Review of 2015

2015 has not been a kind investment year. For this year, investing returns is negative 19.2% (due to the fall in Penguin and writing off fully China Fishery's value).

Despite the negative investment returns, overall value of my portfolio has increased by $19,000 to the region of $238,000. This is due to my tendency of saving a high proportion of income earned from work; this shows why at a young age, saving is a good habit because the magnitude in loss/gain from a small portfolio will be outweighed by the savings we add to it. 

However, as we get older, inadvertently our portfolio gets larger. Then investment returns becomes a greater influencing factor than savings. Hence,  that is why investing should start from young - we can afford to make investment mistakes, learn from them and not suffer the large magnitude of losses, which would have taken place when we are older.

For 2016

Nothing much will change. My prospecting of undervalued gems will still revolve around the company's cash flow generation ability. My expectation is that the O&G sector and their demand derived companies will continue to struggle due to the oil downturn. In addition, the office and retail sector will be affected by the over supply, especially when Guoco Tower opens in 4Q 2016.

On the blog front, I hope to come across interesting articles which will be worth sharing with readers as well as penning some saving habits articles instead of the usual company analysis.

Despite the gloomy economic outlook, this should not be an excuse for another year's of negative investment return. The twin pillars of investing and saving should work their magic and achieve a portfolio of $280,000. 

Recent Portfolio Transactions

Due to the loss of Office Starter 2010 on my computer, I have not been able to copy and paste my Excel into my portfolio update. This is why my portfolio on this blog has not been updated. Hence, this post is to highlight my recent purchases with a short review behind their purchase.

Accordia Golf Trust

At the recent low of 50 cents, I have purchased another 10 lots (potential 8% yield at this level). My analysis of AGT can be found here. 

Kingsmen Creative

I have purchased 10 lots during the recent sell down. The company has a moat due to its good reputation in service delivery within the industry. Its business is in fitting out retail stores and exhibitions; and has recurring customers such as the annual F1 Singapore GP. This serves to show its reputation.

Recently, Kingsmen purchased K Fix and that has affected its cash flow generation ability. The expansion of HQ too will affect Kingsmen's cash flow generation, in turn its dividends. 

Currently, the slowdown in China and Singapore's retail market has resulted in a fall in retail profits. However, in the long run, a rebound of earnings is likely to happen which hopefully means, a return to.its 4 cents annual dividend.

First Ship Lease Trust

Company is experiencing an upturn especially in its product tanker business. Furthermore, I am impressed with the company's current cash flow generation. Investment Moats has written a comprehensive article on it . Purchase of 40 lots.

Sarine Technologies - Suriving the Diamond Downturn

The Singapore stock market has had a particularly rough year, along with it, Sarine Technologies has suffered a torrid year. Year to date, its share price has fallen by half and is at the 1.30 levels due to a slump in earnings.

Overview
The company is in the business of providing technology-related products to manufacturers which turn rough diamonds into polished ones. Despite being an "IT company", Sarine Technologies have demonstrated why it is important to analyse factors that are beyond the company's control such as its customers and the state of the diamond industry.

The diamond industry especially in India, is experiencing a diamond crisis. Market demand for diamonds has been muted in both China and India and many Indian diamond manufacturers are struggling. This has affected Sarine. Its earnings have fallen 90% and it is unlikely Sarine will report a 3 cents EPS for this FY, let alone last year's 7.8 cents. This event shows how dependent Sarine is to the diamond market thus it can be known as a derived demand support company. On the sgx, there are many such companies such as Penguin and Sembmarine who have products supporting certain niches of an industry.

Will Sarine Survive?
Fortunately for Sarine, it has little competitors to its specialized service. Its Galaxy products have a dominant market position and its business model has moved to a recurring revenue base (similar to Silverlake's) which is wonderful. Aided by a balance sheet with little liabilities and good cash flow generation.

Furthermore, Sarine is trying to branch out beyond diamond to other gemstones by having new products like Sarine Loupe and Allegro. However, as these are new products, it will take a while for Sarine to diversify its revenue dependence away from diamonds.

To conclude, Sarine is likely to survive this diamond crisis; however the question is the length and terror of this slump which will hurt Sarine's earnings in the near to mid term. Sarine may have to resort to debts to continue its innovation and survival; but given its pristine balance sheet, it should be able to borrow.

Valuation
At a forcasted EPS of 1 SG cents, Sarine is trading at an eye-watering forward P/E of 133x. However, what matters is the recovery of earnings when the diamond industry turns up. Should it regain to last year's earnings of 11 SG cents, current valuation may not be too shabby.

Accordia Golf Trust – Normalization of yields/Projecting its future

Accordia Golf Trust (AGT) has fallen from its IPO highs to 55.5 cents as of writing. Given the drastic fall in price and sharesinv.com showing an impressive trailing dividend yield of 10.6%, one may be tempted to initiate a position in AGT. Let’s find out if it is worth it

Yield

AGT’s FY15’s distribution statement was lumpy and is difficult to build a projection on. However, this current FY’s first half distribution statement is easier to understand and its figures are not affected by IPO distributions/proceeds from borrowings/etc. From this HY, one can see that the distribution to shareholders is about 2.3 SGD cents (10% income retained).

AGT's FY 16 1H Distribution Statement

AGT's FY 15 2H Distribution Statement

Furthermore, from AGT’s presentation, the second half of the FY is always weaker than the first half's. Hence based on current first half performance, 2H’s distribution is likely to be lower due to the seasonality of visitors. This is further shown by the FY15 4Q result where AGT had a weak quarter during the winter period (4Q income available for distribution was boosted by a very positive working capital change which I do not foresee will be that positive again). Hence I expect 2H’s distribution to be at SGD 1.7 cents (10% income retained)

Visitor ship Data

Hence full year distribution will be 4 cents or 7.2% yield at 55.5 cents.

Business operations

From its financial statements, we can see AGT has a relatively fixed expense base, at 11,000 million JPY mark in each of the past 3 quarters. Hence one has to take note distribution attributable to shareholders is dependent greatly on the revenue generated by the golf courses.

From its three segments, only the restaurant segment has been holding up, but its golf course and membership revenue are showing a slight dip. Due to the relatively fixed cost base, the small decrease in operating income (-5.8%) resulted in a larger than proportion decrease in net profit (-17.7%). This affected income available for distribution to shareholders. 

AGT's Key Financials

To boost distribution, one way is to buy more golf courses from its parent which AGT can do due to its low leverage ratio of 28.8%.

The only visible positive is the upcoming Tokyo Olympics in 2020. Hence for 2019 and 2020, uptick in the revenue segments will be seen; but till then, AGT has to manage the challenges of declining golf course and membership revenue.                   

Minor Pointers

Exchange rate - AGT’s operation is in JPY. Given that JPY is at low rates against SGD, my personal opinion is that the yen will not depreciate much further against the Sing dollar. I believe some appreciation will occur as the Sing economy is in negative territory and a depreciation by MAS will help. However, the change in exchange rate will be small

Interest rates - With Japan embarking on its own QE, I do not expect much spike in interest rates for AGT’s term loans, so interest expense should be the same. AGT’s leverage ratio stands at 28.8%.

Conclusion

At a forecasted 7.2% yield, AGT seems to be a decent investment proposition. It's yields and leverage is better than an upcoming IPO (the latter's yield boosted by strategic investors' decision not to take their entitlement). However, comparing a golf course trust against a retail trust is not advisable.

Comparisons aside, AGT have positives such as the upcoming Tokyo Olympic 2020 which will boost its revenue and profits (AGT has a relatively fixed cost base) and further headroom to purchase more golf courses. 

A negative of AGT is that its revenue does not have a lease-like nature and hence is not as stable as REITS; it can fall drastically and affect distributions available. Hence investors have to weight factors such as: a) being able to obtain 7% yield from more stable investments such as CRCT, b) the gearing of AGT against these other investments and c) growth potential of AGT due to its low gearing.

I have initiated a small position in AGT at 55.5 cents of 5 lots. Pending further fall in prices, it is unlikely I will add further as I am of the view the market has not fully factored the 2H surprise fall in distributions. I am hoping to get in the region of 50 cents (~8% yield).

China Fishery’s Trouble with HSBC

HSBC has recently filed a winding up application on China Fishery to the High Court of Hong Kong. It pertains to china Fishery’s (CF) difficulty in servicing its debts. From China Fishery’s AR 2014, it can be seen that China Fishery had US $303 Mil of debts which needs to be settled within this FY and it has paid US $131 Mil thus far. Similarly, in the financial year before, CF had a US $505 Million debt but was successfully rolled over.

Chna Fishery's Debt Profile

The trouble it seems is that one of its 5 lenders, HSBC, is refusing to continue to roll over its debts. One problem with CF is its inability to have a quick cash conversion cycle. It takes a while to convert its inventories to receivable and then to cash. With just one of its 5 lenders no longer allowing the rolling of debt game, CF is experiencing cash flow problems.

It comes to show how important cash flow management is because banks are free to “take the umbrella away” anytime and leave you in cash flow trouble. Ironically on a full FY basis, CF is able to produce approximately US $165 mil of cash before working capital changes. With about $18 mil in bank expenses, $35 Mil bond payments and income taxes, the company is able to generate about US$112 mil. In addition, from now to 28 March 2016, CF will receive US $61 million in inventory/cash from its supplier. Hence it seems had HSBC allowed another rolling over, it is likely CF will be able to partially pay off its debts.

Takeaway

When analyzing a company, It will be good to see the debt profile. Given the current economic slowdown, it seems banks are now not hesitant to take away the proverbial "umbrella". This will be precarious for companies who are debt laden and rely on the rolling over of debts to support their operations. For CF's case, only one of its five lenders had decided not to play ball, and CF is now in trouble.

Getting to know: Home Protection Scheme (HPS)

The Home Protection Scheme (HPS) is a mortgage-reducing term insurance which covers an individual’s liabilities on home loans in the event of death or permanent disability. Its premiums are affordable and is a government initiative. For every $100,000 coverage under HPS, the annual premium is about $76; that is cheaper than most term insurance.

Eligibility

Currently home owners making HDB loan repayments through CPF-OA have to be enrolled into HPS. Exemptions from HPS is allowed if one shows proof of other forms of insurance coverage. However, in my opinion, the HPS is the most affordable plan and it is difficult to find a similar plan at a lower dollar to coverage rate. It is good too for HDB owners servicing their home loan through a bank to consider the HPS.

Why it is important to learn about HPS

Often, financial planners may unwittingly advise to obtain more coverage (through whole life plans) on the pretext that you are now a home owner with a housing liability (home loan). As many may not be aware that they are covered under HPS, as the funding of premiums is through CPF savings, they may land up in a situation of being double covered - under HPS and a more expensive insurance plan recommended by the adviser. Hence knowing if you are covered under HPS reduces your insurance expense.

To summarise, the HPS covers an individual’s home liability loan. You have to be insured under HPS if the servicing of your housing loan is through CPF-OA, following this reasoning, one can safely presume many new HDB owners are in fact covered by HPS (I wonder how many are aware of this). Furthermore, HPS is one of the best dollar for coverage term insurance, being priced at approx. $76 per $100,000 coverage.

For majority of Singaporeans, it is important to be aware if we are covered by HPS before embarking on insurance planning. It ensures optimal planning and prevent us from falling prey to purchase seemingly more expensive private insurance. To know if you are covered under HPS, do check your CPF statements to see if an annual HPS premium is deducted from your CPF savings. Alternatively, feel free to email CPF to make an inquiry.

Lesson from Tiger Airway's takeover by SIA

Singapore Airlines has made a takeover offer $0.41 per share for Tiger Airway. While it sounds like a good deal representing a 33% premium; shareholders who had “patiently” held Tiger since IPO and subscribed to every round of rights would have paid an average cost per share of $0.67 per share. For that “patient” shareholder, the acceptance of the takeover is a 38.8% negative return.

Turning back to 2010, one will remember how hot Tiger Air’s IPO was. Riding on the budget airline craze, SIA did an IPO for part of its stake in Tiger. The IPO was heavily oversubscribed (similar to a recent IPO). However, time and time again, history has shown that business fundamentals prevail and not the popularity of the IPO, the anticipated growth did not materialize and instead Tiger Airways bled massive cash. Events have gone full circle and now SIA is buying the remaining stake it does not own in Tiger for a song in 2015.

No matter how, the fundamentals of a business always prevails and airline stocks are a terrible investment unless in extremely depressed prices. It is a commodity industry where price is the main factor and yet airlines have to pay hundred of millions to continuously improve their fleet. As Richard Branson once quipped: “If you want to be a Millionaire, start with a billion dollars and launch a new airline.”

For many Tiger shareholders, it may be time to reluctantly accept the offer as without the support of its strong parent (SIA), Tiger may not be able to survive.  In the short to medium term, Tiger will take delivery of s$2 Billion worth of Airbus 320 until 2025. Even though Tiger has turned around, it seems unlikely Tiger will generate that much cash by 2025 to finance the order; hence becoming a wholly owned subsidiary under SIA's wings will help it financially. A lose-lose proposition is in store for the foolish patient investor.