Year End 2018 Portfoilo Update

It has been a while since the last update of my portfolio; since then the market has experienced a turbulent time of decline. Among my portfolio, a stock of mine, First Ship Lease Trust (FSL Trust)has announced a drastic corporate actions. This too has spurred me to react.

Divestment- First Ship Lease Trust

In Nov 2018, FSL announced plans to issue a non renounceable equity raising by issuing new shares at a ratio of 3 new shares for every 2 shares at a price of $0.045. The price of the new shares was at a massive discount to FSL's reported book value of $0.37 as well as the company's fair value of about $0.10 based on the current fleet's value. The issue price is deeply discounted. What is perhaps even more shocking is that is the "non renounceable" nature of this action.

A "non-renounceable" offering means that shareholders are not allowed to sell their rights off on the SGX. Shareholders have to subscribe with their own money or risk getting diluted. This prevents them from not being able to monetise the options should they decide not to subscribe. Seen in this light, my gut feel is that the management felt that it was difficult to raise money from other sources for its fleet renewal and hence, unitholders are forced to subscribe with their money or be heavily diluted.

Fortunately for me, I have started to divest my stake in FSL sometime back in Oct 2018, however I am still holding a significant stake in FSL. The reason for my divestment pre these corporate action is because better companies have pop out and I have re allocated my portfolio. I will be continuing to divest FSL, probably until my stake is in the low number such that I can subscribe to the offering without holding too much FSL shares in the end state. Furthermore the purchase of 2 more tankers will only boost the Assets under management for FSL and increase the management fees the trustee owner will get; I am not sure if purchasing new tankers with an overly dilutive offering will be beneficial to current unitholders.

Addition- Ezion Holdings.

What has been my biggest and highest addition is Ezion Holdings. It is more towards a gamble because I am speculating that liftboat charter rates will improve from its US$29,000 daily rate to that of about US$50,000 daily rate.

Based on a back of the envelope calculations, I foresee that Ezion should be able to charter 12 out of its 14 Liftboat fleet at about US$45,000 daily rate next year. With a cost structure of $46 million per quarter (which includes interest), based on its recent quarterly reports; the company should be able to breakeven in 2019. Current lift boat charterer rates are about US$35,000.

I am basing that eventual state of US$50,000 daily rate will help the company turnaround and this will improve its valuation. However, I too hope that the company will not indulge in too fast an expansion given how debt laden it is now and hopefully it has learn the lessons of the past which brought it to where it is now- too much debts and faced by an industry downcycle.

Addition- Asian Pay TV Trust

I bought this stock after the ex dividend of its recent corporate action. The rationale for the purchase of the company is because of my expectation that the new annual 1.2 cents Dividend is sustainable, as of now.

From its quarterly cash flow, the amount of cash APTT generates after netting off CAPEX and interest expense is approximately 38 million to 40 million annually. This translates to 2.5 cents to 2.75 cents in cashflow generated per share. At a dividend of 1.2 cents, the dividends outflow is only 50% of the current free cash produced. 

The company currently produces about 190 million in operating cashflow. Hence this means that if business is to decline by about 10%. APTT dividends to cash flow ratio will hit 100%. Factoring this into consideration and the apparent fact that APTT's business has deteriorated by about 6% last year; it shows that the current dividend may only be sustainable for approximately 2 years. However, at its current price of 12.5 cents, I feel there is a slight margin of safety at 9.5%. And I do not think the decline in ARPU for APTT will be as drastic as its previous 2 years. Of course should APTT share prices move up to the region of 14 to 15 cents range, I feel APTT will be fully valued at an 8% yield, considering the industry challenges in Taiwan as well as high debt load

So that's all I have to update- a Happy New Year of 2019 to readers!

First Ship Lease Trust (FSL) - Q3 Earnings

FSL has released its Q3 results. All in all, the trust has survived the threats from banks. However from its recent Q3 results, it seems there has been some damage to the company.

Higher Financing Cost

Reading its latest Q3 reports, it seems the new bank loans have a higher margin than the old loans interest of (2.8%+ LIBOR). The new loan arraignments have a weighted average of (4.012% + LIBOR). This means as of now the loan's interest rates are about 6.55%. This is quite high and will definitely affect my previous valuation of FSL.

Coupled with the refinanced 7% convertible loan, it is undeniable financing cost has risen. In my view with the Fed still likely to raise interest, I may have to assume that FSL will have to pay about 7.5-8% for its loan refinancing. After all most of its loans are floating rates.

Also based on its cashflow, it seems FSL is paying down on only the interest as opposed to the previous loan pay down which was amortized.

Cashflow

On the cash flow front, TORM's revenue loss affected as usual. The company is likely to be only able to churn US$37 million in cashflow until 2020. Thereafter, this amount is likely to drop to US $20 million with the loss of the lucrative US$ 20 million evergreen charter.

Valuation

Using a simple cash flow projection, my previous estimate of being able to pay down its loan by 2022 has been pushed back to 2024. This is because of the higher interest cost as well as the fact it has changed from an amortizing loan to that of interest only. This will definitely strain FSL's valuation despite making it easier to run on a cashflow basis.

There may be a chance of dividend resumption though because FSL's cashflow is now on a much better standing.

Based on the cashflow projection, scrap value of US$40 million and 8% discount rate, FSL's fair value is now 10.1 SG cents. There is still an upside from its recent price of 7.3 SG cents

  

Raffles Medical Group

Raffles Medical (SGX:BSL), is perhaps one of the most well known and largest private medical companies in Singapore. Its brand is synonymous with Raffles Hospital situated in Bugis as well as the Raffles Clinics. In the medical line, reputation of the hospital is vital and acts as a natural moat. Raffles Medical has does such by establishing its brand name in the private medical market.

It currently operates its medical business primarily in 2 countries - Singapore and China. As part of its expansion in Singapore, RM recently opened a new center in Holland Village in 2016 and a new wing for specialist center at its Bugis Hospital. It too has business in other SEA countries

Valuation

Based on full year results, Raffles has a reported earnings per share of 4 cents and a dividend of 2.25 cents. From a current price of $1.13 (as of 5 Oct 2018), it points to a 28x PE and a fairly low dividend yield of 2%.

However, it is worth noting Raffles Medical is very very conservative. Its dividends is sustainable with the company capping it at below 75% of its payout ratios, unlike Singapore Telecos who pays higher than 75%.

Figure 1: Raffles Medical Past 5 year results (Source: Annual Report)

From a cash flow analysis, Raffles Medical has always been paying its dividends out of free cash flow generated by its businesses.

Future growth - Singapore

Raffles Medical has completed refurbishing its flagship hospital in Singapore with a specialist center. This will increase the Bugis Hospital capacity. With MOH making it more expensive for foreigners to be referred to public hospitals and given Raffles Hospital Branding, the increase in its hospital capacity should be filled.

Secondly, Raffles Medical too has been granted the license to be an integrated Healthshield provider in Singapore. RM can definitely reap synergy between its insurance business and brick and mortar health business.

Future Growth- China

Raffles Medical has imported its reputable brand name from Singapore to China as well and has been gaining traction. It currently operates various medical centers in China cities. Raffles Medical will have two new Raffles hospitals in 2 Chinese cities in late 2018 and 2019.

All in all, one can reasonably expect Raffles Medical to experience earnings growth from this year until 2020. It seems a decent stock to own that will provide a sustainable dividend under its current management. Personally, I expect its earnings to grow by 20% by 2020 and this may also mean future dividends of 2.75-3 cents per share. And can be sustained perpetually until its reputation is adversely affected

Based on the above growth prospects, I expect an additional 25% growth in earnings in 2020. This probably means RM is priced at 20x its future earnings growth; just about right at current price.

Management

Its reassuring to learn that its Executive Chairman (Dr. Loo Choon Yong) who runs its business is a doctor by training. IWith the key management being professionals in the same field, it is likely to know the running of the ground.

Its management has also been very conservative in building up the business. RM has constantly kept its leverage ratio low, currently at 10%; and pays its dividends in a sustainable manner. I feel this makes the company a good choice as a dividend stock; even better than telecos who are highly leveraged, paying a high payout ratio and beyond their free cash flow.

The only thing dividend investors have to stomach its low dividend yield and conservative management. This comes from the careful and conservative nature of doctors...