Thursday 21 January 2016

Is Keppel Corp worth its current value?

Since from my last post on Keppel, the stock has "gone below $6.", which i mentioned will be worth a re look. While it has breached the $6 mark for a while, I had delayed my coverage because I wanted to view KC's full year results for a better analysis.

What has improved

Over the past 5 months, two significant events have occurred: Accredited investors have "naively" parted cash to buy 1) Keppel 8 year bonds at 3.725%, 2) Keppel REIT perpetuals at 4.75% and 3) Sale of a $160mil property by Keppel REIT. These events have improved Keppel and Keppel REIT's cash flow. It reduces the likelihood of a cash call from Keppel REIT.

What has worsened

The cratering of oil prices to below $30 is a major concern as majority of Keppel's customers are likely to delay their CAPEX plans, ask for a delay in delivery or even declare bankruptcy. This will affect Keppel's order book as evident by the significant decline in order book as of end Dec 15.

On the property front, Keppel's year end shows sales of China residential units are not moving well. Similarly, Keppel REIT is facing the threat of an office oversupply. Coupled with the payment of its new perpetuals, expect less dividends to flow back to the parent, Keppel Corp.


                                                   Net Gearing Ratio

Keppel's Net gearing has risen; so too has it gearing ratio. From its past 2 year's cash flow statement, Keppel's cash has been increasingly locked up in its working capital. This explains why cash is decreasing but borrowings have risen.

Furthermore from a segment analysis, one can see its O&M (a major contributor) is experiencing falling profits. While property profits have risen, it is a one-off event because it was due to Keppel buying over its non-controlling interest of KepLand.

Segment Analysis of Keppel's Profit

From the table, it seems Keppel is now depending on its property segment to sustain its profits.

Outlook in the different segments

Currently we are staring at an oil industry downturn. My view is that oil will stay below $50 for at least 3 more years due to the oversupply. This is because Iran and US are beginning to export their oil from 2016. As oil majors cur their capex, Keppel will not be getting much orders. However, its current order book of $9 Billion should keep its yards busy till 2018, but be prepared for lower profits in the region of s$300-350 Mil.


While one is inclined to point to the fact that Keppel made s$700 mil in its property segment. It is important to note earnings of property coys are lumpy. It is important to differentiate between the recurring revenue (such as REITS fee) and those due to property development.

Keppel Land Profit breakdown (FY14)

In my opinion and from Kep Land's FY14 published results, only a small portion comes from fund management (55.8 mil profit was earned from fund management in FY 14), a significant portion comes from fair value gains of properties and sales of units in China and Singapore. Hence we must analyse the property market of these 2 countries.

Unfortunately, both China and Singapore are now experiencing slow growth and following from Keppel's quarterly financial results power point, sales of China and Singapore residential units have slowed over the year. It is likely moving on, revenue from property trading and investments are likely to fall. I expect only about $500 Mil of net profits coming from KC's property segment.


The investment segment comprises of mainly 3 companies: K1, KrisEnergy and M1. From these listed company results, it can be seen much of the increase in profits can be attributed to K1 ventures, who had recognized huge profits this year due to the selling off of many of its investments. It is especially visible in K1's latest quarterly results where profits jumped from 87.3 mil in latest quarter from 3.02 mil of the same quarter in previous FY. Such profits recognition are one-offs and are not recurring by nature. KC's investment segment may see profits reverting to normal levels from next FY, especially with m1 being unlikely to grow its profits by 20% and Kris Energy being mired in trouble.


All in all, it is likely KC's earnings will fall to s$1 billion next FY. While it is still a respectable figure, it still means a fall in earnings. At a current 9x forward P/E, Keppel is about fairly valued. I may start purchasing Keppel's shares when the price hits about $3.70 or about 7x forward P/E.

Wednesday 20 January 2016

Fear and Worried seeing the STI at 2500+ for the first time?

For investors who have started their journey from 2012, this is probably your first time seeing the STI index and the rest of the market in such a state of red. Now, you are likely to be worried and fretting over your investments. Well I can relate to that fear to yours.

My first experience

It was during the period of July- Oct 2011 that it happened. The European Debt crisis caused almost every market to open in the red each day. Worried and sleepless nights happened and I often refreshed my screen to see the latest numbers on STI and my investments. Concentration in studies was difficult as the stock market rout pre-occupied my mind

To make it worse, I was speculating through CFD in two positions (Noble and SCI); this made the experience all the worse as they were huge losses. 


No doubt there is fear and worry in me due to the current sell off. But I have been acclimatized.So for first timers, it is really natural for you to be worried in this current climate. Markets move in cycles and not a straight line. Try not to think too much on it or bother refreshing that SGX page every 5 minutes. The sell off will still be there!

So how are you feeling in this market rout, feel free to share them in the comments below.

Thursday 7 January 2016

Portfolio Update & Open Challenge to Insurance Companies

Portfolio Update

I have sold one of my main holdings in Fischer Tech at 0.90. It has been a wonderful company which I discovered two years back. While the wonderful management has remained, the outlook of the automotive industry Fischer is so dependent on has not. China automobile inventories are building up and this may lead to lower orders. 

While Fischer is debt free and will survive the downturn, the prospect of declining share price due to declining revenue is why I have opted to cash out.

My DIY Challenge

Readers will be aware of my love for the "buy term invest the rest" concept vis a vis the whole life products offered by insurance companies. Blogged here

To actualize it, I will be starting a hypothetical insurance. It will be a whole life plan where one pays the premiums for 20 years. The sum assured is $100,000 and annual premiums are $2153.60. $153.60 will be for a term coverage of $100,000, while $1000 will be each channeled into the SPDR STI ETF and CPF SA. CPF SA will act as the "bond component". For queries on what happens to money when it enters the CPF SA, please read here. (under "100% of what is saved equally into STI ETF and CPF")

Let's see how I will stand against the titans of the industry over the long run. For those who have just bought whole life policies, feel free to compare your returns against it. It can be found under my "Challenge" Tab. Results will be updated yearly as long as this blog lives.

Monday 4 January 2016

Compounding Your Money (Hopefully an exam question)

Q1 (Basic). Tom (age 30) invests $1 Million into a fund which guarantees an annual return of 7.2% per year. How much will Tom have at age 50 (twenty years from now)?
  1. $2 Million
  2. $4 Million
  3. $6 Million
Answer (2). Using the rule of 72, an investment of 7.2% per year means Tom's money will double every ten years (72/7.2=10 years). Hence Tom's money would have doubled twice over 20 years. 1 x 2 x 2= 4

Q2 (Basic). Tom, now age 50, decides to continue investing his $4 million into the same fund which guarantees an annual return of 7.2% per year. How much will Tom have at age 70 (twenty years later)?
  1. $8 Million
  2. $12 Million
  3. $16 Million
Answer (3). Using the same rule of 72, an investment of 7.2% per year means Tom's fund will double every ten years. Hence 4 x 2 x 2= 16

Q3 (Intermediate). How much more did Tom's money grow between the age of 50 to 70 than when he was between the age of 30 to 50?
  1. $8 Million
  2. $9 Million
  3. $10 Million
Answer (2). Age 30 to 50, Tom's investment grew by $3 Million. At age 50 to 70, Tom's investment grew by $12 Million. Hence $12mil - $3Mil = $9 Mil.

Q4 (Advanced). What did you learn?

Answer: Compounding and Time factor makes hell lots of a difference in wealth accumulation. Start young.

Friday 1 January 2016

The "Onepunch" Financial Training

Image result for one punch man image

For those who have not watched "one-punch man"; Saitama (the main character), is the most powerful hero who blows villains away by his superhuman strength in punching. When being questioned on the origins of his superhuman strength, Saitama replies he of his daily repetitions he does without fail:
Saitama training

  • 100 Push-ups
  • 100 Sit-ups
  • 100 Squat
  • Run 10km 

And no matter how tough the training gets, he never stopped hit not even for a single day. It took him three years to reach that strength and perhaps, the strengthening of his mind. 

Maybe "one-punching" our way to financial freedom could be simple too. Instill financial discipline, sprinkle some repetitions, never give up on the regime and we become "powerpuff hero". 

So without further ado, here's the (possible) secret recipe to financial superpowers.

Save 20% of your monthly bonus 
You would have probably heard this phrase over and over again: "Income - Saving = Expenses". So yes, just save 20% of your take home monthly income (and 100% of your bonus). Always save 20% of your income first before you think of other expenditures. To summarise, save 20% of your take home pay and feel free to indulge with the remaining 80%.

100% employment 
If possible, keep working until you are 55. This is because when during the initial stages of your working life, your invested capital is very small. Any magnitude in gains and losses in your portfolio will not be as great as the amount of savings you add. 

Quoting from the business insider: 

"Buffett made $62.7 billion of his $63.3 billion networth after his 50th birthday. $60 billion — nearly 95% — is from after his 60th birthday."

This shows how the compounding effect on your wealth will only be significantly felt after you have amassed a sufficient amount of capital.

100% on term and medical insurance
Focus your insurance expense/need into buying only term and basic medical insurance (Don't buy any other kind of insurance for now). This insurance expenses should be part of your "80% expenses".

100% of what is saved equally into STI ETF and CPF 
Do it monthly. While people will ask what happens to the money in your CPF, let me share. Firstly, the money you deposit is automatically set aside for your minimum sum. This means when you turn 55, you can't withdraw the money if the rest of your CPF savings don't meet the minimum sum. 

However, if you have been working till 55 and earn about $2,500 per month, it is likely you would have met the CPF basic sum ($80,5000 currently) with ease, especially for Singaporean males. Using a simple illustration: 

CPF savings: $100,000; Contribution into CPF under this plan : $40,000

Assuming you decide to go with the minimum sum of $80,500. The $40,000 you have deposited on your own will be first used for the $80,500. This means the other $40,500 will be taken from your "$100,000 CPF saving", allowing you to opt for a withdrawal of $59,500.

If you are gungho enough and wish to skip the complexities of the CPF system, just channel the entire 20% into the SPDR STI ETF.

Train your mental resilience
Ignore those "trading seminars which promises high profits", keep to the regime. Alternatively, you may be tempted to take a break and indulge or your friends may suan you. But no! Keep to this regime! 

You are already indulging with 80% of your take home pay.

A small Diclaimer

However, I will like to do a disclaimer: " I do not think the STI will do well in the short run, the key is to buy in monthly as over the long run, the SPDR STI ETF has always done well - about 6.6% annual returns since its inception in 2002." Hence, I believe this strategy will outperform the numerous financial plans out there over the long run.

(*The author is merely a "B-ranked hero" who just started out on the hero journey. He is only a financial hero as a hobby, so please don't take him too seriously. Please note the publication of posts is solely for informational purposes and is not to be construed as a solicitation or financial advice)