Sunday, 19 March 2017

Lesson from Ezra Bankruptcy: Asset "Rich", Cash Flow Poor

By now, some of you would have read Ezra's filing for bankruptcy protection in the United States. Previously a billion dollar company, Ezra's fall from grace was due to the fall in oil prices. Nevertheless here are a few things we can learn from it.

1) Cash/Cashflow is key

One reason for Ezra''s decision to file for bankruptcy was due to its inability to pay creditors. The reason was simple - Ezra's assets was neither generating sufficient cash flow to meet its daily expenses nor did it have enough cash reserves. If one were to examine Era's balance sheet over the years; despite a growing asset base, Ezra's assets were generating paltry cash flow.

In the personal finance sphere, it highlights to us the importance of our assets (income from work or property rental income) to generate the necessary cash to service our cash expenses. This is because regardless of your asset's worth, if your cash expenses exceeds the amount of cash your assets are able to generate; chances are you will run yourself to the ground.

2) Stated Asset Value vs Value of Asset when Force Sold

In Ezra's FY16 balance sheet, Ezra's stated assets were worth US$622 million with a net asset of US$378 million. Logically, all Ezra had to do was sell off some assets on its balance sheet to raise the necessary cash to tide over. However, I have reasoned that this could not be achieved because the true recoverable value of Ezra's assets were perhaps only about 30% of its stated value. This is largely due to the oversupply of offshore oil equipment in Ezra's deep waters industry.

It highlights how in times of distress, the value one's assets is perceived to fetch might not be real. In fact, it reminds how during a financial crisis, property values can be so depressed because no one is interested to buy a home and home owners are desperately trying to sell properties to cover their cash expenses. The valuation as appraised by valuers is one thing, but the true market value of your property is another. This is something we have to take note of in light of Singapore's property market which is oversupplied; What happens if your rental income from property are decreasing. Do you have enough cash generating assets to tide over your cash expenses during these hard times?

Saturday, 25 February 2017

Portfolio Update Feb 16

Since my previous portfolio update, I have made a few more purchases.

The first was the purchase of Broadway Industrial at 0.195. The thesis is pretty simple because I am hoping for a bumper dividend from completion of its "Foam Plastics and Flow Control" Segment. I am hoping its one off high dividend will attract investors attention and push its stock price up. Thta is where I will evaluate my position. 

The Second purchase was World Precision Machinery at 0.22. Its business is in the metal stamping industry and is based in China. It is a subsidiary of Bright World Group, a chinese SOE. What attracted me was the strong constant Free cash flow generated from its operations. At an estimated free cash flow generation of RMB 80 mil annually, the company is being sold at a ratio of 6x P/FCF, to me its rather cheap and i have initiated a position.

To allay the fear of fake cash, the company has been declaring dividends to shareholders annually. 

The last purchase is a familiar name to me- First Ship Lease Trust. It was only purchased last Thursday at a price of 0.133. To me, despite the company's announcement that it will be doing an impairment exercise which resulted in a full year loss; it's strong cash flow generation ability is a draw.

The trust produced about US$70mil cash from operation before working capital changes in the most recent financial year. Moving forward, given the declining tanker rates and that many of the leases of its tankers are up for renewal this year, it will prudent to assume the company is only able to generate about 70% of that (US$42mil). Assume dry docking expenses of US $2mil and interest expense of US$8mil, FSL should be able to generate free cash flow of US$32 mil. This translates to about 1.6x P/FCF.

However the above ratio should not be a key consideration. This is because FSL operates assets which has a limited lifespan. Its ship fleet currently has a weighted average of 10 years. This means probably another 16 more years before they are scrapped.

Unlike Rickemers who is having trouble repaying its debts, FSL cash flow shows it has the ability to repay its entire debt in 5 years. My opinion is that FSL is unlikely to pay dividends for the next 5 years to pay down its loans, after which it is anybody's guess. Hopefully then, its cash flow remains strong and should it decide to pay just half of its free cash flow generated, I will be getting an approximate 30% dividend yield at current price.

Wednesday, 1 February 2017

Owning a Car in Singapore can make sense

Fellow Blogger, Bullythebear, covered an interesting concept he read from 'Tools of Titans" by Timothy Ferris. It talks about weighing the utility of the extra time gained from spending an extra dollar to get it.

This concept reminds me of constant conversations about how a car is a tool of convenience through saving time. So, I will be using a mathematical approach to show when owning a car in Singapore may make sense.

Cost of Owning and Maintaining a car

Firstly, lets find out the approximate expense of owning a car for 10 years. I used the price of a Toyota 1.6L as a gauge. Its current price is about $102,000. Next I estimated a down payment of 50% with the rest being financed by a car loan at 3% interest for a 5 years tenure. I also provided an estimate of the annual road tax, fuel expense and car insurance in the table below. As this is an annual expense which happens every year for the next 10 years, I applied a discount rate of 4% to get the present value (P.V.). Lastly, I estimated receiving a scrap value of $6,000 at the end of the 10 years and discounted it to present vale (P.V.) The below Excel shows the estimated present value of owning and maintaining the car over 10 years. This will be the amount we are spending to gain the extra time.
Figure 1: Finding P.V of annual expenses over 10 years

Figure 2: Total Expense of Car

Utility of Extra Time

Ask anyone on the street how much would they pay for an extra hour and a variety of answers will be obtained. Hence to avoid doing a sample survey, I will base it on "hourly wage" concept by dividing the monthly salary by 168 man hours worked in a single month. Hence, if someone earns $4,200 monthly (excluding Employer CPF Contributions), his perceived utility of earning an extra hour is $25 per hour ($4,200 divided by 168).

Next, I ask how much time is saved by commuting on a car than public transport. From my guess estimate of commuting to the city for work, I realize it is fair to say one saves about 30 minutes on a one way trip; so two ways will be 1 hour saved. And on Saturdays and Sundays, people will definitely use the car for easier commute. So in a year of 365 days, one person will have gained an "extra" 365 hours.  

So in the current year, a person saving 365 hours and basing on a monetary value of $25 per hour, the person gains S$9,125 for the first year. As one will realize, the utility gained is over a 10 year time frame, therefore I will have to calculate the present value of this utility earned over 10 years.

Figure 3: P.V of Utility
Figure 4: Scenario of $8,400 monthly pay


I did some permutations and made two observations.

i) Income Level

If one is earning at least an estimated $50 per hour wage or $8,400 monthly, owning a car in Singapore alone is justified because the utility from the time gained is about the same as your overall expenditure on the car (owning & maintaining), see Figure 4.

ii) Ownership of a car if one is married or with a sibling

Of course, many of us do not earn $50 per hour (including yours truly!) However, if you are married or have a sibling who is working, mathematics will prove that earning $25 per hour justifies the reason to own a car in Singapore.

Figure 5: 2 person at $25 per hour wages


This simple Excel model has informed how the efficiency of the public transport system affects the ownership of a car to a large extent. In fact, with many Singaporean graduates already entering the workforce with an at least $3,000 monthly paycheck; it is likely a married couple's combined income level would have exceeded the $8,400 threshold having worked for a while- a tad worrying.  

From this angle, it seems our transport and urban planners will have to accomplish much to reduce the travelling time by either increasing the connectivity of the public transport system or decentralizing commercial spaces. 

The diabolical alternative is to reduce the wages of the people; to make them feel time is not that valuable 😈

Sunday, 22 January 2017

How to be a millionaire through Stock Investing in 2017

Dear Readers & Fellow Bloggers,

I am neither hallucinating nor suffering from permanent brain damage as I write this post. I have stumbled across a company on the SGX where you can indeed earn a million ( if you believe the management & auditors). Introducing China Sports International

About China Sports International

A China Company which sells Sports & Apparel products in China under the brand name "Yeli". The company's current market capitalization on the SGX is s$9.228 million. Its current auditor is RT LLP.

How To Make a Million

Before you guys get too excited , lets analyse its latest Balance Sheet:

China Sport's Balance Sheet as of 3QFY16

If you notice the company has RMB 133 mil cash & equivalent and a total liabilities of only RMB 66 Million. 

The Plan

Step 1: Go to any (dumb) bank, tell them you wish to takeover China Sports International and need a s$12 million loan to launch the takeover. Take the money and announce the s$12 million takeover (at a 30% premium).

Step 2; Takeover the company and use its cash to pay off all the liabilities; you will be left with cash of  RMB 67.41 Million (approx s$13.9 million). 

Step 3: Repay your s$12 million loan and you will  be left with s$1.9 million cash; what's more you get a  factory in China and an inventory loads of "Yeli" Shoes and Apparel.

Be a Millionaire!

Let me reiterate my disclaimer that I accept no liability whatsoever for any loss or damage of any kind arising out from the use of any or part of this post.

If you are gungho/naive to adjudge the numbers reported by the management as true, this is truly your chance to become a millionaire in 2017.

Sunday, 15 January 2017

Portfolio Update and New update of Ellipsiz

Since the last update of my portfolio, I have made a few more purchases: 23,000 shares of silverlake shares at the price range of 52-52.5 cents and 10,000 shares of ARA at s$1.685.

The rationale for ARA is straightforward. The company is undergoing a takeover offer at 1.78. With the takeover targeting for completion by 1H2017, I am expecting a return of about 5% over the holding period of half a year. The downside is of course the failure of the takeover. However, ARA is a relatively strong company; given that it is dishing out annual divided of 4 cents and is in the business of a portfolio manager, I am inclined to continue holding the stock for its dividend.


I am more interested in my latest addition and that is Ellipsiz. To summarize, the company main's business is the production of probe card for the semiconductor and electronics manufacturing industry and distribution of service solutions for the electronics manufacturing chain.

Good Free Cash flow

This is one of the main thesis for investing into Ellipsiz.

Ellipsiz Operating Cashflow

From its cash flow statement for the past few years, Ellipsiz's has been generating an increasing operating cash flow before WC changes. Given that the semiconductor industry it is serving is still going strong due to the demand of electronic goods, my opinion its current cashflow generation will be constant. 

At current cash flow generation of about 13 mil, then deducting taxes, interest and its maintenance CAPEX of approx 2.7 mil, Ellipsiz free cash flow is about s$8.5 million.

At current share price of 0.375, Ellipsiz market capitalization is s$62.6mil. This means it is selling at a 13.5% FCF yield.

Strong Balance Sheet

At a debt ratio position of 19%, the company is relatively lowly geared. The company too has been paying down its bank borrowings which it had utilized due to the acquisition of a Japanese company in the past. Soon, the company will have negligible borrowings and that is definitely a positive sign.

With the recent disposal of an associate company, Kita, the company is in a net cash position of 78%.

<Vested 20,000 shares at 0.375>

Saturday, 7 January 2017

When Reality does not Meet Expectations

Read a US news article which argued how dining expenses will increase if President Trump's policy were set in place. You can read it here.

What got pique my interest was this particular paragraph:

"A stark example of the need for immigrant labor was apparent in 2011, when the North Carolina Growers Association had 6,500 farm jobs available, all of them in or next to counties with unemployment rates greater than 10 %. Only 268 of the approximately 500,000 unemployed North Carolinians applied for a position. Ninety percent of them were hired, but only 163 showed up to work on the first day, and only seven workers — of the 6,500 required — completed the growing season"

This reminded me of Certis CISCO recruitment failure in Singapore where they were not able to obtain enough locals to fill its manpower vacancies and had to seek foreign manpower to fill this gap. Article can be read here.

What surprised me was that despite offering about $2,575 monthly salary to "O" level graduates after their training period (and a higher starting salary to those who join with a higher educational level), many of the local workforce are still not inclined to join. To get a sense of how much is a $2,575 starting salary; this starting pay is much higher than the average starting pay of any polytechnic graduate in MOE's survey

To add icing to the cake, Singapore's labour situation is not rosy at all - Our economy is experiencing a problem where there are more job seekers than job vacancies. As the situation narrated in the US article, it bears resemblance to what we are experiencing here. 

When Reality does not Meet Expectations

So why does such a disparity exist. Another paragraph from the US article will shed some light:

"Some may argue that these laborer positions could, and should, be filled by American workers. But the reality is that these positions are not considered desirable due to the physical demands and the need to work outside in inclement weather."

So as one may guess, the answer is because those job vacancies do not match what job seekers are expecting; in psychology, we learn that when one's expectations are not met, it leads to a drop in dopamine in the brain, resulting in the feeling of disappointment. Perhaps our local workforce are disappointed with these available jobs and are bidding their time to seek employment.

Singapore is going through an interesting period and therefore I am curious - Given the current scenario where reality is not matching the expectations of the workforce: will businesses here pack up due to the stringent labor compliance cost (eg. local to foreigner ratio/high cost of labor) or will the hunger of the people eventually succumb to the acceptance of jobs below their expectations.

This reminds me of another viewpoint article written by a local journalist. Is the lack of hunger something which will hinder our economy navigating through these tough times?

Monday, 19 December 2016

Portfolio Update: Dec 16

Given the price weakness of my core (only) 2 holdings, I have decided to accumulate Hyflux Preference shares (avg weighted 93.50) and Penguin Holdings (21.1 lots at 0.23 cents). It will be interesting to see how it goes, my thinking or Hyflux is that redemption is likely, while for Penguin, it's P/B ratio is rather low despite negative earnings. This allows a huge margin of error and upside in the event of liquidation.

What I am eyeing

One of my old favorites, Silverlake Axis, has fallen back to levels which I had purchased at in 2015. You can read my old coverage on the company. 

Only one event has changed for SIlverlake post 2015 - 1) Disposal of GlobalTech shares. It is definitely a positive event but to me, I will like to know how much is intended for repayment of Silverlake''s growing debt and the ability of Silverlake to repatriate the money back from China to Malaysia/Singapore due to China's capital controls. 

On a cash flow basis, Silverlake has consistently generated RM 210 mil. Netting off CAPEX of about RM 60 mil, Silverlake produces about RM140 mil. Doing the maths, Silverlake is able to dish out dividednds of 1.8 sg cents per share, barring any deterioration in its business industry.