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 12.5 cents (0.7 times its net tangible value at its brokerage estimated end FY21 NTA of 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 of SMM; 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>

 

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)

What I'm doing now that the STI has fallen to lows of 2,500

The Singapore stock market went below 2,500 - the second time it has hit such lows in a month. During this recession, the lowest the STI has went is 2,200 and we have not experienced the upward rally of the STI that was of the same magnitude as the S&P and Nasdaq (a 30% rally).

On Friday, the Singapore market lows was due to Hong Kong's protest against the Chinese government proposed new security laws. Given the STI lows, I have started to monitor some stocks.

SATS

When air travel resumes, SATS should recover because its business is mainly in the management of airport terminals and flight catering. The company has huge cash pile given that it did two rounds of bonds raising recently. This should ensure the survival of SATS in this crisis.

SATS has demonstrated that it is capable of generating about 15 cents per share of free cash annually. Will be monitoring it as a future holding for when air travel resumes.

China Everbright Water

A Chinese water company. It has a large water treatment capacity in China and is still actively constructing water plants. This is why it is still cash flow negative. Should the water plants start construction, there is a possibility of  positive cash flow. While I have some holdings, I am interested to add more.

As of now, I am monitoring and just waiting to add more to my stock holdings as the pandemic unfolds. Its the simple saying of "staying calm".

Portfoilo Update: Addition of more Companies

Given the recent market weakness, I have added three new companies company to my stocks with the proceeds of FSL Divestment

I have added KSH Holdings, China Everbright and Suntec Reit.

The addition of KSH was due to my viewpoint that as part of the government strategy to prime pump the economy, the public sector would add construction infrastructural projects to offset the downturn. KSH is a A1 graded contractor which allows it to undertake any public project of any value. The company also has an A2 civil engineering grading which allows it to bid for civil engineer projects for up to $85million. Construction forms a major revenue component for KSH and even among its projects, most of it belongs to the Public Sector.

In addition, KSH has a property development arm which has a few projects that are pre sold. For example, its Riverfront Residence project is 80% sold. However due to accounting standards, KSH is not able to pre book the revenue/profits and will recognise such revenue/profits in the next few years.

China Everbright was purchased at 0.205 because of the resiliency of its water projects across China. However, I did not add as aggressively as KSH due to my worries of its negative cashflow business.

Suntec REIT was a purchase as I feel the dividends is worth at  current low price of 1.30ish  I forsee further dividend cuts until the REIT yields about 5-6 cents annual dividends. However, in 1-2 years time, should the Covid situation improve, we should see a return to profitability for its exhibition hall segment and a return of 9-10 cents dividends.

As of now, my portfolio looks a bit more diversified across various industries. It is unlikely I will add more stocks for now. This is to ensure a sufficient war chest should another downturn persist.

Asian Pay Television Trust

Recently Asian Pay Television Trust (APTT) announced an issue to raise cash at a ratio of 1 new share for every 4 shares owned.

The aim is to pay off an offshore debts which is charging at a high interest rate.

Dividend Cut

In addition, APTT announced its quarterly dividends will be cut from 0.3 cents to 0.25 cents. In my view this is because APTT wishes to maintain the amount it is distributing as cash for dividends. Hence increasing the share base by 25% and reducing dividends by 17% will maintain the current annual cash outflow.

This brings to the next question. Is the current outflow of cash as dividends sustainable?

Sustainable Cashflow?

Based on APTT 2019's financial cashflow, APTT's dividend of 0.3 cents is indeed sustainable. However, there was little cash remining(nett of income tax and dividends)for APTT to repay debts. That to me signals APTT might have trouble reducing its debts. As of now, APTT debts stands at s$ 1.6 billion.

There is an announcement made that APTT is reducing its capex cash outlay over the next few years. Given that APTT's cash outflow in CAPEX was only s$91 million in 2019, even if there is a reduction of 50% in capex, translating to APTT having excess cash of s$45 million to repay debts annually. It will take 35 years to repay its debts.

Hence I believe it is unlikely APTT will repay all debts but instead roll over some.

Leverage Ratio of APTT

The current gearing of APTT is about 53.1%. It is way higher than a lot of REITs which keep to a 40% leverage ratio. 

Taking a simplistic approach of pro rating dividend yield to leverage ratio, the current yield of APTT is 7.8%. Assuming the trust is to function at 40% leverage ratio, we can guess that APTT is similar to a REIT yielding 5.85%. While other smaller REITs are now yielding between 6.5-8.0% based on last year's dividends, it is highly likely their this year distribution will be reduced by 20-30%; pro rating this, their expected dividend yield is 5 to 5.6%. 

This means APTT might have some upside but just slightly more only.

At a leverage ratio of 53% and dividend yield of 7.8%, there might be a slight upside of APTT as compared to its current price of 12.7 cents. Hopefully the trust can continue working towards reducing its debts further. Personally, I might take interest in APTT if it is successful in reducing its debts further to 45%. This means needing to clear about s$300 million more in debts.

Jardine Cycle & Carriage - An Indonesian Conglomerate (well mainly)

Mention Jardine Cycle & Carriage (Jardine C&C) and the first thing that probably comes to mind is the Mercedes Car it distributes in Singapore. Well, one is indeed right, Jardine C&C is an automobile distributor for Mercedes; however, it does more than that - it distributes other brands such as Kia, Mitsubishi and etc. 

On top of it, it is a distributor for cars in Malaysia and Myanmar. It owns distributorship stakes in Indonesia and Vietnam

A Conglomerate in Indonesia

Besides car distribution, Jardine C&C is big and diverse in Indonesia. It owns a majority stake in Astra International which does financial service, mining, agriculture etc in Indonesia.

The market capitalisation of Astra is currently SGD$14.7 billion. And Jardine C&C 50.1% of stake is valued at $7.35 billion. Astra is trading at only 7.31 times P/E and a dividend yield of 5%; its quite cheap at the moment and I believe if Indonesia recovers from its Covid Lockdown, Astra will recover. 

The current market cap of Jardine C&C is $7.95 billion, this leaves $0.6 billion of Jardine uncounted for. So what other businesses do Jardine C&C have?

Exposure in Vietnam, Thailand and Myanmar

Jardine C&C owns stakes in Siam City Cement (25.5%), in Vietnam, it owns Vinamilk (10.6%), Refrigeration Electrical (29.0%) and Thruong Hai Auto (26.6%). 

As it can be seen, Jardine C&C has quite a diversified exposure in Vietnam and considering Vietnam is industrialising, has a growing economy which has dealt with Covid 19 well and reopened, a large domestic market which insulates it from the closure of international borders now. I am quite optimistic that Jardine C&C stake in Vietnam will grow. 

Jardine C&C stake on Vinamilk alone is $1 billion. So for us shareholders, we are essentially getting the rest of Jardine C&C Vietnam and Thailand Business for free ( as well as their Singapore and Malaysia Mercedes Benz Distributor rights)

Valuation of Jardine C&C

Using the sum of parts method at the Jardine's current share price, investors are only paying for Jardine's stake in Astra and Vinamilk. The rest of Jardine's business is free; as reflected in the market price on the various stock exchanges. * Jardine's stake in Siam City Cement is SGD$4.5 billion and its Refrigeration Electrical stake is $0.16 billion.

To me, this looks like a potential upside of 50% in Jardine's C&C value on the Singapore stock market.

Jardine has a trailing dividend yield of 6.1%, which I think will likely fall. The company declares dividend in accordance with its net profits. For a large conglomerate with exposure to Indonesia and Vietnam, its dividends and market value of its stakes in associate companies is very cheap in my view. 

I am personally optimistic of Jardine's companies and am invested in them. It is important to see how Astra performs financially because that is where Jardine's largest exposure is.

<Vested in Jardine C&C>

Plans for May and Portfoilo Update

Cancellation of My American Express Krisflyer Card

For the mile chasers out there, many of you are aware Grabpay topup is no longer considered for miles accumulation on AMEX Krisflyer Card. Owing to the card's hefty annual fees that are due soon and the lack of efficient mile accumulation, I will be cancelling my card come mid-May. Readers who have signed up for the AMEX krisflyer card in October last year can consider cancelling the card because it is now beyond the 6 months period - it’s always best to cancel the card before annual fee is charged on your credit card, which is about 11 months into your card membership. Terms and Conditons for sign up mile accumulation has also changed since then

Portfolio Updates

Now that the Covid Outbreak has stabilized, I am on the look out companies which has a strong cashflow earning and at low valuation. One company that fits the criteria is Silverlake Axis. This is a company which I have covered in past articles, so there is nothing much I can write about it. My analysis on Silverlake Axis can be found here and here. To me most of silverlake revenue is now on a recurrent basis which means it is stable and not adversely affected by the Covid Issue. I expect Silverlake will be conservative this year and will only be giving out a dividends of 1.2 cents. At 5% dividends and payout ratio of about 60%, the current price of 24 cents seems like a good deal to me.

Besides Silverlake, I have also purchased shares in Jardine Cycle and Carriage. This is due to my thoughts that countries with a large domestic market will be a better investment opportunity. I am expecting a prolonged closure of international borders. Jardine C&C is conglomerate who has stakes in multiple companies in Indonesia (Listed and Unlisted), stake in Vinamilk, Refrigeration Electrical Engineering Corporation & Truong Hai Auto (Vietnam) and Siam Construction (Thailand). Hopefully these countries, especially Indonesia, will rebound. I personally believe these countries with a large domestic market on its own and a growing middle class is good and Jardine C&C is in a position to benefit.

That’s all for now. Given the rising stock market, I doubt I will be adding more exposure.

APAC Realty: Better known as ERA

Say APAC realty and many people will not know what the company does; however if I were to say ERA, then everyone knows it is a property agency company.

To avoid further confusion, APAC realty is in fact ERA realty.

Business Profile of APAC Realty

APAC realty is one of the big 3 property agency in property crazy Singapore; the other being Propnex and OrangeTee. APAC has thelargest network of property agents in Singapore and are planning to expand in Vietnam, Indonesia and Malaysia

How APAC makes money is that it collects the commission for the property transactions, gives a cut to the property agent who did the transaction and uses the rest to finance its cost. Its a straightforward business.

APAC Realty revenue is greatly dependent on how many property transactions its agents make in a year. The more transaction, the greater the profits. And in a property crazy country like Singapore which has a lax immigration policy that encourages property demand and a "Chines culture" where property is a favoured way to store wealth, the property agency business will thrive (this statement may change should the government changes its immigration/housing policy stance).

Why It is Interesting

The industry is not capital intensive because it just needs property agents to do more deals to grow. Furthermore, its property agents are incentivised to do more deals because they themselves earn more commission (and in turn for APAC Realty). This is similar to many sales job like insurance agents, an industry that makes an insane amount of commission from consumers.

Throughout its year of listing, APAC realty has never encountered a year of negative free cash flow. And even during the GFC 2008, the company was profitable. This is because property transactions have to be made. What is more interesting is that despite HDB having their own e service transaction portals, a lot of property owners are still engaging agents to help them transact, instead of doing on their own and saving the 2% commission of their property value (2% of a 1 million property is $20,000 fyi).

All these shows how APAC and to an extent Propnex, another listed property agency company, are cash flow accreditive company. To me, it seems they will make a good dividend machine due to easy to scale up models with minimal CAPEX cash outflow.

Why APAC Realty over Propnex?

To me, its the relative valuation. This is the current valuation of APAC realty and Propnex as of now.

APAC realty P/E: 8.02
Propnex P/E: 8.80

Both are 5% dividend yielders at current prices and are paying well below their free cashflow. However do note their dividends fluctuate according to their market performances. When they make lesser property commissions on that year, APAC Realty reduces its dividends; this is in line with its 50% dividend payout ratio.

That said I am definitely interested in investing in a property agency company. The question is when, given that I am expecting a slowdown in property transactions. I am optimistic that the Singapore property market will improve in the medium term because it has to happen. Singapore's economy is built on the property market and a downturn in property market is a significant credit risk to our economy and thus the government will find ways to avoid it.

Given that APAC realty is still heavily concentrated in Singapore's property market despite its recent expansion, it will be a good proxy to the health of Singapore property market.

Two Companies Doing Share Buybacks During the Covid Crisis

The Covid 19 Crisis has caused valuation of companies to plummet. For companies, it is an opportunity to back their own shares at low valuation to increase shareholders value.

However one downside of a share buyback is that it depletes your cash reserves, cash reserves act as buffer to protect you during a downturn. During this crisis, we have seen airlines and cruise operators suspend buybacks and dividends in order to preserve cash to survive. Many corporations such as HSBC and DBS has not done share buy backs consistently despite the low prices, in order to conserve their cash. 

To me, the fact that these 2 companies have been buying back shares daily shows they have excess cash reserve to protect their operations and at the same time, is using this opportunity to increase shareholder value.

The 2 Companies

Both are listed on the SGX- Silverlake Axis and China Sunsine Chemical

I have covered Silverlake Axis quite extensively, you can find it here. Basically, it is a software company which provides its core banking software to run its operations. As far as I know, it is providing services to OCBC, UOB, Malaysia Banks and some of Thailand Banks. Its competitor is Infosys; DBS is using Infosys's core banking software. Silverlake's Cash flow generation ability is exceptional

The other is China Sunsine who is the largest supplier to rubber tyre makers globally. As far as I can recall, about 50% of tyre makers raw materials come from China Sunsine. Again China Sunsine's Cash flow generation ability is exceptional.

Share Buyback

A picture says a thousand words just look at how frequent their share buybacks are!

     
 Silverlake Axis- Share buyback Since 10 March 2020

     China Sunsine- Share buyback Since 9 March 2020

Currently both companies have dividend yields above 5%. To me, I feel there is a margin of safety in investing in them now

<Author is Invested in Silverlake Axis>

My View On What Causes Market Crashes

Many Stock Market indexes have now rebounded approximately 20% from their lows. Now market spectators are divided- some say this is a technical rebound and the bottom has not arrived; while another group says the Monday close was the bottom and we are out of the woods.

I will weigh in my thoughts on market bottoms, based on what I observed of the GFC 2008-2009

GFC 2008-2009 Bottom - 2 Bankruptcies in 2 Industries

There were two events that triggered US markets to crash each time. I will be basing on the Dow Jones Index Performance as a reference.

The first was the collapse of Lehman in late Sept 2008. This resulted in the Dow crashing from its 11,000 point level. The crash happened for a period of market days and the Dow only stated to range bound when TARP was officially implemented in Oct 2008. The Dow remained at the 7000-8000 levels for the rest of the year after this. However, this did not spell the end of the market crash.

The second event was the collapse of the US automakers where a bailout was announced in Dec 2008 and was finally implemented in March 2008. Again the Dow crashed over a 2 months period and only stopped its decline when the US government officially took control of GM and Chrysler in March 2008. The second event caused the Dow to fall from the 8700 levels to the 6500 mark.

From these 2 events, my view is that it takes the entire implementation of a policy before markets will regain normalcy. And if there is a bankruptcy in another industry, markets will collapse and only stabilise when the subject industry stabilises.

Back to 2020

By now, we know the collapse of airlines have been starved off with countries providing credit lines to their airlines. For our markets to resume normalcy, the proposed legislations have to be implemented. As of now, US has signed its legislation but has not put it into place yet. 

Hence one may expect things to be volatile for the next few months until the official implementation. After that, the next order of thinking is if there are any more industries that are poised for bankruptcy. 

What Low Oil Price Environment Means to Investing?

It has been one week since the Saudi and Russia disagreed in their production cuts. The week long price movement in WTI Crude and Brent gives an indication of where prices will be in the year or so.

To me, it seems WTI will trade in the band of US$30-40, while Brent will trade in the band of US$35-$45. It is at this junction one will wonder how they can position themselves in their oil investments

Four Main Ways to Extract Oil

There are 4 ways to extract way: I) Onshore (land) drilling, ii) Extracting Oil from shallow Water wells (less than 150 metres), iii) Deep water oil wells and iv) Shale Oil.

Each method has their own breakeven cost. Onshore land drilling is the cheapest where the Saudis are extracting oil at a single digit per barrel, the Russians are extracting oil in the USD$10-$20 range. This means at current levels, it is still cashflow positive for many onshore drillers to extract oil. Do note, I am looking at the cost of extracting oil, there are other cost items to look out for such as corporate overheads etc which is why there are news that says "Russia need $40 oil per barrel to break even/balance their budget" etc.

For me I am looking at purely the cost of extracting oil which will affect the immediate businesses supplying to the 4 different oil extraction Segments. Their is another cost analysis people look at which is the total breakeven cost, this affects their decision to intiate a new oil well or otherwise. For shallow water, deep water and shale, such breakeven cost tend to be US$50-US$70 per barrel. This means it is unlikely we will see new oil projects coming in.

How much it cost for Shallow Water Drillers and others?

Moving on, the cost of extracting shallow oil is unknown to many of us; fortunately, there is one listed Shallow Water Oil Producer company here- Krisenergy. Based on their corporate presentations, the cost of extracting oil ("Lifting cost:) in South East Asia shallow waters is US$20-25; it means shallow water oil operations is still cash flow profitable under current circumstances.

Deep Water drilling cost is about US$25-40, while Shale is US$25-60, the US Permian basin has one of the cheapest extraction for shale oil but its the only one, the rest are in the range of US$30-50s.

Seen in this light, at current oil prices, it is definite shale oil is not profitable to extract and companies will not be adding new shale oil wells (Shale oil companies need about US$50-60 to justify drilling new shale wells). My view is that Shale Oil will fail in the next 2 years.

How it Affects SGX Companies

There are only a handful of companies that has exposure to shale such as CSE Global. At current low oil prices, CSE is going to see a fall in revenue especially when the US segment is one of its largest revenue.

The other SGX companies tend to service the shallow oil producers. Examples are Nam Cheong, Penguin Holdings, Marco Polo Marine, MTQ (MTQ services companies across the 4 extraction segments). While shallow water oil producers extract oil at a much lower cost, the lower oil prices will affect their revenue and they will try to ask for lower quotations from the mentioned companies for the services they provide.

Sembcorp Marine and Keppel Corp services the deep water and shallow oil segment where the profitable contracts tend to be deep water oil rigs. It is likely with such low oil prices, Sembcorp Marine and Keppel will see very little new orders. They will have to rely on refurbishing ships to sustain their yard operations.

However as we progress through this oil crisis, it is likely shallow oil producers will emerge from the woods first. This is due to their lower cost base

My rough gauge is that Shallow Oil needs US$50-US$55 per barrel to breakeven from all costs they have.  

How Long will the Oil Price War Continue?

In my opinion, this can go on for a long time. Saudi Arabia and Russia carry very little debts. So if they continue to sell oil at below their budget breakeven, they can resort to taking on more debts at cheap rates. They have to be thankful for the QE by the 3 main reserve banks (US Fed, ECB, Bank of Japan).

Shale oil producers will not last long because they are already in a state where they have taken a lot of debt and are struggling to repay their debts even at these low interest rates. Russia and Saudi Arabia can move to the phase of taking more debts and with their low oil extraction rates, they can easily service the low interest on their newly issued debts.

In 2021 and 2022, we will likely see shale oil being almost wiped out and at that junction, I believe Oil will then move on to $40-50 range. I do not think Oil will go back to above US$70 for a long time because this makes it profitable to drill new shale oil wells. 

FTS International (NYSE; FTSI)- Hydralic Fracking Solution Company with No Turnaround soon

This is my first foray into evaluating a company outside of Singapore. This company was brought to my attention in a forum and because the format it reports its financials are similar to how Singapore companies report here; likely because its institutional shareholders are Singaporean linked companies, I was able to analyse the company easily.

Background of FTS International (FTSI)

FTSI is in the USA Fracking Industry. Its main business is the leasing of fracking units to oil exploration and production companies in the US Shale Oil industry (also known as Fracking). Their model is similar to rig companies who own the rigs and leases these rigs to oil exploration companies who are extracting oil in the sea.

FTSI financials can be found in this link, under "Current report filing" dated 12 Feb 2020. The group has only two full years of financial results because it IPO'd in 2018 to raise funds for its operations.

Will it be Able to Repay its Debts?

As of writing, the company is trading at a range of US$0.40-US$0.50 per share. It made a loss of US$72.6 million or US$0.67 loss per share in 2019. It is now selling at a book value of 1.45 times. Quite an expensive valuation in my view.

What is interesting is its debt profile and cashflow generation ability. FTSI has two tranches of debt:

(A) Term Loan Due in April 2021 of US $90 million
(B) Senior Notes (Bonds) due in May 2022 of $369.9 million

Its cash profile is as follows:

(A) Cash Reserves of US$223 million, of which it needs only about US$100+ million to run its business (a Q&A asked during the presentation of financial results by FTSI management), indicating an excess of US$100million in excess cash.

Weakening Fundamentals of US Shale Oil 

One of the biggest news that happened this week was the disagreement between Saudi Arabia and Russia in maintaining oil prices. This resulted in oil prices falling to the US$30 per barrel range which was last seen in 2015-2016.

For the past 2 years, FTSI had been operating in an oil environment where WTI price was in the US$50-70 range. If one observes the free cash flow generated by FTSI in those 2 years, one can notice a pattern: In 2019 when WTI was at a US$50-60 range, FTSI produced $26 million from the leasing of its fracking units. In 2018, when WTI was in the range of US$60-70, FTSI produced about US$280 million in free cashflow. See Page 6 of the financial report in the Link

If WTI is to stay in its range of US$30+ to US$50 range over the next 2 years, we can perhaps say that FTSI will be producing very little free cash flow for its business. Furthermore, the current low prices means US frackers will definitely reduce their drilling activities in the USA. Furthermore, some fracking oil E&P US companies are poised for bankruptcy under current oil conditions. All these point to a fall in demand for FTSI fracking units.

As mentioned, FTSI is definitely able to repay its 2021 term loan due to its cash pile, however I doubt FTSI will be able to redeem fully its 2022 bonds, especially when capital markets are now less welcoming to the energy sector. In the market, FTSI bonds are currently selling below the 70 cents range which indicates distressed levels.

Furthermore, with US fracking industry poised to decline, there is going to be an oversupply of fracking units in the market.

Expected Value of FTSI

The weakening of US shale raises the question if FTSI will be able to roll over its debts in 2022. Until WTI moves to above US$50, it is prudent to value FTSI at a book value of between 0.25 to 0.50 times its book value, to indicate some form of distress. This points to a US$10-US$20 million market cap or US$0.10-US$0.20 range