Monday, 18 January 2021

Divesting ISDN and using the proceeds

 With the run up of ISDN, I have moved it to purchasing stocks in Ho Bee Land and SIIC Environment.

Ho Bee Purchase

The decision to purchase Ho Bee is more of a defensive position as the company has a strong recurring cashflow rental of about $190 million to support its expected annual 10 cents yield. At the price of $2.42, the dividend yield is about 4+% which is decent.

Market analysts are alluding to a possible monetization of REIT by Ho Bee of its Singapore, UK and Australia Office properties. While the unlocking of properties into a REIT will indeed free up a lot of cash, I don't think the upside is a lot. CapitaLand REITs are yielding at 4+% and it is likely Ho Bee, if it lists a REIT, will be pricing it at about 5% yield. This is similar to the current yield of the parent company. Readers will comment on the REIT being able to use leverage to amplify its dividends, but Ho Bee itself is highly geared at a 45% ratio in its current state; hence it has to pass a large amount of its debts to the REIT. This means it is difficult for Ho Bee to use the magic of leverage to juice up its assets value. Hence the upside is limited. 

The upside is Ho Bee becoming a REIT manager.

Assuming a $2.9 billion asset monetization into a REIT, applying a 2% AUM fee as revenue and a potential sale of its Singapore biomedical office property into the REIT in future, we are looking at a REIT manager with decent profits (similar to ARA). Majority of Ho Bee's commercial assets are in Singapore (e.g. Metropolis which forms $2 billion out of $2.9 billion of its significant real estate). In a property craze country like Singapore where the government has done little to curb the property appreciation, the effects of a downwards valuation risk to Ho Bee's assets is minimal. Hence Ho Bee will act as a defensive part of my portfolio earning a 4% yield, while one can wait for the unlocking of value in its Singapore properties. 

SIIC Environment Purchase

Bought this company shares because it offers 5+% as yield. While it is highly geared, it is a utility company in waste water treatment and power generation; companies in this industry such as Sembcorp Industries are highly geared. On the contrary, SIIC is less leveraged than SCI and is offering a higher dividend yield. 

On a apple to apple comparison, SIIC environment offers better value than Sembcorp Industries.

Saturday, 9 January 2021

First REIT- How much is it worth Post rights and Post Covid

First REIT is restructuring and the management has been proactively persuading shareholders to accept the restructuring. First REIT has consolidated all the important information in this PowerPoint proposal which I will be relying on.

Post Renewal of Master Lease and Rights

The Reit has proposed for a rights exercise at $0.20 per share. In addition, the new master lease has the following terms (page 7 of the slides):


What stands out is how the new terms for rental is an "either/or" option for its base and variable rent; unlike the previous arrangement which was an addition of the two. Furthermore, the base rent has been drastically reduced and my sensing is that the 8.0% of preceding financial year revenue is the higher of the two.

The new terms will take effect in FY 21 if it is voted through. This means the lessee will be basing its payout to First REIT on FY 20's performance, which is when COVID happened! This means unitholders are going to suffer a drastic drop of revenue/ distribution.

How bad is it?

First REIT manager did an excellent presentation in which they showed many of the good stuff upfront but placed all the bad stuff in the annexes (at the tail end of the slides where less people read). The new arrangements is detrimental to current unitholders as seen in the below slides. Below is the effects for unitholders if First REIT were to transit to the new lease arrangement:

FY19

1HFY20 (During COVID and placed as an Annex)

Annualizing 1HFY20 results, it means First REIT's revenue will be $52.2 million against FY19's revenue of $115.3 million. This is a 54% drop. DPU has fallen to only 0.55 cents for the first six months. 

How much is First REIT worth now?

Based on FY20 results, the expected DPU for unitholders post rights and new lease arrangement is about 1.1 cents. Moving to FY21 and FY22, I think unitholders can expect only about 1+ cents of annual dividends as Indonesia has been slow in improving its COVID situation.

First REIT too has shown if it was during FY19 (when times were good), one can expect DPU of approximately 2.6 cents. However, it is unlikely the business environment in Indonesia will improve so quickly to 2019's level.

Based on the bad reputation Lippo companies have achieved during this crisis, I will expect an 8-10% yield for the risk of investing with them. If one is pessimistic enough, they can assume a 1.1 cents annual DPU for a few years with an incremental growth in DPU while expecting a 10% yield on First REIT, this will mean the shares is worth about 12-15 cents at present. Assuming (a) Lippo pays First REIT the base rental (as the higher of the two), (b) the rupiah depreciates against SGD 2% annually and (c) investors expect an 8% yield, one can expect First REIT's fair value to be in the region of 17 cents.

Wednesday, 16 December 2020

UOB KayHian Calculation Mistakes may be an Investment Opportunity into Sembcorp Marine

In March 2020, I had covered Sembcorp Marine (SMM) and lamented that given the poor O&M Industry outlook, it is likely interested bidders will pay for the company at 0.7 times its book value.

UOB KayHian (UOBKH) has recently released its brokerage valuation of SMM; valuing the company to be worth at 0.7 times its net tangible value at its brokerage estimated 17.8 cents per share and issued a sell call. This is one of the probable contributing factor to SMM share price fall over the past 2 days.

I do agree with the analyst in his projection of how much losses SMM will be incurring through to FY22. However, I realize the analyst had made mistakes in his calculation and has opened a possible investment opportunity.

UOB KayHian's Calculation Mistakes

In the analyst report, SMM's estimated 2021 tangible book value is at 17.8 cents after factoring in a loss per share of 2.1 cents and 1.1 cents in each of the FY leading to it. Back of the envelope calculation means UOBKH has calculated the current tangible book value to be 21 cents per share. This is factually wrong based on SMM's published results.

In SMM's investor relation and annual report for end FY2019, they have published its net tangible asset per share to be 92.1 cents per share (see screenshot above). This is before the dilutive issuance of 5 rights for every 1 shares at 20 cents. After netting the effect of the rights dilution, the net tangible asset value of SMM share does not tally to UOB KH's report. The actual post dilution NTA is 31.95 cents per share. This is repeated in page 13 of the circular sent to shareholders in July 2020.


The True Calculated Net Tangible Asset Value

Hence factoring UOBKH's forecasted losses of 2.1 cents and 1.1 cents per share and the actual NTA; in FY21F, SMM's estimated net tangible asset value is 28.75 cents per share. 

Applying a 0.7 times book value factor, SMM is valued at 20.1 cents per share.

In summary, UOBKH has greatly miscalculated SMM's estimated NTA by at least 10 cents. The analyst had calculated it to be at 17.8 cents when it should be 28.75 cents.

This signals a potential investment opportunity (upside of 35%) from the current sold down price if the 20 cents target based on UOBKH's forecast and parameters are met.

I have invested a bit into the shares today upon realizing the calculation mistake by UOBKH.

<Vested in SMM shares>
 

Sunday, 20 September 2020

New Purchase: ISDN Holdings

 Came across a company that was highlighted by "Squirrel" in valuebuddies. Pretty decent company which has reorganized itself to a profitable entity. As most of the thoughts below are his and i do find them valid. I will be summarizing the value proposition of ISDN. Here is the link to his full excerpt on valubuddies.

Improving Profit Margins

ISDN's major business segment is a solution provider (think consultants) in the Industrial Automation control industry. The company has seen its profit margins in the business improving, demonstrating its efficiency in executing contracts. In addition, the segment revenue has been growing in its main country of business of China. ISDN provides its services to a myriad of customers including the Chinese GLC tech companies. With the recent push by China to being self sufficient in chip technologies etc and US sanctions, this will mean the creation of automation lines of production in China. 

Improving profit margins and increasing revenue bodes well for ISDN

JV for Disinfectant Business

ISDN have made announcement that it is the supplier of disinfectant for one of our public transport company. With the fear of COVID and increasing need to sanitize everything, ISDN JVs is positioned to earn more revenue and profits in the disinfectant business in Singapore.

Hence it is my new purchase

To me, the points above are valid and proven by facts/global events. Hence I have initiated a position.

If the company can continue its path of growing its business and remain efficient in executing contracts, at 39 cents, it will be a single digit PE stock which makes it undervalued when compared against industry comparable. 

Thursday, 17 September 2020

Increasing my Stake in China Everbright Water

Increased my stake in China Everbright Water (CEW)

The decision was due to my thinking that low interest rate environment will be here in the long run. Hence a good industry to invest in would be the utilities companies since they employ a large amount of leverage to own tangible cash generating assets.

Closest Comparable

Was thinking between Sembcorp Industries and China Everbright who are the remaining 2 large utilities companies on SGX. Below were my comparison:

Debt Ratio: Post demerger, Sembcorp Debt ratio stands at 66%, while CEW was at 61%.

Dividend Yields: Sembcorp was paying around  5 cents per share, while CEW was paying 1.3 cents per share. At current share prices, SCI was yielding 3.7%, while CEW was 5.7%.

Payout ratio was about the same after stripping out Sembcorp Marine losses. What this meant was that CEW was a better yielding stock at the same payout ratio. Book value wise CEW was trading at a steeper discount (but i dont really analyse on PB ratios anymore as asset values can be easily written down)

Cashflow yield: SCI cash flow generation ability was much better than CEW based on its cash flow projection. However, it is worth noting that CEW is in the BOT water business and is at a growing stage. As a result, cashflow generation is still weak. SCI on the other hand is in the mature stage and has completed power plants.

CEW Industry and Potential Growth

Industry wise, while SCI is diversified across power, water and waste management. CEW is a pure water play (the only one in Singapore). This makes it slightly difficult to compare but SCI was the closest apple to compare it against. In addition, CEW is in an expansion stage and is doing water treatment in China. This is a growing market as China needs a higher clean water treatment capacity to meet up with the growing urbanization of its population. This bodes well for CEW's future growth and revenue increase through water tariffs.

Final thoughts: Given the strong yield CEW has, I had bought more to make it one of my core positions.

Wednesday, 9 September 2020

Why Borrowing at Current Low Interest Rate Works (just be Smart)

 Recently, Singapore's favorite oppa, Jamus Lim, has been receiving flaks for his suggestion of the government employing leverage during this recession time. While it may be true, it is not ideal for government; for us ordinary people, in the realm of personal finance it makes sense.

Its just that we have to be wise about it.

Low Interest Rates and Strong Dividends 

Many Singaporeans have been using the low interest rate environment to make their bucket of gold in Singapore's property market. Borrowing at 2.0% interest and below, they have purchased apartments and rented them out to foreigners, expats and even to our own countryman at rental yields of 2-3% on the condo price.

They have earned the differential between rental yields and interest yields as well as having earned their pot of gold from the appreciation of Singapore property prices through the decade.

In my view, it is definitely wise and even prudent to borrow at low interest rates works.... BUT only borrow a small amount. This is because of the loan-to-value ratio.

Leveraging on Stocks (aka Borrowing)

Right now, in the stock market, margin rates are going at low interest rate of 3-4%. On the contrary, many stocks are providing 3-5% dividends yields despite having reducing their dividends. So perhaps when the good times returns, they can be 6-8% dividend yielders. Borrowing at 3% interest helps a lot. 

The reduced dividends now will cover partially some, if not all your interest expense for leveraging; and when the good times return, you will earn from the differential of increased dividends or be able to keep up with the increase in margin rates. 

The best part is that during such a good economic period, stock prices tend to rise because it is not dependent on factors such as having more foreigners to maintain the property demand.

Do it Safely

But we need to focus on the margin (leverage) level you take. In my opinion, leveraging on blue chips at a 10% leverage ratio (10% debt, 90% cash) works. This is because you will only get margin called if your stock portfolio falls by 85% (in today's context, this means DBS stock has to fall to below $4).

Secondly, do note, I mentioned the words "leveraging on blue chips". These are stocks who have been stood the test of many crisis or are the "Temasek stalwarts" that Temasek owns substantially (heck even Temasek is leveraged at about 20% ratio based on its financial filings).

So yes, I do feel borrowing on our low interest rate environment now is good- but do it in small amounts (10% borrowing, 90% cash), invest in blue chips and diversify across them. It might be wise to employ a little leverage now during this Covid times.


Sunday, 9 August 2020

How I am Positioning Myself for a Reopen of Singapore's Borders

While Covid still rages on, the economic ramifications due to loss of tourism demand is visibly painful to Singapore. Hotels, restaurants and the transportation industries are suffering from a loss in revenue,. Hence in my view, the opening of Singapore borders for the recreational tourist will be in the very near future (by early 2021). This is due to the small and undeveloped domestic tourist segment our country has.

So how am I positioning myself? Below are two investing themes I have:

1.    Air Travel for tourism will resume soon

Yes, this will definitely happen. It is only a matter of when. For this, I think it will be soon (likely 1Q2021). The main beneficiaries are airline stocks and its ancillary services. For me, I am evaluating companies with a low leveraged balance sheet. This is because while air travel will resume, it is unlikely we will see business as usual, but "business is 3/4 as usual". 

I am not thinking of hotels for now because Singapore's hotel business is fragmented with multiple listed companies (Far East, Hong Fok, Hiap Hoe, CDL, Fraser); while the airline component has only a few dominant companies with little competitors (SATS, SIA Engineering, CAO)

2.    GLCs will give dividends at a higher payout ratio

Due to Covid, governments across the world have brought out budget stimulus and run big budget deficits. With the need to refill their coffers, I expect governments to send hints to its GLCs to give more dividends so that it flows into the state's budget revenue. Hence starting from 2022, I expect dividends will resume at "business as usual" rates for GLCs when business has not reached usual levels. While businesses volume will not pick up and hence EPS are lower than pre Covid levels, GLCs will be increasing their payout ratio to help their parent state.

Building on these 2 points, I have started scouting on the SGX for companies that fit the two ideas. I have divested Silverlake Axis as the price has run up to 33 cents. I plan to use the proceeds for deployment into counters which fit the 2 ideas.

<Invested in CAO>