Tuesday, 29 May 2018

First Ship Lease trust (FSL Trust)

A few major developments has happened on FSL- one of it is the securing of three loans which in my opinion secures the survival of the trust.

Refinancing Concerns- Cleared

Mr. market has been concerned by the syndicated term loan FSL has. Due to the clause in the term loan, all bankers in the loan has to agree to an extension before it can be renewed after Dec 2017. However, FSL hit a road block when not all parties agreed to extending it; as a result the trust is under court protection and this has spooked investors.

As of now, FSL's debt stands at US$110 million. However, recently FSL has secured three loans - totaling US$108 Million. These 3 secured loans are agreed in principle and should FSL and these bankers put pen to the paper, the amount is sufficient to repay the syndicated loan. FSL has current cash reserves of about US $7 million. 

Cash Flow Viability

The next question is how much cash flow will FSL generate as it continues as a going concern. Given the weakening tanker market, FSL has been able to generate US$10 million in cash flow per quarter. Based on an estimated interest rate of 5.5% on its US$108 million loan and 7% interest on its US$7.5 million convertible bonds. It will probably take FSL until 2022 to repay it based on its current cash flow. After which, its cash flow should be available to unit holders as dividends.


In my opinion, it will be based on how the 3 loans are structured.

If these 3 loans are amortized with straight line repayment, unit holders will probably have to wait until 2022 to get some sort of dividends. Tankers have about 20 years of operating lifespan. Based on an assumption that FSL is only about to generate US$7 million per quarter of cash flow (older ships will secure lower charter rates) and scrap value of about nett US$40 mil for scraping of its entire fleet, unit holders can reasonably expect about US$180 million ($240 million) in cash flow from 2022 to 2027. Per unit holder, this means about 37.6 Singapore cents of cash flow available. This is of course based on the assumption that the tanker market does not worsen or improve from its current conditions ("ceteris paribus")

If we are to present value this amount to today's value based on a 8% discount rate, this means the trust is worth about 17.4 Singapore cents now.

Similarly, if the three new secured loans are packaged similar to the current syndicated loan structure where small quarterly pay downs are made with a large sum to be repaid at the end of the tenure, unit holders may enjoy dividends from the trust as soon as 2019; however, this might affect the ability of FSL to repay all its debts before 2022.

<Author is vested in FSL Trust>

Monday, 21 May 2018

What Twice taught me about Share Prices

This was a post I had pondered about writing since Dec 2017, but stopped short due to the fear of ridicule from the Investing community; but since Twice's popularity has grown ever stronger. I shall take the plunge. So hope you all will "Likey" this post.

For K-pop fans especially boys, no introductions is needed. For those not into K-pop, avid readers of investing, Twice is probably definitely the hottest (and loved by a certain gender) Korean girl group. Debuting in 2015, the group gained popularity in 2016 with their Single "TT". In Oct 2017, they released "Twicetagram" and since then their popularity has grown strength to strength and probably still growing after their latest single "What is Love" in April 2018 with teasers in March 2018. They are managed by JYP entertainment

Their legions of die hard boy fans at events are definitely more vocal than our ardent PAP supporters and probably numbers greater than 70% of our voting population (Gee I wonder how I managed to be so sarcastic).

So let's break it down into a timeline:

i) Debut in 2015 and gain immense popularity near end 2016
ii) Released Twicetagram to much fanfare (Oct-Nov 2017)- Popularity gaining
iii) "Won many boy's heart" with "Heart-shaker" and "What is Love"(Jan 18 - Present)

Let's compare it to JYP's share price. If one notices the movement of JYP's entertainment share price follows the success of Twice in close resemblance (4,000 KRW in at start of 2016, 4,800 KRW in 2017, 15,000 KRW in 2018). 

In fact, prior to that, JYP did not have any breakout artiste group in their stable. With all these hype, JYP's entertainment P/E is now at 44 P/E based on last trading price of 22,100 KRW.  JYP's profits has grown 200% from FY16 and an amazing 500% from FY15.

Let's compare in a Price Earning chart:

Based on fundamentals, many of us would have said at start of 2016: Buying JYP would be crazy at a price of 4,500 KRW (P/E 44) and buying JYP at 10,000 KRW in Nov 2017 at P/E of 38 (based on EPS of 266.2) would be tremendously insane. But then investors would have reaped a 100% gain holding the stock for only 6 months and seen an earning results which has doubled. In fact, if you do a case study of another popular girl band (Girls' Generation and their listed agency, SM Entertainment), you will notice the share price of SM Entertainment follows the rise and fall of Girls' Generation.

Looking back, if we had bought JYP then at 44 P/E at 4,500 KRW, we will eb holding a stock yielding 9 times P/E based on our cost price. Currently, the share prices are again trading at close to 44 P/E (current share price is 22,000 KRW). I believe the market is pricing for JYP's profit to probably double into the future given Twice's popularity. Not an indication to buy/sell please*.

Lesson Learnt

The lesson learnt is simple: very often share prices of companies are indicators of what lies ahead and is not based on past release financial data (aka trailing earnings). Hence, when we invest, solely relying on past financial results is not a good indicator/valuation.

To do well in the stock market, it seems our success is linked significantly to our ability to judge the future earnings of a company and reap benefits by investing early. A lot is based in investing on qualitative factors that may or may not happen (aka speculating). The past is only a image in the side mirror, we are more interested as car drivers to know where the road takes us to.