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. 

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.

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.

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>

Starhub Woes in the Teleco Space

Starhub 1H2020 financial results was another round of disaster.

Year on Year, Starhub's net profits were down 12%. The main contributing factor to its poor results was the declining ARPU in its post paid customer segment (Starhub's largest business contributor) points to a forever declining rate. ARPU in June 2019 was $40, in March 2020, it fell to $34 and now in June 2020, it is at $30.

This has surprised me as I thought Starhub's decline in revenue would have stopped. However, it seems the rot has continued.

Consumer shift to SIM-only plans

Singapore consumers are still shifting en-mass to SIM-only plans because these plans are cheaper than the old bundled plans. In the SIM-only market, posts paid consumers currently pay as low as $10 up to $25 to have high usage monthly data plans. With Starhub's own MVNO, giga, now charging $10 for post paid customers, Starhub's ARPU is likely to fall to the $20 range by end 2020.

Not only does a SIM-only shift adversely affect Starhub's ARPU, it affects Starhub's business segment in selling equipment and handphones. As evident, sales of equipment has fallen 32% in the period because consumers are no longer buying handphones from Starhub stores but instead directly via the mobile phone makers or on the  e-commerce space.

Projection of Cash Flow

Starhub generated $267.7 mil in operating cash flow for 1H2020. This was a decline of 14% from 1H 2019, which stood at $311.9 mil. 

With further declines in ARPU for mobile and pay TV expected, I estimate Starhub's cash flow generation ability to decline another 10% to $240 mil. Extrapolating this to a full year, one can expect the company to have a cash generation ability of $480 million per year

Intrinsic Valuation of Starhub

 

As a business, it is definite Starhub will not distribute the full $480 million as dividends to shareholders, it needs to pay for interest expense ($42mil), CAPEX of 5G and other infra (approx $250mil), perpetual distribution ($8mil).

This leaves Starhub with about $180 million. As Starhub has a highly leveraged balance sheet with borrowings of $1.2billion. I think it is prudent for Starhub to save 50% of the remaining amount to repay its debts. This leaves $90 million for shareholders or about 5.2 cents dividend.

Starhub has recently declared a 2.5 cents dividend for 1H2020, which is just about there

Assuming a 5.2 cents dividend and 5% yield (to be in line with perpetual shareholder yield), Starhub's intrinsic value is about $1.04. 

How a Lack of Domestic Tourism affects Singapore based businesses

Some of us have probably heard of the phrase "Domestic Tourism" in recent months. It refers to citizens being a tourist in their own country for holidaying purpose. Well known examples of domestic tourism are the Japanese visiting Hokkaido during late spring/ Okinawa during the winter months or Koreans visiting Jeju Island. 

In recent times, our government has been trying to boost the local tourism space by having campaigns and encouraging Singaporeans to visit our own attractions and have staycations; but truthfully, it is implausible that I can plan a 3 days itinerary to Jurong to visit attractions.

To me, this is an issue that seems to be under-rated by investors in Singapore now. Tourists are one of the most price insensitive consumers who are willing to spend money to unwind and try new things. For the Americans and Japanese, even if their borders are closed, they still holiday at other states or prefecture. This helps to boost their own economy and minimize the impact of COVID. Singapore on the other hand does not have a domestic tourist market to rely on at all.

The lack of a domestic market (price insensitive tourist) translates to a lower sales receipts. Industries ranging from Malls, hotels to Taxi businesses such as Grab and CDG are hurting a lot. Tourists are less hesitant to hail a cab so that they can get to the high speed rail station or airport with their luggage or eat at a well known restaurant because its probably an annual thing for them.

Building on this trend, until Singapore reopens its borders for international tourism, I am neutral if not bearish on Singapore based businesses such as Hotels and REITs. Expect more price slashing discounts for hotel deals (Hospitality REITS), tourist attractions (Genting Singapore) and restaurant deals (Japan Food, RE&S Holdings).

Its something that we have to accept being a small nation which lacks a domestic (tourist) market. It is going to hurt sales. No doubt the stronger businesses may survive, but I wonder how much cash burn will the smaller companies stomach with no tourist coming in until the end of year.

How to earn a Higher than Bank Interest for Retirement

Many of us know what is CPF because a portion of our pay is always "locked" to it. But in the current low interest environment, did you know the CPF system is probably the best money hack available to grow our wealth for retirement? One way is through the CPF Retirement Top Up Scheme. 

CPF Retirement Sum Topping Up Scheme (RTSU)

CPF RTSU is a scheme which allows us to make voluntary cash contributions into our CPF Special Account (CPF SA). The money goes into your SA which then grows over time.

If you like most Singaporeans have to continuously work to make ends meet, there is an extremely high chance that at age 55 (or later), you will be able to withdraw and enjoy the RTSU top up amount you have put in.

Benefit 1: High and Stable Interest

The CPF Special Account gives you 4% interest and is backed by the Singapore Government. In short, you are buying Singapore government bonds which continuously yields 4% each year that you can withdraw at 55 (or opt to continue holding post-age 55 to enjoy the 4% interest). 

If you do an RTSU top up at age 25, its the same as buying a Singapore bond of 30 years. 

In the current market, private investors have to accept a 1.3% interest yield when investing in a Singapore 30-year bond, however we as CPF Account holders get to enjoy a 4% interest ! CPF has never lowered the SA interest to be lower than 4% since 2000.

Even among banks, there is no bank that is offering such a high interest rate for their personal banking accounts or FDs (in fact many banks are lowering their interest rates for accounts)

Below is a comparison of Singapore Bond Yields vs CPF:

                    ^Data Extracted from MAS website on bond yields.

Benefit 2: Top up early and you will be in a much better position than others

Let's create two hypothetical person in the world: Jack and Daniel. Both earn the same pay and progress the same; the only difference is that Jack puts in $7,000 annually in his RTSU from age 30-39. Here is the low down: 

If both of them decide to work until 65 and only start to withdraw their CPF SA, the difference in their CPF SA balance is going to be huge.

At age 65, Jack has an approximate $220,000 head start over Daniel to enjoy for his retirement. This was due to Jack's decision to set aside $7,000 yearly from age 30-39 to prepare for retirement.

Benefit 3: Tax Savings in the Present 

The first $7,000 you top up each year allows you to enjoy tax savings. This will be automatically filed into your annual income tax assessment.

However not Everyone Qualifies for it

CPF has an annual contribution limit of $37,740. Any money that you top up into CPF and exceeds the contribution limit will be refunded to you and you will not enjoy any of the above benefits. This means only those earning $100,000 and below annually can enjoy this.

In addition, if your CPF SA balance has exceeded the value of the current full retirement sum ($181,000 as of now); you will not be able to do RTSU.

Act on It!

Based on the above information, it is perhaps wise to start RTSU in your 30s to 40s. This is because if you start too early at the early 20s, your money is going to be locked in for a long duration of 30+ years. However if you do it too late at say age 50, there may be a chance that your CPF SA has exceeded the full retirement sum and you will not be able to top up or there is too short a time frame for your money to compound by leveraging on the high interest yield of CPF SA.

So plan your retirement and remember out there, there exists a scheme called the RTSU - available for many ordinary folks like us to act and take advantage of. 

To read up more on this scheme, click on the link here (it leads you to the CPF website)