Start Saving when we are young

Came across an article today by SGYI and in which a reader has commented the difficulty of getting returns of 12% etc etc.. Guess what, I did write on a similar subject on "the powers of compounding" few months back with realistic settings. 

Here is an excerpt:

"Albert Einstein called compound interest "the eight wonder of the world" and rightfully so. Lets consider an example to illustrate it. Two individuals, Ah Huat and John, enters the workforce at 25. Knowing the importance of saving when young, Ah Huat decides to set aside $7000 yearly from age 25 to 35 and does not save further from age 35 to 60; John on the other hand starts to set aside $7000 yearly from age 35 to 60. Both invests in the same investment which yields a 6% return per year. At the age of 60, Ah Huat has amassed $476,782; while John has $438,940. Hence, despite saving for only 10 years as compared to John (25 years), Ah Huat has saved up a larger amount of money thanks to compounding! From this example, it shows how important it is to start saving when young to enjoy this eighth wonder."

Many people are attracted to the dream of financial security and are looking for a way to it.

Start saving when young 

Pretty simple.Getting 5 to 6% returns out there, IMO, is pretty decent and achievable especially if we are bench marking it to SPDR STI ETF's annual returns of 6.28%. (Do note on the volatility of the ETF though). So start saving from young! Yours truly did exactly did and is benefiting from it. 

Secondly, saving $7,000 annually is easy. For all those new to the workforce, instead of signing up for a $200,000 coverage whole life or savings plan from that "sweet-talking eye candy" in a tight fitting skirt (that last phrase is for guys), why not buy a $200,000 term plan instead. The former will set you back about $3650 per year, while the term will set you back errrmmm, $450?. That's a savings of $3200 of course without the investment component. 

Of course, you will want to invest the remainder of the money right, well you can invest it in the STI ETF or REITS, that where 6% returns is achievable but you must be ready for the volatility. Investmentmoats has a few good articles on REITS and ETF. You can read it here and here.

To summarize:

This is Ah Huat

Ah Huat wants to be financially free.

Ah Huat does not believe in internet get rich schemes and on street investment talks.

Ah Huat does his own research, saves from young, saves well and invests wisely (he reads my blog)

Ah Huat is smart.

Be like Ah Huat.

If you are interested on how to save and invest well, here is the link to my first article. At this juncture, I will highlight that investing is risky and one must have appetite to stomach the volatility (that includes passive investing)

Sources

http://www.diyinsurance.com.sg/portal/products/more-comparison-pdf?insurer=Manulife&prod_name=ManuProtect+Life+(1x+SA)&gender=Male&min_age=25

Local Crowdfunding Expansion and Defaults

March has been an eventful month for the P2P industry with high profile loans being issued. While p2p loans are innovative, there is still one risk that remains - default.

Default

March too has seen a few defaults. One of which has been covered by another blog. The company is a travel agency who has a few p2p loans.

http://letscrowdsmarter.com/another-default-s-travel/

Similarly, Moolahsense too has encountered a default on a bullet term loan by one of its issuers. And yours truly too has a late repayment by one of the companies in my p2p portfoilo. 

What can we do?

The only probable way is to research on the company issuing the loan and diversify your portfoilo to minmise your risk. Letscrowdsmarter has  good write ups on beginners tips for p2p loans which you can read here and here.

Basically, what we individuals have to do is research more on each company we intend to invest in, know the risk and diversify. This will take time like in stock researching

What the industry can do? Trust

The P2P industry here is new locally. And being a new kid in the block, building trust is paramount. Talks with many of my friends, shows not many people are willing to trust such third party sites as wealth building vehicles yet, this is because of the red flags and lack of regulations in these otherwise promising industry. There are few who are only willing to give new comers a chance as the risk borne is high. Hence for such p2p service providers, it is important that they first build up trust among the community that p2p loan is viable, and not a cowboy town despite being in an unregulated industry.

It is indeed nice to read reports of million dollar loan issuance, however if the industry is riddled with defaults and recourse of non payments by issuers, many people will not want to invest due to a lack of trust. Furthermore, P2P loans are not exactly cheap; one has to invest at least a few hundreds or one thousand dollars. Unlike taobao or Qoo10.sg, where you are putting a few dollars at risk, the money quantum in p2p loans are larger. You can laugh off being scammed $3.99 for trying to buy a USB cable online but losing a $1,000 due to default is something you will definitely kpkb and remember for a long time. This demonstrates how and why the public will require a larger degree of trust that these platforms are credible/have done their due diligence before approving these companies.

No doubt, these companies have turned to crowd funding because of the probable fact they are unable to obtain bank loans. But P2P platforms should be aware that as pioneers of this industry; unless they are only planning to be profitable for the next 12 months, rapidly expanding without due consideration to the type of loans issued will result in the erosion of the public's trust in p2p loans.

Trust is important to building the foundations of any business. While it is tempting companies are now knocking on the door for crowd funding loan, compromising on the aspect of service delivery for profits is a recipe for disaster. 

Increasing my P2P portfoilo

This week something historic happened in Singapore's crowdfunding scene -  a company related to an SGX-listed company sought to raise debt via crowdfunding. It was none other but Epicentre- once famous for selling Apple products.

You can read the article here.

Epicentre Crowdfunding

It is quite unprecedented for Epicentre to raise funds this way. Prior to this, the company relied on unsecured bank loans which yielded 3+% - 4+%. However, now it is relying on callable and equal monthly installment loans for working capital and purchase of inventory.

Looking through Epicentre full year and recent 1H results, my guess estimates is that the company is likely to generate 500k annually in operating cash flow before working capital changes. With a balance sheet of current cash (4.5mil), trade receivable (6.5 mil) against trade receivables and debts of about 20 mil, my sensing is that Epicentre is likely to roll over debts (bank or P2P). Fortunately for them, they have now secured a new "revolving credit facility" with Moolahsense. This allows them to tap onto a new platform for capital.

What I have done

After a through analysis, I have decided to put my money into its equal monthly installment debt. No doubt the effective yield is smaller, however there are two advantages.

Firstly, "optimal deployment of cash". As of now, I am holding a high level of cash as I am unable to find bargains in the stock market. Deploying some of these cash in such equal installment monthly bonds, I am able to yield a decent return on my "warchest"; and over time will hopefully have the cash again in my warchest when the stock market tanks. It is worth noting even if the stock market tanks, I will only buy with each level of decrease and hence money parked in these equal monthly bonds can be viewed as my last line of "bullets" (hopefully the war does not happen in 6-8 months time).

Secondly, equal installment bonds are less risky than callable because the company has to make monthly repayments instead of a principal lump sum at end of period. Essentially, capital preservation is one factor.

Local crowdfunding scene

Unfortunately, unlike last year, the crowd funding scene has heated up. As a result, now I do not have the luxury of thoroughly analyzing the companies before investing. Epicentre was the exception as financials of the company was readily available, I had prior knowledge of the company for following them in 2013-2014 and had adequate time due to the size of capital raised.

All being said, it seems there is a pent up demand by retail investors to seek high returns and a lack (but increasing) number of P2P loans. At this juncture, I will like to remind readers it is very important to do due diligence in your P2P investments especially when it is still an unregulated financial landscape. Also, please diversify; while i state my P2P loan as one component, I have lent out to 6 different SMEs.

Short update to hypothetical and Real portfoilo

Quick Summary

In line with my bearish outlook and following from my post, my hypothetical "insurance arm" has decided to sell off all STI ETF holdings at today's price of 2.83. This means netting a sales proceed of s$1003.90, after  "brokerage fee of Stan Chart and clearing fee rates" Coupled with the 4.6 cents dividend received, Total net proceeds is now $1020.20 and will be placed as cash.

A positive 2.02% was achieved. As per my fund restriction, only the STI ETF can be bought and sold. No other equities can be targeted.

The transaction has been reflected on my "challenge" page.

Real portfolio

I have purchased more stake in FSL trust @ 0.138 today. Not to be a broken recorder, just read my previous latest post to see why I am positive on this stock.

I am aware of the concentration risk and will be managing it. Well, payday is coming, so its just using my March pay to add to FSL trust :)

Nothing much has changed

On 4th Jan 2016 (the first trading day of 2016), the SPDR STI ETF was selling at $2.90. Fast forward to today, the STI ETF is $2.84 and has given dividends of 5.1 cents. So overall, little loss has been made despite the tremendous amount of news and market gyrations. 

Nothing has changed since New Year's Day

That's pretty much it, nothing much has changed since the start of the year. The narrative is still the same: Oil price is down, some economies in Asia are slowing as expected and wall street is now expecting a few rate hikes as insisted by Fed Chair, Janet Yellen.

This comes to show how important it is for us as investors to ignore the noise (gyration) of the market and focus on fundamentals and what is happening on ground.

Based on observations, I am not sanguine of our economy especially on the oil & gas and commodities sector. *My viewpoint remains unchanged since Nov 2015. Some observations I have noticed are the slowing sale of property units here (by URA's data), local companies contemplating retrenchment to rightsize and an uptick in employment hire by a particular public service sector due to increasing applications; my opinion is things may be getting worse. 

What I am doing

As well coined by a certain blogger: "Don’t fall into the trap of thinking a downturn affects all companies in the sector the same way"; it is important to sieve through beaten down industries to search for the well managed ones as evident by their history of cash flow generation and balance sheet. This is because the market may have indiscriminately sold down all stocks in a particular sector - even the well managed ones.

As such, I am eyeing a few O&G related counters and have initiated a small stake in Tiong Woon. The company specializes in cranes and have a heavy exposure to O&G customers. However, given that the company is much more conservatively geared as compared to Tat Hong (worth noting has a different customer base) and that its new HQ is now ready, I am giving it a go at 0.22 (albeit 5 lots as that was what Mr. Market was willing to sell me). 

Similarly, I have accumulated FSL trust despite the lower tanker rates vis-a-vis 3 months ago. The company is on the right track in downsizing its debts and is generating strong cash flow. I expect it to generate 70 mil in operating cashflow, which means an estimated free cash flow of 14 mil (current market cap of 93 mil). Of course, I am mindful that its operating cash flow will be dependent on the market conditions of tanker's market rates.

"Shorting" the market

Instead of daring to short the market via CFD, I have decided to hold more cash to reflect my bearishness. In the recent run up, I have decided to divest from Accordia and some stake in Silverlake Axis. From Silverlake's cash flow, the company is just about able to sustain its annual dividend of 3 cents. Hence at the selling price of 0.615, my opinion is that it is just about fairly valued at 4.8% yield. The price is right and it is time to convert some of these investment into cash. 

This is my way of "shorting" the market - accumulating cash. The growth of my ready to access cash is now at $100,000.  That does not mean I will be trigger happy and purchase any falling knife. Discretion in purchases is still important and targeting companies with a strong/clean balance sheet and operating well under a conservative/good management (be it in a distress or "recession proof" industry) is what I will still have to do.

Is Starhub a buy for its dividends?

Starhub is the second largest telecommunications company in Singapore. It is part of the 30 components stocks of the STI and a crowd favorite due to its stable business that produces good cash flow. Starhub has committed to reward shareholders an annual dividend of 20 cents in 2016.

Sustainability of its 20 cents Dividends

Dividends are only sustainable if they are paid from cash flow. Hence, it is apt we start with the cash flow statement. Firstly, lets remember Starhub needs to generate $346 Mil of cash to deliver its 20 cents dividends.

From its latest full year results, Starhub has generated about s$674 Million from operating cashflow before changes in working capital and spent about 320 Mil in maintenance CAPEX (approximated from its past few years capex spending). Doing further approximations, we can roughly gauge Starhub has to annually pay cash interest expense of 20 Mil, taxes of 65mil and will receive 30 mil from government grants. This leaves Starhub with about $300 Mil to distribute as dividends.

While its 173 mil cash hoard will support 2016 dividends, it seems hard for Starhub to sustain its dividends in the long run given the cash gap.

High debts

It is interesting to learn Starhub has one of the highest debt to equity ratio on the SGX. The number stands at 9x. Closer inspection of its liabilities, one can see that it contains about s$687.5 mil in borrowings.

Starhub's FY15 Balance Sheet

A worrying sign is that Starhub has not been paying down its borrowings, but only the interest. Furthermore Starhub has a 220 mil bond due in Sept 2022, which I think will unlikely to be rolled over at the low rate of 3.08% given a rising interest rate environment.

It will be good if Starhub takes the initiative to pay off debts or accumulate cash now to redeem the 220 mil bonds because it will reduce interest expense. This will improve the sustainability of its dividends in the long run, in light of a rising interest environment.

How to value?

So it seems Starhub is might not sustain its 20 cents dividends from a cash flow analysis (even when it is not paying down its debt principal amount). From the current results of $300 mil cash generated, lower dividends may be expected. 

With all this information, what do readers think of Starhub's true valuation as a dividend stock?

Portfolio update- Investing in TTJ and BBR

I have made additions to both TTJ and BBR. The investment thesis is simple: to invest in companies which will benefit from the Singapore government's infrastructural plan. Given the gloomy outlook of our economy, it is likely our government will commence on some form of expansionary fiscal policy to sustain growth. The most evident way is through infrastructural projects. From BCA's outlook, 2016 construction industry is likely to be about 27 to 32 Billion (2015 was 27.2 Billion). BUT with about 65% driven by the public sector.

We have a few underground MRT lines and depot which will start construction. Hence companies like TTJ and Yongnam are likely to benefit. TTJ was chosen over Yongnam because of my view that TTJ has a better management as evident by the business's strong cash flow generation and little leverage. For the lastest FY, TTJ was able to generate approx 8 cents per share in free cash flow, giving it a P/FCF of 3.25 times.

Similarly, I too am interested in companies that does general construction work for the public sector. Two names stood out - BBR and KSH. Both companies does a significant amount of government projects and have exposure to both the construction and property development. BBR was chosen in the end for its less exposure to the property development business which I am not sanguine about. 

It is likely for both companies I will attempt to add more stakes at current prices. However, given their low liquidity, it will be a slow process. I too am monitoring OKP which does road and drainage infrastructural projects, however, its current price is a tad too high for me. Lastly, I have added a few more lots in FSL trust.