Saturday, 21 October 2017

3 Things People Forget to Consider when Investing in a Condominium Property

Recently, Channelnewsasia covered a topic asking whether Singapore's private housing market is in a bubble. In it, a certain property firm’s "expert" was interviewed. One fact which made me interested is how annual rental yields of Condominiums in Singapore are now between 2.8% - 3.2%.

Having been in the real estate and investing on my own, my perception is that these figures do not reflect the reality for investors buying a private property to rent out for investment purposes. In my opinion, it seems 3 significant expenses may have been forgotten/ignored by property investors when computing the rental yield:

1. Property Tax

This is the biggest factor which many seem to have forgotten. In Singapore, the property tax is determined by the annual value of your property and for properties renting out, it is based on the annual rental income of the rented property. The base tax rate is 10% and moves up to a max tier of 20%. E.g., if your monthly rental to a tenant is $3,000, the annual value of your home is $36,000 and will incur a tax expense of $3,720. You can find the link to property tax here.

Cost relative to monthly rental income: 1.20 - 1.40 months (Variable cost)

2. Monthly Fees for Maintenance

Unlike HDB flats where our town council helps maintain the amenities, Condominiums have their own MCST that is in charge of maintaining the condo’s compound and amenities. Each owner pays a monthly fee (proportional to their housing unit’s size). For many, the monthly fee to the MCST is about $250-$300.

Cost relative to monthly rental income: Approx 1.10 -1.25 months (Fixed Cost)

3. Commission to Agent

Commission is about 0.5 months per rental year of lease.

Cost relative to monthly rental income: 0.5 months

With these 3 main factors and small items such as Insurance etc., a landlord (owner) will incur a cost equivalent to 3 months’ rental income for every 1 year of rent secured. And this is under the assumption that the condo is always rented out (in fact, our country is now facing a 10+% vacancy rate).

To summarize, if a Condo is touted to give a 3% yield, its true yield to the owner is about 2.25% (factoring the above mentioned costs).


This got me wondering if people investing in private properties now are fully aware of how low the yields they are getting and the financial perils associated with such a low yield. 

It is true current interest rates for a private housing loan is low, ranging from 1.6% -2.0%. But a simple hike in interest rates of 0.75% (3 rate hikes equivalent in the federal reserve context) will mean the housing loan interest rate exceeds that of the condo’s yield. 10 years ago, Singapore’s housing loan interest was in the region of 4% p.a and if we were to look further into history, the rates were higher than 4%. A reversion to the mean of about 4% p.a is a likely scenario based on history.

It may end up a situation where investing in a private property eats into your cash flow or that instead of becoming an investment for retirement, it becomes a liability to you; serving only the bank's bottom line or as taxes contributing to the nation building of Singapore.

Saturday, 16 September 2017

How Much is ComfortDelgro Worth?

Challenged by Grab/Uber in the taxi segment, ComforDelgro (CDG) taxi's segment has been hit hard and its taxi division has been suffering with declining profits. While others will focus heavily on CDG's Taxi business, it is worth noting CDG is quite diversified across many sectors.

So lets analysis CDG's sector by sector and try to find the valuation of the group on a whole based on its projected profits.

Public Transport Segment

Almost everyone is familiar with this segment which involves SBS Transit running bus and train operations. Due to the industry overhaul by LTA, SBS transit is moving towards an asset light structure, becoming an operator with no ownership of the assets. The profit segment is relatively stable and one can reasonably expect this segment to generate s$170 million per year.

Profit: s$170 million

Taxi Segment

This is the most contentious segment right now. While the taxi segment has been generating close to s$150 million yearly, the increasing competition from Private Hire Vehicles is pushing the fleet utilization and rental rates of CDG taxis down. To make matters worse, CDG had paid high prices for the COEs of its taxis in the recent few years. This makes its fixed cost high and it does not help that fleet's utilization rates are falling as well as rentals.

Hiring private rental cars cost about s$70/day and drivers enjoy rental rebates when driving for Grab/Uber, while renting from CDG starts from $90/day. If CDG is to reduce its rental rates by 20% to match competition, it is likely to lose all its profits. Hence, I do not expect CDG to slash its rental rates by 20% but instead 10+% to retain its profitability.

In its recent past two quarters report, CDG reporting results has shown a slow decline in taxi profits (1H: $72.3mil). In my opinion, on a long term basis, it is likely its Singapore taxi division will show the true extent of competition from Grab and Uber during its next financial year's results. I estimate CDG local taxis will make 40-45 million in profits annually, while 5-10 Million will come from its oversea taxi businesses.

Profit: s$50 million

Bus Station

A segment which I do not understand why LTA has left the assets to SBS Transit even though other assets of the public transport network has been bought. It could be a political decision to leave this cash cow in CDG's balance sheet to buffer it from competition because the segment is highly profitable (40% NPM).

Profit: s$12 million

Automotive Engineering

This segment supports vehicle maintenance and engineering for vehicles (including Comfort Cabs and SBS buses). Given that Comfort Taxis are piling the roads less often, expect a slight fall in this segment profit moving forward.

Profit: s$45 million 

Inspection & Testing

This segment relates mainly to analysis on Vicom's profitability. Given that Cars in the 8 to 10 years age range is now declining on Singapore's Road, this reduces the number of vehicle inspections overall and thus it is unlikely for Vicom to replicate its profit highs; a slight decline is expected.

Profit: s$30 million

Other Segments

Its Car rental is facing some competition and expect profits to decline, however given the monopoly CDG has in driving schools in Singapore and better reputation in China, CDG is able to command a premium (and force Singapore Driving Students to pay a sky high fee)

Profit: s$20 million

Total Profits before Taxes and Non Controlling Interest (Financial income is netted off Finance Expense)

Based on the above, CDG's new profits should be s$327 million. If we were to adjust for estimated Tax Expense of s$62 mil and non controlling interest of s$61 mil, the overall net profit attributable to CDG's shareholders is s$204 million annually over the next 5 to 7 years. This is because of the high fixed cost structure of its taxi business due to the high bidding for COE prices.

Are Current Valuations justified?

Based on its current market capitalization of s$5 billion, the expected P/E is 25 times. In my opinion, the current valuation is too optimistic and CDG should be valued lower. Based on its past price earnings ratio in the region of 16 times, we should expect CDG to be valued at s$1.36 share price or s$3.3 billion market capitalization. 

It is possible that Mr. Market is predicting the government may step in to protect Comfort Taxi and the rest, which means CDG's taxi business may not decline from s$150 million to s$50 million, but instead to s$100 mil profit level. This will make current valuations of CDG justifiable.

Assuming CDG's Taxi Business is not Profitable

In fact, my above analysis assumes that CDG's taxi business in Singapore remains profitable despite competition from Uber, Grab and Private Hire companies. If one had been utterly pessimistic and think that CDG's taxi business will break even (not even assuming loss making like Grab), the fair valuation of CDG has to be reduced by a further 20% to a price of s$1.10.

This is because Grab and Uber have been making losses and burning cash in their business. Furthermore, Grab has recently raised another round of funding from international investors, thus being able to up the ante against CDG.

As an investor seeking a margin of Safety, I may peg myself to the more pessimistic scenario before considering buying a stake in CDG.

<The author has no vested nor shorted interest in CDG> 

Thursday, 7 September 2017

Portfolio Update- Divestments and Seeking New Gems in a "Fairly Valued" Market

It has been a while since the last update of my stock portfolio. Th main reason is because I have made a few transactions over the months.

Penguin Holdings – Sold all remaining 25,000 shares. This brought to the end of my infatuation with Penguin believing it was then riding on the oil boom in 2014 and being a low leverage company
Ezion - Sold 24,000 shares at 0.26 however my CPF portion was not sold and now I have to await the debt talks before deciding. The irony is that I had sold off my Ezion shares via CPF at 0.26 and bought it back at 0.22 as I sensed a trading opportunity (should have sold off and not bought back)
Silverlake Axis- Sold off at 0.620 before ex-dividends. This is because I believe the company is now fully valued and cash flow ability seems not to be as strong as before.
BBR holdings- Did a short term buy because BBR has been continuously doing share buybacks. Bought at 0.22, sold at 0.23
Ellipsiz- Sold it off today at 0.75

Over the past months, I had added on to FSL because of my belief that the fleet’s liquidation value, nett of debt, is above its market price of 7 cents plus. This were at various price points ranging from 7.5 cents to 8.2 cents. I do think there is value in the trust and I await the verdict to see if they have successfully rolled over their debts or otherwise.

Still Seeking Gems
With the various divestment, my cash holding is now at a 37% level. Paring down of my FSL stake is expected especially if share prices move above 10 cents. This is because the concentration risk is getting too high; becoming a binary bet.
I have tried looking for value in other companies. However, none of their free cash flow yield relative to current share price are at attractive levels. The two in my monitoring now are CSE Global and Sarine Tech. Other than that, I am currently finding little value in Singapore’s market.

Monday, 4 September 2017

Saving $100,000 by 31

“How do I start to reach my financial goals?”

“What must I invest in?”

These are questions often asked as newcomers to the workforce embark on their goal to start saving for retirement. And the first steps to it is saving with a certain figure in mind. So how can one achieve this first financial milestone of saving, say their first $100,000? While many would think the ability to invest smartly is required to achieve this goal, the truth could not be any further.

Its more about Saving Habits than Smart Investing
In my view, if you have the goal of saving $100,000 before the age of 35 (or preferably 31), achieving your milestone depends more on how much you save than the ability to invest for wonderful returns.

Let’s use the example of “Ben” to illustrate. Following the path of most university graduates, Ben graduates and enters the workforce at the age of 25. There he attains a job with a monthly salary of $3,000 (After CPF: $2,400). Ben expects an annual 5% increment during the early stages of his career and intends to save a full 1 month of his bonus annually. In addition, being a new investor, Ben expects to invest in “safer” stocks which will yield him an annual investment returns of 4%.

Under $1,000 Monthly Expenses
As mentioned, Ben intends to keep his personal monthly expenditure to under $1,000 or about 40% of his take home pay. This is how his monthly expenditure will look like. Do note that while the insurance expense is low at $45, this is because term coverage of $200,000 and hospitalization insurance is utilized.

All in all, Table 2 shows how much Ben will save monthly. At the start of his working life, he is saving only about 30% of his monthly take home pay.
Table 2: Saving Table at age 26 & 30

Based on the calculations, Ben will save
$100,000 when he is 31 years old.

Analysis of how Ben achieved his $100,000
Based on Table 3, a significant portion of the $100,000 was due to Ben’s savings. In fact, only $8,910 was a result of his investment returns. To summarise, 91% of Ben’s financial milestone was due to his efforts of keeping monthly expenses low (below $1,000); enabling him to save 30-40% of his take home pay.

What if Ben had been Given Wrong Financial Advice or Spent More?
Let’s put additional thoughts to the above example. How would Ben’s milestone of $100,000 be affected if instead of spending $990 monthly, Ben spends $1,340 monthly. The reasons can vary such as instead of being advised to take Term insurance, Ben was offered Whole Life insurance (which will cost him $350 more monthly for the same coverage) or Ben simply decides to spend $350 more to pamper himself.

From a spending ratio of 30-40% of his take home pay, Ben’s spending ratio has now increased to the 43-55% range. Correspondingly, this will affect his savings ratio (a decline from an average of 39% to 26%).
Table 4: Saving Amount at reduced Saving Ratio

At age 31, Ben will only be able to save $73,991. Hence, just a decision to 'spend more' or 'an advice to choose Whole Life instead of Term' sets him back a difference of $26,000. Ben has been delayed by approximately 2 years in achieving his financial milestone of $100,000.

To summarise, the financial milestone of $100,000 depends greatly on what you spend and the amount you save. From Table 3, it shows just how little investment returns contributes. It is only if we take a longer term horizon, will the compounding of investment returns be substantial to contribute to our wealth building. However, for our investment returns to be significant, we need to build a large capital base and this boils down to an individual’s spending and savings habit.

Lastly, some individuals (particularly insurance agents) will dispute the later part of this post where I have “expense” the differential where Whole Life insurance is involved. It is worth noting for individuals who purchase such policy, they will never get to see their maturity sum, hence such a sum/differential should never count towards their retirement fund. Suggestions such as surrendering the policy when they are older (i.e. age 65) may then be offered; however, such a surrender comes at a penalty, and it reduces the returns of whole life insurance to the region of 2-3% per annum. If that is the case, investing the differential on your own is a much better option.

Wednesday, 23 August 2017

When can Whole Life Insurance be better than Term Insurance?

The topic of buying Life Insurance popped into my mind again recently when the Straits Times covered a topic of how Insurance Product options have expanded online and how it can be purchased without the need of going through agents. So perhaps it is a good time to re-evaluate when Term Insurance is better; and when Life Insurance is better.

Previously, I did a short write up of the common types of Insurance shown which can be read here. Hence if you need a basic understanding of how Term and Life insurance works, you may read it before continuing this post.

The "Money Psychology" associated with Term and Whole Life Insurance

My conversations with others on the topic of Term and Life Insurance has unveiled an interesting observation. Many individuals do not consider the value of their Whole Life Insurance policy when calculating their net worth or for retirement. This is intuitive because you yourself will never get to see the sum of money since... oh well you know. Hence many people view life insurance as an expense, whose premiums unfortunately form a significant portion of their take home salary.

Conversely for Term Insurance, as the premiums paid is so much lower than that of a Whole Life, one is able to save more. Currently, the premiums for a term insurance is approximately s$150 per year for a $100,000 coverage, while the premium for whole life insurance is about s$2,200 yearly. This means a savings of about s$2,050 yearly. 

This is one of the reasons why you see a few bloggers possessing a 6 figure investment portfolio despite being in their late 20s or early 30s. It is simply due to the fact that they (we) use term insurance to insure ourselves instead of Whole Life (and also our high propensity to save ratio). As a result of this, society seems to think we are in a better position to retire early and better.

Let's show it mathematically through two individuals who plan to insure themselves for a $200,000 coverage - Mr T (who will utilize Term insurance) and Mr WL (who will use Whole Life). In a short span of 10 years, assuming a return of 4% earned on the difference, Mr. T will be ahead of Mr. WL by $49,225.
Savings over 10 years at 4% Average Returns

To summarize, individuals do not view Whole Life Policies as part of their retirement fund despite the premiums paid being much higher than that of Term. On the other hand, those who purchased Term insurance are able to see the tangible difference by a faster rate of accumulation in their bank balance; and if they were to invest wisely this difference, they will have a higher net worth compared to individuals on Whole Life. This sums up the "money psychology".   

When can Whole Life Insurance be better than Term Insurance?

So the question beckons? When can Whole Life be better?

The answer boils down to the individual - i) when the individual is ill-disciplined in savings or ii) the individual is not very good in managing his money/savings.

Following from my above example, an individual will have an extra $4,100 yearly. He can either a) Save this amount or b) Spend it away. An individual who is indiscipline at saving or poor in managing his money will do exactly b); spending it away for present consumption and not saving for retirement.

Seen in this light, one will notice that Whole Life Insurance is in fact a form of "Forced Saving" scheme. This is because it takes a significant amount of your take home pay now, locks it away until the end of your life to help you benefit from the magic of compounding. Unfortunately, the downside is that you will not enjoy the maturity sum, only your beneficiary.

The Returns from Being Locked Away

So what do I mean by saying an individual is not good in managing his savings? Well it means not knowing how to put the money saved from term insurance into good use (returns). While Whole Life publishes that their projected returns are 4.75% etc, readers will know that the true returns for many such policies are approximately 4% per annum.

If an individual has the discipline and is able to make use of schemes such as POSB-invest saver or ETF to invest in a basket of  shares belonging to companies of credible financial strength, achieving a long term average of 4% is achievable and feasible.

Similarly, if an individual is terrible in investing such that he is always making negative returns annually, then Whole Life might be a better option of locking away his savings for accumulation. However, an altering of his psychology has to be done to come to the realization that the maturity sum from his whole life is part of his retirement plan. Alternatively, he can try to surrender his policy near his 70s to use the proceeds to fund his retirement. 

However surrendering a life policy is not the best option because it reduces the returns to the region of 2-3% per annum; which is pretty achievable if you had started by putting money in your CPF special account at the beginning (CPF SA provides 4% annual returns). 


If you lack the financial discipline to save or is an individual who is unable to control one's own expenditure, Whole Life may perhaps be a better option scenario. This is because it acts as a form of "Forced Savings" that locks away part of your income for the future. Similarly, if your savings is generating less than 2% interest per year, utilizing a Whole Life policy to help in retirement planning may be an option as well.

It is at this juncture, that I would suggest to tap on another form of forced savings - topping up into your CPF Special Account. This is because it earns a close to risk free 4% returns with the benefits of a one-time tax deductions. However, there is a cap to how much you can top up into your CPF-SA.

Related Link:

Monday, 21 August 2017

Spend Less on Bubble Tea if you want to be rich and healthier

Most people would have heard about the money hack on cutting back on Starbuck's latte to increase your savings.

Some will have recently heard about Australian's Millionaire Tim Gurner rant on Advocado Toast and how it is making millennials poorer.

Locally too, we have a beverage (food) that is making Singaporeans poorer.

The Bubble Tea

Initially, I wanted to paste a picture of LiHo's or Gong Cha's Bubble Tea; however to avoid potential lawsuit for damaging their business, i guess better not! So down to the facts.

The Bubble Tea is a favorite Singaporean beverage and costs about $3- $3.50 per cup, especially among the younger generations. If an individual decides to reduce the occasions he drink on a weekly basis say from 5 times to only once. The annual savings will be: $3X 52X4 = S$624. That translates to about 20% of a young office worker's monthly take home pay.

And that's not all !

The Potential Health Downside to drinking too much Sugar Drinks (e.g. Bubble Tea)

Initially, I wanted to paste a picture of PM Lee's National Rally and the 'war on diabetes"; however to avoid any potential flaming by netizens of political affiliations etc, i guess better not! So down to the facts.

Recently, PM Lee delivered a somber fact that diabetes is becoming increasingly prevalent among Singaporeans. Let's face it, getting diabetes drains you financially because you will have to pay for the medical treatments, consultations etc. 

And general knowledge tells you one of the main reasons why you get diabetes is because you have consumed too much sugar in your lifestyle. That's where the nasty bubble tea fits in - it has many cubes of sugar (even if we order at 50% sugar).

Hence while cutting down on drinking bubble tea provides you the instant savings of $624 annually, it also reduces your risk to diabetes, preventing from having to bear the financial strains of incurring medical expenses for diabetes.


To summarize and to build on and quite fellow blogger, Kyith's words: Diabetes can be traced to as a function of affluence and if you look at the insatiability of Singaporeans to go for gong cha, koi, llao llao. The hunger for such snacks borders on addiction and is becoming a problem.

Cutting down on such sugary treats will not only reduce our risk of health problems in the future. It will also save us money in the present. No doubt we Singaporeans are becoming more affluent; however our hunt for food filled with sophisticated and deep flavors should not come at too high a price, damaging our health and financial freedom goals. 

Sunday, 20 August 2017

A review of Starhub's Dividend Sustainability

From my previous post on Starhub on Feb 2016, I asked about the sustainability of the company's 20 cents dividend policy on a cash flow basis. You can read the previous article here. 

Since then Starhub has reduced its dividend policy to 16 cents annually. This means Starhub has to generate $277 Mil of cash to deliver its 16 cents dividends.

What has happened?

Since then, Starhub has experienced 2 events. 

Firstly, the issuance of a s$200 mil perpetual securities with a 3.95% yield. In my opinion, the proceeds from this perpetual securities is likely to be used for to repay Starhub's maturing debts such as its Sept 2022 bonds. Hence, it is likely this perpetual securities is used as an instrument to roll over Starhub's debts to a longer duration. 

Secondly, Starhub has experienced a deterioration in its business environment and erosion of its moat. In its recent Q2 results, Starhub experienced a net profit drop of 20%. Its pay TV and mobile segments saw a fall in revenue and user subscription. Fortunately, Starhub's cash generation ability did not deteriorate by 20% in tandem. From the results, Starhub's operating cash flow before working capital changes for the first half of the year was s$339 million; and if we are to extrapolate it on an annual basis, the company is generating about s$678 million per year. 

Starhub's cash flow Statement as of Q2FY2017

Are the New Dividends Sustainable?

So to recap, Starhub now needs a free cash flow of s$277 mil to support its dividends. With an extrapolated cash flow generation ability of s$678 mil, we will have to deduct the following few cash outflow items first:

i) Maintenance Capex - s$300 mil (based on past annual reports)
ii) Income Tax of about s$60 mil
iii) Finance Expense of s$30 mil (based on Q2 results)
iv) Annual distribution to perpetual holders of s$7.9 mil

In addition, I have estimated that Starhub will be receiving about s$10 million in government grants. This is about a 66% fall from previous FY but a rather fair estimate as seen in its cash flow statements

Starhub Q2 cash flow Statement (Financing Activities)
This leaves Starhub with s$290 million to distribute as dividend or about 95% of its estimated cash flow generation ability or nearly 100% (if we exclude government grants)

To conclude, it seems Starhub has just about sufficient cash flow to support its current dividends. However, with such a huge amount of debt in its balance sheet and the increasing competition experienced in the mobile segment, it may be prudent for Starhub's management to re look at its dividend policy. Perhaps one good way is to announce that the company will distribute 90% of its free cash flow instead of guiding for a fixed amount of dividends it will give on a yearly basis.