment in HanKore (previously known as “Bio-Treat”), FF Wong mentioned that extensive and exhaustive due diligence was done on the Company prior to the investment. To recap, Boustead invested $4 million in HanKore by purchasing 100 million shares at 4 cents/share. HanKore has a complex group structure and the recent rights issue and fund raising meant that more parties were roped in to help the troubled company. It was mentioned that cash flow was poor for BOT projects (which is why Boustead themselves do not utilize the BOT business model) but prospects were good.

Recent reports on HanKore have been largely optimistic that the Company has put its troubled past behind it and would be able to generate healthy cash flows and profits. It remains to be seen, however, if this comes to pass. Boustead’s Management is not terribly excited about HanKore’s near-term prospects, and my feel is that they intend for this to be a medium-term investment.

Cash Management

Boustead’s cash management program allocated $50 million for the purchase of corporate bonds, and it was mentioned that $12 million was invested, out of which $1 million of profits were made (yield of about 8.25%). This ongoing program helps to ensure that the cash is properly invested in products which are not too risky, yet are able to generate a return higher than inflation. Instead of letting the cash sit idle, it will be put to good use while Boustead waits for a suitable M&A opportunity.

As at July 29, 2011, Boustead’s net cash balance amounted to $228 million. After the payment of the final plus special dividends, this will dip to “only” $200 million. FF Wong mentioned that holding so much cash has its advantages as well, as it allows flexibility for Boustead and also attracts more suitors who are eager for Boustead to assess their business to see if it can be bought over. Therefore, this opens Boustead up to more opportunities as compared to if it did not have its large cash reserve. Holding so much cash also improves Boustead’s reputation as a well-managed company and boosts its standing in the corporate world.

Boustead will continue to keep its eye out for potential M&A opportunities to utilize its burgeoning cash hoard. With the Europe crisis flaring up again and a crisis of confidence engulfing the Euro Zone, perhaps this may throw up juicy opportunities for Boustead to consider. However, since its focus is mainly Asian (and Asia has yet to experience a crisis as severe as the AFC in 1997), it may not be able to find attractive investment opportunities around SEA and may have to venture to Europe or USA. Whatever the case, shareholders like myself will have to keep the faith that the CEO knows what he is doing.

Conclusion

The above summarizes the main points gathered from my attendance at the FY 2011 AGM. The buffet spread was quite marvellous this time round (with lobster salad, crayfish and other high-quality food), but the experience was marred by a very cramped corridor which everyone had to literally squeeze through to get to the food. This meant a delicate balancing act when it came to shuttling food back and forth, and drinks were particularly tricky. It did not help that the conference room also felt cluttered with many chairs blocking the way. One of the shareholders requested that an auditorium be booked for next year’s AGM, and the Management said they would look into that request as they had not expected such a good turnout and were similarly caught by surprise.

I shall be providing another update on Boustead when it releases its 1H FY 2012 results some time in November 2011.

Averaging Up or Down?

I guess the question above would be particularly applicable to value investors, as they often know and understand their own companies best over a period of time and thus are often faced with the question of whether to purchase more shares in these same companies. An investor would be confronted with the simple question of whether he should average up (i.e. purchase shares at a higher price compared to his original purchase) or average down (purchasing at a lower price than his original purchase in order to reduce his overall average cost per share). Let’s analyze both situations to see what insights can be gleaned as to the actions to be taken, and also the ramifications and consequences of each action.

Averaging Down

I guess this would be viewed as a simple decision – to purchase more shares in a company in order to reduce the cost of your holdings. Note that this can usually only be done in a major correction or in a protracted bear market, as the value investor would have usually purchased his shares with a requisite margin of safety to begin with. This means that it will be unlikely and improbable (but not impossible) for the share price to fall below his purchase price and remain there for a long enough period for him to accumulate comfortably. Even if this does happen, the investor must not only be nimble enough to be able to capture the opportunity to buy more shares in his favourite company, but must also control his emotions of fear and panic when market valuations plunge. The logic of buying more when prices fall may be sound, but in reality it can be difficult and uncomfortable to go against the crowd as human nature dictates that we feel more at ease following the direction of the herd. Hence, a seemingly simple action such as averaging down comes with a lot of emotional hang-ups, and as an investor who has done this before, I can only say that one must have both conviction and fortitude. In short, one must do the necessary research and be convinced in one’s own analysis to be able to carry out the transaction; and along with it also comes the ability to withstand short-term market price swings without batting an eyelid.

Another danger of averaging down comes in the form of the Value Trap. As one reader recently commented on my post on divestment of GRP, the one big mistake which all value investors face is the seemingly attractive low PER and valuations offered by a company which hides the true extent of its unsuitability. An investor must carefully assess the future prospects of the business, and convince himself that the business is able to at least sustain its cash flow generation to be able to pay out steady dividends, or that it is growing slowly but steadily. There is a fine line to be drawn between a company in a declining industry which is floundering, and one which is in a mature industry with little growth potential; but the difference can be of paramount importance in determining the returns to be obtained over the long-term.

It all boils down to an investor performing a conscious evaluation of a business’ potential to continue to generate profits and cash, in order to justify his averaging down strategy. A business is not always more attractive just because it has lower valuations, and vice versa; as everyone knows that conditions in the business world are never so simple. Hence, it involves a detailed assessment of valuations in relation to profit and FCF-generation capability. I am the first to admit that this is far from easy, therefore the decision to average down should not be taken lightly and should be a matter of grave importance – significant judgement is required to ensure that one’s investment does not spiral down into the depths of a black hole or chasm.

Averaging Up

Averaging up, I feel, is a lot trickier than averaging down. Perhaps a reader might attribute it to a matter of perception, as it never seems to make sense to purchase something at a higher price (and by extended definition higher valuations) compared to one’s original purchase price. At this juncture, perhaps, I should clarify a few mis-conceptions about the process of averaging up which even I was prone to make prior to writing about this topic. These mis-conceptions do not just include those of valuation, but also involve psychological biases under the umbrella of behavioural finance.

When one thinks of averaging up, one immediately thinks of violating the basic principle of investing, which is to purchase at a more affordable valuation as compared to a higher valuation as provided by Mr. Market. But things are not always as simple as they seem – a business is dynamic in nature and is always changing, therefore valuations and prospects do not stay constant either. The difficulty is in determining what constitutes a margin of safety in purchasing at a higher price as the business may have improved or deteriorated since your previous purchase. The hard work involved is to assess and ascertain once again if the business is worth purchasing in its current form, by incorporating all new information, news flow and corporate actions and events since your last purchase.

To give a recent example of mine, I had averaged up on purchase of Boustead after an absence of 2.5 years. Essentially, I had to make another assessment of the Company based on the recent corporate newsflow, as well as reading the Annual Report FY 2011 thoroughly and by talking to and questioning the Management during the recent AGM in July 2011. This evaluation has to be conducted to ensure that at the current price level and valuation, Boustead would still make a decent and compelling investment. Once the assessment was done and the conclusion was made, I then proceeded to execute my order to accumulate more at a market price of 85 Singapore cents, and this was blogged about some time back in late-August 2011.

The behavioural bias involved in averaging up is anchoring bias, which means that one tends to use their historical purchase price as a mental “anchor”, and anything which is higher in PRICE tends to look more expensive in relation to your purchase price. However, this is a wrong attitude to have as your previous purchase price is considered history and should not be relevant to your current decision. In fact, one should behave as if one is considered the stock for purchase without owning any in the first place, as it is irrelevant to one’s purchase decision to always mentally anchor oneself to a historical purchase price.

Conclusion

From the above, it can be deduced that whether one decides to average down or up, the common theme in both cases is to do a rational and objective assessment of the business to see if it continues to be investment-worthy. It is never an easy and clear-cut decision and one has to be prepared for losses in case things do not pan out as planned; but we should take such lessons stoically and continue to learn from them. As investors it is impossible to avoid mistakes, but we should always aim to make small financial mistakes and to reap big financial rewards, which in the long-run would translate into an increase in financial assets and would bring one ever closer to the dream of financial independence.

August 2011 Portfolio Summary and Review

August 2011 was by far the most interesting month thus far, not just for the stock market but also in terms of economic news, upheavals and other alarming news. As I am much busier these days with family and work, I shall not comment too much on news events which I am sure most readers can peruse through in the daily newspapers. Instead, I will focus more on the companies within my portfolio and the portfolio itself.

In a previous post, I had written about my portfolio changes already, so I will be not be repeating it again my portfolio section but will merely detail the usual gains and losses, as well as dividends received. The refund for my daughter’s hospitalization has arrived, thankfully, and the money has been encashed and is ready to be deployed. Dividends have also been very healthy for August, with money flowing in from SIAEC, Boustead, Suntec REIT as well as newly-acquired VICOM.

Below please find my portfolio as well as corporate summaries for August 2011:-

1) Boustead Holdings Limited – On August 10, 2011, Boustead announced that its Energy-Related Engineering Division had secured $22 million worth of contracts from the oil and gas industries globally. These involve the design, process engineering and construction of key large-scale process systems and waste heat recovery units for downstream oil refineries and gas processing plants in Australia, Canada and the United Kingdom. On August 12, 2011, Boustead Projects announced a Design & Build Contract worth $42.45 million for Kerry Logistics to build a logistics facility at the Tampines LogisPark in Singapore. The Facility will have gross floor area of 34,500 square metres and is expected to be completed in 4Q 2012. Also, on August 12, 2011, Boustead released its 1Q FY 2012 results. Revenue was down 53% while net profit attributable to shareholders plunged 73%. The reason for this was that 1Q 2011 saw the sale of a leasehold property of $67.8 million. Adjusting for this, revenue and net profit would have decreased a smaller 27% and 18% respectively. The key reason for this was the slower recognition of revenue on contracts which had only been secured in 4Q 2011. Otherwise, the Balance Sheet remained strong with net cash balance of about $200 million and FCF amounted to $34 million for just 1Q 2012.

The final dividend of 2 cents/share and special dividend of 3 cents/share was received on August 19, 2011. On August 19, 2011, I had increased in stake in Boustead after an absence of about 2.5 years, raising my average cost to 62.3 cents/share.

2) Suntec REIT – On August 12, 2011, Suntec REIT announced that the REIT had entered into a share sale agreement with several parties to acquire 51% of the issued share capital of Harmony Partners Limited (HPL). HPL owns an 80% indirect stake in Suntec Singapore International Convention & Exhibition Centre (Suntec Singapore). This acquisition will raise Suntec REIT’s stake in Suntec Singapore from 20% to 60.8%. The purchase consideration is $114.75 million and will be funded by bank borrowings; and this will form part of the asset enhancement plans which Suntec REIT has.

The dividend of 2.532 cents/share was received on August 29, 2011.

3) MTQ Corporation Limited – There was no announcement from MTQ for August 2011, other than to fix the issue price of the new scrip shares at 82 cents/share. I have chosen scrip to be received on September 16, 2011.

4) Kingsmen Creatives Holdings Limited – Kingsmen released their 1H 2011 results on August 11, 2011. Revenue fell 15% to $93.6 million in the absence of mega-projects like the Shanghai Expo pavilions during the same period last year, while net profit also dipped 15% due to a comparatively weaker performance by the Museums and Exhibitions Division. Gross margin, however, improved to 29.7% for 1H 2011 against 27% for 1H 2010. Interiors continued to perform well with revenue increasing 6% for 1H 2011 against 1H 2010, while revenue also increased by 47.6% and 27.7% for Research & Design and IMC divisions respectively. Cash flow was healthy for 1H 2011, with Kingsmen generating $4.6 million of OCF and spending $1.4 million on purchase of PPE, resulting in FCF of $3.2 million. Though this is far below what was generated in 1H 2010, Benedict Soh is confident that business will pick up in 2H 2011. An interim dividend of 1.5 cents/share was declared (similar to 2010) and will amount to about $2.84 million (i.e. it can be sustained by the FCF generated). If I have time, I will discuss more on Kingsmen but after my 5-part comprehensive analysis, I decided to take a break for a while.

5) SIA Engineering Company Limited – There was no news from SIA Engineering during the month of August 2011. The final dividend of 14 cents/share and special dividend of 10 cents/share were received on August 11, 2011. I raised my stake in SIA Engineering on the same day, bringing down my average cost to $3.97 from $4.064.

6) VICOM Limited – VICOM released no news for August 2011, except to report its 1H 2011 results. Revenue for 1H 2011 increased by 8% to $44.7 million, while net profit attributable to shareholders increased 10.5% to $12 million. This represents a net profit margin of about 26.8%. The Balance Sheet remained solid with no debt and OCF amounted to $9.8 million, while capex was $7.65 million due to the construction of the new facility for Setsco at Teban Gardens. FCF thus amounted to $1.15 million for 1H 2011. Capex under “normal” circumstances would only amount to about $1.3 million (using 1H 2010 as a guide), and thus FCF would have been much more at $8.7 million last year. An interim dividend of 6.9 cents/share was declared and paid on August 31, 2011, up from last year’s interim dividend of 6.3 cents/share.

Portfolio Review – August 2011

Realized gains have increased to S$65.2K due to Boustead and VICOM going ex-dividend this month. A total of $5.5K was received in dividends for the month of August 2011.

For the month of August 2011, the portfolio has decreased by -2.5% (using XIRR in MS Excel to compute) against a -9.6% fall in the STI; thus my portfolio performance has outperformed the STI by +7.1 percentage points. This was a much better performance compared to July 2011, when the portfolio out-performed the STI by just +0.5%. Cost of investment has increased from S$219K to S$238.7K and unrealized gains stand at +7.8% (Portfolio Market Value of S$257,200).

September 2011 is anticipated to be a slow and boring month with no results released by any companies within my portfolio. Analysis of existing results shall carry on, as well as reading up more on value investing and companies.

My next portfolio review will be on September 30, 2011 (Friday).

MTQ – FY 2011 AGM Highlights Part 2

Part 2 of the MTQ AGM Highlights will touch on Neptune Marine Services, Oilfield Engineering’s recent acquisition of PSL and PEMAC, as well as elaborate on Engine Systems Division.

Neptune Marine Services (NMS)

Naturally, quite a few pointed questions were asked about the recent NMS acquisition, as the Group had pumped in a substantial sum of money into this investment. MTQ was even buying up more shares from the open market recently in order to reduce their cost of investment further from A$0.05 to A$0.0467; but the recent market turmoil has actually pushed down NMS’ share price to as low as A$0.026. No questions were asked during the AGM proper but it was after the meeting that one or two shareholders (myself included) approached Mr. Kuah Boon Wee (KBW) to find out more about NMS.

One shareholder’s concern was that NMS was a micro-cap stock (below 10 AUD cents) and therefore it would be very difficult for valuations to rise and hence the share price would stay depressed for extended periods of time. KBW acknowledged this but maintained that the reason for MTQ investing in NMS was that the restructuring left them with a very clean Balance Sheet and that the divestments meant that cash would be raised and the business model would be very much more streamlined as compared to previously (before the rights issue). KBW was also questioned on how experienced the new CEO Mr. Robin King was in managing such a company, and the reply was that he was sufficiently competent. Another query was – why would MTQ invest in NMS unless synergies were to be obtained, and do the businesses of MTQ and NMS overlap in any way? KBW’s reply was that NMS’ business was subsea, and MTQ was also dealing with subsea business as it was repairing equipment relating to subsea operations; hence there was overlap and both companies are essentially serving the same industry.

My concern was that NMS would take significant time to turn around as the divestments did not ensure that the core business would be profitable and cash-flow positive. KBW mentioned that the current financial year ended June 30, 2011 would look terrible due to the rights issue and significant write-offs, while the next financial year ended June 30, 2012 would look similarly disastrous because of the various other divestments of non-core assets and streamlining of the business. I took that to mean that the business of NMS would only “stabilize” in the financial year ended June 30, 2013; and this also implied that MTQ would take a long-term stance on NMS in that they had the patience to sit through the restructuring to ensure their investment bore fruit. Note also that in the interim, NMS would not be paying a dividend at all, thus unlike Hai Leck, MTQ would not enjoy any yield at all for their waiting.

It will be interesting to continue to monitor the business of NMS and their periodic announcements on ASX to follow the progress of the restructuring, and to see if they eventually bear fruit. Thus far, Mr. Market has been less than kind to NMS and has accorded it a very low valuation; time will tell if Mr. Market was right, or if he had been overly pessimistic.

Oilfield Engineering Division – Acquisition of PSL and PEMAC

Besides the issue of Bahrain, the other major talking point about Oilfield Engineering was the recent announcement of Premier Sea and Land (PSL) and its workshop division called PEMAC. I broached this topic with KBW as well and he mentioned that it was acquired cheaply at about 4.7x PER and 1.29x P/B (I provided him with the numbers which he agreed with). He also mentioned that the business was cyclical in the sense that last year’s earnings for PSL of US$4.1 million was considered one of its “lowest” points, with other years registering much higher net profit. Therefore, it would make it look as if MTQ had capitalized on this temporary blip to acquire this company cheaply.

When quizzed by another shareholder on why the parent would want to divest PSL when it was profitable and had an unleveraged Balance Sheet, the reply was that the parent was a US-based company with operations and revenue derived from North America; while PSL was the only Asian arm with most of its revenue derived from South-East Asia. Hence, there was a mis-match and the parent considered divesting it to focus more on its core regions. KBW also mentioned that MTQ had been aware of PSL for a long time as a competitor and was simply waiting for a good and ripe opportunity to come along to acquire the Company; thus killing two birds with one stone – integrating PSL’s business and product range with MTQ’s, and also eliminating (i.e. buying out) the competition!

I was also asking the CFO about PSL’s half-year performance ended June 30, 2011 (it had a December 31 year-end), but he declined to give exact figures; only saying that it was “better than budgeted”. I guess there was a certain amount of sensitivity in revealing such numbers as PSL is not a listed company; therefore there is no onus for disclosure of such information. As long as PSL is doing well, I have no worries about not knowing the exact numbers; in fact all I wish is that Management know how to integrate it well with MTQ’s core Oilfield Engineering Division and in time to come, produce positive synergies and tangible benefits for the Division.

Engine Systems Division – Acquisitions and Margins

The final aspect to ask about was the Engine Systems Division, which was rather neglected during the course of the meeting as no one was particularly interested to ask about it. Most attention was (of course) directed at Bahrain, PSL and even NMS and I guess most shareholders assumed that Engine Systems Division would just “chug” along like a well-oiled engine (no pun intended). My concern was whether the division’s margins were improving and the CFO assured me that they were working on this. My important question to them was whether the division generated positive cash flows and the reply was in the affirmative.

I also expressed concern that one of the recent acquisitions (three of them as detailed in the AR FY 2011) was loss-making, while the other two were acquired too close to the end of the financial year for any positive impact to be seen. The CFO took a different tack when answering this question – he mentioned that for Engine Systems, scale and coverage were very important. In fact, MTQES was the only Company in Australia which had nation-wide coverage in terms of branch locations; and the acquisitions had helped to make this a reality. With this enlarged coverage, MTQES would be more effective in engaging customers all over Australia, and I took it to mean that this would be positive for the Division over the medium-term (and that the effects would not be immediately apparent).

I had to admit that Engine Systems had come quite a long way since I looked at it three years ago, and even though margins were still thin, they had improved quite a bit since then and I believe it can be attributed to the Management Team’s focus on the Bosch partnership, expanding its range of products such as turbochargers, as well as extending its reach so that it could more effectively serve its customers. These measures take time to show results and therefore, I am willing to be a bystander and observe this Division further before making more conclusions.

This concludes my AGM highlights for MTQ, and I will probably not blog about MTQ for quite a while until it releases its 1H FY 2012 results in late October 2012. Meanwhile, the issue price for the scrip dividend has been announced at 82 cents/share, and my decision would be to take up 100% scrip as I believe in the growth prospects for MTQ.

Note: For a good write-up on MTQ’s AGM, please also refer to this article by Next Insight.

Portfolio Changes - Divestment of GRP and Addition of VICOM, SIAEC & Boustead

It’s been a while since I made some major changes to my portfolio, but this month seems to be a good month for it as Mr. Market went through a rather wild mood swing due to the historic downgrading of US Debt, which caused markets worldwide to tumble sharply and valuations to become more attractive. This event, coupled with debt problems in Europe and runaway inflation in China, served to unnerve the world and caused many bouts of forced selling and margin calls. The result, of course, was that the STI fell about 13% in 7 straight days of blood-letting, and this opened up very good opportunities for me to purchase shares. But before I go on about the additions, I have to declare my divestment of GRP and also the underlying rationale for it. Fortunately for me, the timing of the divestment was just right for me to pick up some shares of VICOM, which does vehicle inspection and testing in Singapore; as well as to average down on my cost for SIA Engineering. At the same time, I also bought some more Boustead to add to my current holdings. In the sections below, I shall elaborate on the reasons for the divestment and addition, and also give a brief account on the addition of SIA Engineering. All portfolio changes will be reflected in my month-end portfolio review, though I will provide some details within this post itself of the movement in cost, and also any dividend effects.

Divestment of GRP – Reasons and Rationale

I guess of all the companies within my portfolio, the one which was the most stagnant and which had a declining business had to be GRP. The original rationale for purchase was to enjoy a yield of 10% due to GRP’s large cash hoard and also its ability to generate free cash flows (FCF) due to the presence of rental income derived from its Bukit Batok industrial property. However, do note that the rental income from its property had ceased with effect from May 2010 following the expiry of the lease agreement in April 2010, thus 1H FY 2011 (ended December 31, 2010) did not include the effects of this rental income. As a result of the absence of this item, net profit fell 47% year on year. This was not the only thorn in GRP’s side – gross profit margin had also declined from 35.9% to 31.9% due to more intensive competition in its divisions. Though administrative expenses had fallen 23.8%, the more worrying factor was the erosion of gross margins, which was witnessed in Tat Hong and which also portended a slow but painful decline in its core business.

However, the above was not the only reason for the divestment. In the May 2, 2011 issue of The Edge Singapore, director Han Hai Kwang was quoted as being on the lookout for “synergistic” acquisitions to halt sliding profits, as GRP’s core business divisions suffered from competition and saw its profits eroding. Its PVC business in China, in particular, was suffering as a result of intense competition and the business itself was a commodity one in which GRP itself had no firm competitive edge. It would seem that throughout the years in which I was vested in GRP, Han had been continually looking out for such M&A but without much success, and this resulted in the cash building up into a hoard of about 9.5 cents/share. No special dividend was declared though, as I believe the Company saw that their business was vulnerable and therefore they wished to retain more cash for working capital.

What was more alarming, however, was that GRP’s operational cash flows for 1H FY 2011 had dropped to just $559,000, while capex was $95,000, resulting in FCF of just $464,000. The current dividend of 1 cent/share every half year amounts to $1.4 million, and this represents a shortfall of $1 million. Note that while rental income was still flowing, and using 1H FY 2010 as a comparison, FCF amounted to $$2.24 million, which would have been sufficient to pay out a dividend of $1.4 million and still retain roughly $800,000 for working capital. Looking at GRP’s balance sheet as at December 31, 2010, cash stood at $13.3 million and if they were to carry on with their current dividend policy, the cash would be depleted within 6.5 years ($2 million deficit per financial year), and that is not even counting in working capital requirements. Hence, my conclusion was that the current dividend policy was unsustainable (at 10% yield), and thus the original rationale for purchase was now invalidated; thus requiring an action to divest.

Another related point which I should mention was GRP’s announcement, on July 13, 2011, that it would be disposing of 63.5% of GRP (China) Pte Ltd, its uPVC business, for a cash consideration of $1.92 million; and will also, at the same time, book in a gain on disposal of $313,327. The reason for the disposal was the cash burn and losses suffered by this division for three consecutive years. On the surface, it looked like a good decision; but I have to question why Management took so long on their decision to divest, and also whether there are underlying unspoken reasons for wanting to divest for cash. One possibility (uncorroborated, no doubt) which crossed my mind was that the Company was foreseeing declining business and needed the money for additional working capital; and that they would also concurrently lower their full-year dividend from FY 2012 onwards (I am still expecting a final dividend of 1 cent/share for 2H FY 2011; as of this writing, GRP’s FY 2011 results ended June 30, 2011 have still not been released).

On August 3, 2011, I sold off my entire shareholding in GRP at 20.5 cents/share, realizing a capital gain of 2.5%. If I factor in dividends of $4,000 received since I first purchased GRP on October 28, 2009, then the total net gain on GRP rises to 22% (net of brokerage). Using XIRR on Excel, I have computed that the annualized return on investment amounts to 13.5% per annum.

Purchase of VICOM

The proceeds from the divestment of GRP were then used to purchase VICOM at an average cost of $3.40833 on August 8, 2011. VICOM is a company listed on SGX (68.19% owned by Comfort Delgro) which is involved in vehicle testing and inspection services (for all cars in Singapore). Revenue for this division hit $25.5 million (a 10.7% increase) for FY 2010 (it has a December 31 year-end) and 438,454 vehicles were inspected during the financial year. This division has seven testing centres spread out over Singapore, and include Sin Ming (lease just renewed for another 30 years), Changi, Bukit Batok, Yishun, Kaki Bukit, Pioneer and Ang Mo Kio. As of June 30, 2011 (based on 1H 2011 results), the Vehicle Inspection Business took up 30.5% of revenues, and had operating margin of 35.7%.

VICOM also has a wholly-owned company called Setsco Services Pte Ltd (Setsco) which provides non-vehicle testing and inspection. This includes construction material testing, certifications, calibration, training, inspection and consultancy. It has its headquarters at Changi but VICOM is in the midst of building a new four-storey building at Teban Gardens due to be completed by 3Q 2011. Revenue for this division hit a new high of $51.4 million (a 7.6% increase) for FY 2010. The division also has operations in Selangor (Malaysia) and Ho Chi Minh City in Vietnam. In FY 2010, Sestco formed a JV in UAE with Dubai-based Ali Omran Al Owais Investment Company to form a 49%-owned associated company called Setsco Middle East Laboratory LLC. This remained dormant for FY 2010, registering a loss for the year. As at 1H 2011, there was still no share of profit from this associated company, which implies that operations had yet to fully commence. For 1H 2011, the proportion of revenue from Setsco was 61.6%, and operating margin stood at a respectable 20%. The remainder of the revenue came from leasing and other related businesses.

I had already stated at the end of m SIA Engineering’s five-part analysis of purchase that I will not be doing a very detailed analysis of purchase for new purchases subsequent to SIA Engineering, thus I will be very brief on the reasons I purchased VICOM. VICOM has a captive market in its vehicle inspection business, as all cars in Singapore have to be periodically inspected as part of compulsory requirements to own a vehicle. As COE prices remain high (as of this writing a Cat A COE costs $49,000 while a Cat B one costs $65,000), fewer people will scrap their cars and thus will hold on to them longer, requiring more inspections. VICOM also has a clean Balance Sheet with no debt, and generates strong FCF every year. In its recent 1H 2011 results, VICOM declared an interim dividend of 6.9 cents/share, up from 6.3 cents/share a year ago. Assuming final dividend remains unchanged at 6.9 cents/share as per last year, total dividend for FY 2011 would be 13.8 cents/share, translating into a yield of 4% at my purchase price. Incidentally, I did not buy VICOM very cheaply; it was priced at about 12.2x PER and about 3x P/B; but this is to be expected since the business model is sturdy and it generates consistent and predictable FCF every year. A total of about $20,000 was spent purchasing shares of VICOM.

Addition of SIA Engineering

As Mr. Market was feeling particularly panicky in those seven days of decline, I decided to deploy more cash (about $10,000) to purchase SIA Engineering, and managed to average down on my initial purchase by buying at $3.51 on August 11, 2011. A quick analysis of SIAEC’s cash generation ability showed that since listing in 2000, it has only dropped its dividend once (in ten years) from FY 2008 to FY 2009 (20 cents/share to 16 cents/share), not counting special dividends. Even if we assume a drastic cut in dividend of 40% from 20 cents/share to 12 cents/share due to another global economic meltdown (crisis), that still represents a yield of 3.4% at my purchase price. With cash flows from associated companies and JVs remaining strong, I would expect SIAEC to at least maintain their dividend policy as they should have baseline cash balance of $400M after paying their recent final + special dividends.

As a result of the averaging down, average cost for SIAEC has fallen from the previous $4.064 to $3.97, and this will be reflected in my next portfolio review.

Addition of Boustead

Even more cash was deployed to purchase more shares in Boustead, at a price of 85 cents. The Company is sitting on a cash hoard of about $39.75 cents/share and has been paying consistent, increasing dividends over the last five years. This effectively values the rest of its business at a mere 5x PER ex-cash, and considering it is a global mid-cap company this “conglomerate discount” was not justified. It has a strong balance sheet with negligible debt (mostly, it is used to finance their real-estate portfolio) and generate very strong FCF every financial year. The strength of its business lies in Geo-Spatial and Real-Estate Solutions Divisions. For the former, it has a PBT margin of around 22-23% and is cash-flow positive, with Government agencies forming the bulk of their customer base (hence, bad debt probability is very low), while for the latter, Boustead is steadily building up its Design, Build and Lease portfolio to just above 90,000 sq metres currently. This is reflected under “Investment Properties” in the Balance Sheet, and the recurring income and cash flows will provide a stable base against the turbulence experienced these couple of weeks in Europe’s and America’s economies.

At my current purchase price, projected yield based on 4 cents/share is about 4.7%; and my average cost has increased from 55.8 cents to 62.2 cents.

Summary

The above transactions had the net effect of increasing my cost base from $220,000 to $238,700, as $20,000 was divested from GRP and re-deployed into VICOM, $10,000 was spent acquiring shares of SIAEC and another $8,600 to acquire shares in Boustead. This represents another new high for my cost, and I shall endeavour to continue to put more money to work if Mr. Market continues to offer me opportunities.