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.