Friday, September 24, 2010

Share Buyback or Dividends?

When a company you have invested have excess free cash flow, do you prefer that they use the excess cash to buyback shares from the market or give them out as special dividend?This is especially true in the case when good investment opportunities are not readily available.

The way I see it, engaging in share buyback reduces the amount of outstanding share in the market and hence will lead to an increase in eps. However, there is a danger that this may be used to mask a stagnant performance by dressing up the eps by the management. In addition, it is possible that the company could have given out substantial share options to employees earlier at a lower price. ( Singpost given out 800K share options at $1.02 in Jan. It then subsequently does a share buyback of around 10M shares at around 1.12/1.13 about 2 months ago). It is able to do so probably by taking advantage of the low interest rate for debt by raising $200M in Fixed Rate Notes which bear an interest of 3.5% per annum). I am of the opinion that the recent improvement in singpost share price has less to do with any significant improvement in business outlook than to mere finance rejiggering.

By giving out special dividends, it basically return the excess cash to to shareholders an let them decide what to do with it.

As a retail investor, I prefer special dividend anytime as I can decide what to do with it.

Monday, September 20, 2010

Reality Check on Stocks

Since 1929, 46% of the S&P 500 index's annualized total return has come from dividends, according to some studies done in the US.

You may think that because the company with the lower dividend payout ratio will have more to invest in its future. That should translate into a faster earnings growth rate, which in turn should eventually result in greater price appreciation for the company's stock. However, this is not often necessarily so.

When searching the empirical record for evidence that companies with lower dividend payout ratios have higher earnings growth rates, some researchers have come up empty.

So, if you based on entire portfolio on trying to hit the 10, 20 or even higher multibaggers, this is akin to gambling. More often than not, these are going to be smaller companies where a single mistake in execution will take your investment in them several years backwards. No doubt, it is possible for some of them to make it, but it should be wise to only assign a fraction of your portfolio to look out for these opportunities.

For the rest of your portfolio, try to compound your wealth over time. I find this to be the more realistic strategy. Afterall, stocks only gain in value because of the underlying earnings that get accumulated over time.

Sunday, September 19, 2010

First REIT

Just receive news that one of the Reit that I am invested (First REIT) is in the process of acquiring two additional healthcare properties in Indonesia. It is intended that both the properties will be leased by First REIT to the Sponsor under long term master lease agreements.

They are exploring the options to raise funds for the acquisition. I am watching with interest as to how do they want to raise funds eg through equity (rights, private placement) or debt (bonds, long term loans).

First REIT current gearing is not that high relative to other Reits at around 16%.

Dividends Safety

As a DIY value investor, I view dividends from the stocks that I owned very seriously. They are the portion of my passive income that I expect to come in automatically into my account regardless of the daily fluctuation in stock prices. Moreover, I would definitely prefer that those dividends be maintained even though the general economy may be going through a difficult period of stress and are sustainable over a long period.

To ensure that the dividends are "safe" and will not be cut at the slightest sign of volatility, I look for the following:-

1) Dividend payout ratio. For a growth oriented company, I would expect the dividend payout ratio not to exceed 60%. However, for the Reits and infrastructure trust that I invest, it can be higher provided I am convince that the businesses are stable and back by long term contracts or are in providing some essential critical services with high barrier of entry.

2) Earnings in a economic downturn. Ask if the company cut dividends in an economic downturn will give you a clue into the sustainability of those dividends.

3) Debt to Equity Ratio. If the company has a high proportion of debt, than a lot of the earnings will be utilised to make interest payments, making it more uncertain that dividends can be sustained when economic environment changes.

4) Extremely high dividends yields. As usual, worry when things look to good to be true. Usually, these are cases where the company stock price has fallen dramatically due to worsening outlook.

Saturday, September 18, 2010

Dividends for Sept

I receive in excess of $11K dividends this month from the following:-

SGS Bonds
SBS Transit
UOB Preference Shares
OCBC Preference Shares

Also, I divested MiiF (it was a tactical buy by me anyway), and reinvested into
StarHill Global and LMIR. I am willing to take some small bet on Indonesia given its large domestic economy which was hardly scathed by the 2008/2009 crisis. Also, the next Presidential elections is in 2014, so the political landscape should be clear till then. For StarHill Global, I view it as one of the more reasonable Reit to invest at this stage where it is still trading at substantial discount to NAV.

I made a capital gain of around $2K from my Miif divestment on top of the $600 dividend received this month.

Thursday, September 16, 2010

The right time to buy value stock

The best time to buy value stocks is when nobody else wants them. If everyone "knows" that they are producing the next big thing, changing the world and so on, the shares are not going to be cheap.Value stock are usually not the ones grabbing the headlines for their outstanding performance or joining the ranks on the 52-week high lists.

The real excitement come from the extra 2% to 3% a year returns, multiplied over a lifetime of investing, that make you the substantial piles of cash down the line. For some people, this approach is often too boring.

Too often, most people think that to make money in stocks, you will need some luck. But more importantly, you will need a lot of time for the force of compounding to work to its fullest impact. If you start young at around 25, you will have 30 years of time to work for you until you reached 55.

Friday, September 10, 2010

Chasing Hot Assets

Here are a couple of statistics from the US:-

1972-1979          5.1%             11.1%             10.5%                        22.1%
1980-1989         17.5%            15.6%             22.8%                        10.7%
1990-1999         18.2%              9.1%               7.3%                          3.9%
2000-2007           1.7%             16.3%               5.5%                        13.3%

We all know what happen in the US from 2008-2010, real estate crashed. The conclusion is that what is hot in the last decade may not be hot in this decade. No point chasing for the latest hot stuff based on past performance. Just periodly rebalanced your invested portfolio instead of moving in and out in huge quantites from one sector to another in search of higher profits.

Thursday, September 9, 2010

Your First Stock

In 2007 Berkshire Hathaway annual reports, Buffet wrote about the traits he looks for in any acquisition. They are:-

1) At least $75M in pre-tax earnings
2) Consistent earnings growth
3) Good return on equity
4) Manageable or no debt
5) Quality Management that is committed to the company
6) A simple business model

If you are purchasing your first stock to build up your investment portfolio, maybe you can use it as a reference. You may need to relax condition (1) a bit if you are investing in the local market as the companies are smaller.

I used to infrequently buy, hold and then sell some stocks in the past. But when I started to build my current portfolio from an all-cash position in 2008, my first stock was SPH.

Wednesday, September 8, 2010

Bond Bubble?

I purchased some quantities of SGS Bonds in early Feb this year. The YTD maturity is about 17 years and coupon rate 3.5%. My bid price is at 102.4

I check recently and the bid price is now at 111.93. I am pretty surprise at the run up of such a supposedly stable instrument in such a short time. The indicated yield now is only 2.6% for such a long term bond. Including the dividends, my gain from this is close to 10% this year, better than quite a couple of my stocks YTD performance in 2010.

Understand the yields of long term US Treasury Bill are also at quite depressed levels.

Do we have a bond bubble here where demand have suppressed yields to record low? Or is it a long term trend where investors prefer the security of fixed-income instruments to higher risk instruments after going through so much volatility in the last few years.

Tuesday, September 7, 2010


Historically, September and October are the two worst months for stocks in the US.

Some of the biggest declines occurred around this time of the year. They include the crashes of 1929,1966,1973,1987 and 2008 (vividly etched on our minds).

Hold on to your seats!

Taiwan Depository Receipt

I watch with amusement that Oceanus, Yangzijiang and now China Taisan has
joined the chorus of companies listed on the local bourse to get a TDR listing in Taiwan. They do this by issuing additional shares or allow the redemption of existing shares into TDR. Typically these are companies with significant business exposure in China and reckon that their value will be greater appreciated by the Taiwanese market. In fact, TDR for Oceanus is trading at a premium over the value of the local share.

Could this lead to the floodgates being open that allows the S-Chips to head for what they think may be greener pastures. For some companies, maybe yes.

In spite of the growing importance of the Chinese economy and the higher possibility that you can find 10, 20 or even 50 baggers among these thousands of mainland companies, I think it will be wise to be extremely careful. Remember, even excellent companies in promising market niches can be screwed up by a fraudulent management. The recent commercial case against the founder of Gome (the largest electronic retailer in China) is just one of the many cases happening daily over there.

As a general rule, I tend to avoid S-chips with some rare exception. Even in doing so, I am mentally prepare to lose my investment sum, if I make the exception.

If you are investing with your retirement sum or your child education, I suggest you skip the S-chips completely.

A Taiwanese Depository Receipt (TDR) is a certificate registered in the holder's name or as a bearer security giving title to a number of shares in a non-Taiwanese based company deposited in a bank based outside Taiwan. These certificates are traded in the TSE.

My Portfolio

In descending of portfolio size:-

SP Ausnet
Suntec Reit
First Reit
StarHill Global
DBS Pref4.7%
Ascendas India Trust
Keppel Corp
China Merchant Pacific

Monday, September 6, 2010


With the recent BP spill in the Gulf and the subsequent Mariner Energy owned platform that erupted into flames (without any oil spill though), this may leads one to think about the possibility of the US enacting a temporary ban of all offshore oil exploration in the US. If this is so, it will surely affect Keppel Corp, who is the world leading builder of oil rigs. I ponder on the likelihood recently.

But, I read the following statistic. There are about 3400 platforms operating in the Gulf according to the American Petroleum Institute. Together, they pump about one-thirds of American domestic oil. Given the American addiction on oil to lubricate and run the economy, I do not think a ban is possible, albeit a temporary one. Just witness how fast the BP spill is fading away from the daily news radar.

It is extremely difficult for a Singaporean company to be the leading player in the world in their core business. Keppel Corp is one of the rare few.

With the recent government recent cool down actions on property demand which causes a knee-jerk downward pressure on Keppel Land, and ultimately Keppel Corp share price, I thought it was an opportune to vest in Keppel Corp.
I vested at 8.74 and intend to hold it for quite a while. I miss out investing in Keppel Corp in 2009 when the price was much lower due to my indecisiveness.

I did not do a detailed analysis on the B/S, Income Statement nor CashFlow Statement as I do have some implicit faith in how Keppel Corp run their business. I need to revisit it sometimes.

I do not always do analysis before I vest. Sometimes quality blue chip, I just monitor the price for a long period of time and take action based on gut feel.

Leverage Measurements

There are many ways to measure how leverage a company can be.

For bond holders, they will typically be interested to know the liquidation value of the company since bondholders are senior to equity in their claim for assets on liquidation. The debt ratio will provide such a measure:-

Debt Ratio = Total Liabilities / StockHolder' Equity

To get a measure of the amount of leverage taken on by a company relative to its size, the Debt-to-Equity or Leverage ratio would provide such a measure. It disregard current liabilities as such liabilities are day-to-day related and short-term.

Leverage Ratio = Long Term Debt / StockHolder's Equity

To get a measure of whether a company can service its debt, the interest cover ratio will be useful. Because earnings rise and fall depending on market and economic conditions, it would be preferable if the company’s earnings were much higher than interest expense in most years; otherwise, investing in the company would incur significant risk when the economy falters, as it always does eventually

Interest Cover Ratio = EBIT / Interest Expense of Long Term Debt

Some companies use EBITDA to calculate interest cover ratio, but you should be careful in those circumstances as the usual claim is always Depreciation and Amortization is not actual cash expense and does not affect the ability to pay debt interest.

Sunday, September 5, 2010

Why I invest in SBS Transit

Everybody knows what SBS Transit does. It runs 75% of the buses in Singapore and the NE Line. It also manages the 17+ bus interchanges located throughout Singapore. It is one of those businesses perceived to go on and on but probably will grow very little and maybe shrink down a bit when the MRT coverage is more comprehensive. But it is a very stable business that will not be jolted in a severe recession. This is a stock that no analyst wants to cover because liquidity is low and it is so unexciting.

Before I invest, I made the following assessment:-
I calculated the total Cash from Operating Activities from 2002 to 2009. It is 918.5M.
The total capex from 2002 to 2009 is 573.2M. I noticed that in 2008 and 2009, capex was exceptionally high as SBS upgraded most of it fleet during the recession.It is not possible to do a meaningful assessment on a single period. A multi-year assessment is probably more appropriate.
The average FCF per year work out to be 43.2M.
I did not noticed any long term debt and cash and equivalent is about 14.8M
So the Enterprise value is 554M - 14.8M = 539.2M.

So, FCF / Enterprise Value work out to be 0.08. The company is generating 0.08 ct of cash per dollar of Enterprise Value. Assuming no major changes in operating environment, the company will be able to get back a dollar of cash in 12.5 years for a dollar of Enterprise Value.

But, I think there will be some upsides

1) With all the major capex done in 2008 and 2009, I believe the FCF moving forward will look better
2) There is the possibility that SBS will win another operating MRT line besides the NE Line due to its successful track record with NE Line and the desire to avoid a monopoly by the government
3) The resident population will most likely move up higher to around 6 to 6.5 million.

Hence, I vested at an average price of $1.73 a few months ago and had hence received two dividends totalling 8.8cts

Note: If a use Benjamin Graham's intrinsic value calculation, assuming only a 0.5% growth rate, it will be
intrinsic value (SBS) = 17.75 * (8.5 + 1) = 1.69. Pretty close to my purchase price, though

Cash Flow

I like to make a note here on Cash Flow because it is such an important item to be looked at when someone is evaluating a company, but more often than not, it is typically not highlighted in the press releases when reporting quarterly or annual results.

The cash flow of a business is the total amount of cash actually received in a given period minus the total amount of cash actually paid out in that same period. Positive cash flow is the receipt of more cash than was paid out; negative cash flow results from paying out more cash than receiving.

Cash Flow = Cash Received - Cash Paid

In accrual accounting, which most companies use, income is listed when it is earned, even before it is actually received, and expenses are recorded before the money is actually paid out. Depreciation or amortization, for instance, is an expense that doesn't require the immediate payout of cash. Thus, net income alone, which is the income after all expenses are subtracted from all income in a given time period is not an accurate representation of how much cash a company has, or even how much it is generating.

Cash Flow = Net Income + Depreciation + Other Noncash Expenses

For companies in matured or regulated industries, the main evaluation should really be the stability of their cash flow generation since at the end of the day, when you invest in these companies, what you really are investing is in the cash generating power of these businesses.

Watch out for the company Cash Flow from Operating Activities figure every quarter if  you have significant investment in these companies. If you see major deviation in the trend, you should really find out why.

Additional concept you may encounter is Free Cash Flow (FCF)

Free Cash Flow (FCF) = Cash Flow from Operating Activities - Capex

FCF is a measure of how much value can be extracted from the company without altering the cash generating power of the company. You need not be alarmed if you see in certain quarter where the company may be running into negative FCF because it may need to make major capital expenditure during those times to upgrade the business. But consistent negative FCF over many quarters should be investigated thoroughly. If you consistently track these numbers with those companies you own, you will start to understand their businesses.

Saturday, September 4, 2010

Why I am giving Oceanus a miss right now

If you look at my portfolio, you may conclude that I am very conservative and will not and is not looking at investing into small high growth stock which pay little or no dividend. This is not exactly true though I am not terribly optimistic that I will find such opportunities frequently in the local market. They are by far too few and  if they happen to be there, I may not be able to spot it early on and get invested.

But that does not stop me not continuously scouting and looking around for such potential. If I think I find one, I will be mostly willing to put some money in it.

Today, I will talk about one such potential that I have been looking at for a while but I must conclude that I am not convinced by it as yet. - Oceanus. This is an interesting case as all the standard valuation techniques cannot be used.
There  is not FCF and actual sales is not exciting. Why Oceanus?

Yes, Oceanus - a land-based abalone farming company operating in Southern China whose Chairman is a Singaporean. It offer an enticing notion - more than a billion consumers in a rapidly affluence country where abalone is considered a "luxury" food item.

However, when I Iook into it a bit more, I am not comfortable with it. There is a possibility that it will take off but there is also a high chance that this will blow-up or just shrivel down and die away quietly. Or even sold off to some bigger acquaculture company at an unexciting price eventually.

First, the actual sales it not really there, RMB 106M in Q12010, RMB103M in Q22010. It made a net margin in both quarters by having  a fair value gain in it biological asset (BA) of RM 177M in Q12010 and also RM 177M in Q22010. What is fair value gain in BA? It basically means that the abalones in the farm have gotten bigger and worth more in the market and new young abalone additions that did not exist last quarter. Now, this is counted as revenue which in reality the sales did not actually happen and the risk is still with Oceanus. Also, there is no guarantee that the market price will remain the same or go higher.

The bulk of Oceanus assets is in the BA, currently at RM 987M. Although, the company have taken some preventive steps to prevent large scale infection (by separating them into tanks) and insuring part of the BA assets, this is no guarantee that nothing bad will happen.

Most of Oceanus land-based farms are near the coast, a torrent of heavy floods or typhoons could possibly wreck havoc with the crop. There is also the possibility of poaching when the abalones have grown bigger and hence more valuable. I have not seen any comments by the management how they can prevent this from happening.

I also, read that abalone need 5-7 years to reach length and weight maturity. Small abalones are worth very much less than bigger ones. This means that Oceanus is currently "burning" cash very fast to feed the young abalones. Real profits are still a few years away.

Evidence from this is from the cash holding which drop from RM 561M in Q42009 to RM 185M in Q22010. Oceanus has recently completed two rounds of TDR in Taiwan to raise cash, I believe. They took a loan of $74M in 2009 at a interest rate of 9%. In exchange, they issue 490M warrants to the lenders which can be exercised at any time before 2012 at a price of 0.15ct/shr. There is definitely heavy dilution going on but I think this may not be suffice. I think they will need additional cash later on but I doubt they can get them on good terms. As at June 2010,one-third of the warrants have been converted. I guess they have been converted in exchange of TDR which is currently trading at a premium to the SGX shares. This may allow the investors a window to take risk off the table and profit.

I read from some sources that the ratio you can keep young abalones (< 1 year) to mature ones (> 5 years) in tank is about 12:1. Now, I think most of the abalones in Oceanus farms are young, if they grow bigger, they might have an issue with tank sufficiency. I read that there are going to put the bigger ones into into sea for conditioning and fattening, but I think the issues behind could be tanks sufficiency. Trying to acquire more tanks means acquiring more farms but the cost may be prohibitive. The group intend to implement sea-farming once the trial is successful to enhance weight and selling price, but we know sea farming is riskier than land-farming due to difficult to migitate natural disasters.

I also note that they tried unsuccessfully to established a cafe-style restaurant chain serving abalone-meals in China due to poor net margins. I wonder if demand for live abalone at the right price is so good in China, why the management need to bother about setting up a restaurant channel to consume the produce from the farms at this stage in the company growth cycle. Lately, they are turning to processing farm produce into canned abalones instead. With this, I am getting the impression that may not have sufficient confidence and market know-how in selling the live produce in the china market as yet when volume ramp-up.

Yes, despite all my analysis, I might turn out to be wrong and this will turn out to be an excellent opportunity. But as value investor, I look at it and decided that it is not worth taking the risk at 0.315cts/shr as I inclined to believe that there may be more dilution to go on to raise capital assuming no serious aquacultural disasters.

I hope to revisit Oceanus at some future date for a reassessment.

Friday, September 3, 2010


I bought into MiiF a few months ago. My average purchase price of MiiF is 0.509. I am due to receive my first dividend this month.

The reason I purchased this stock is very simple - I do not want to lose money but is also very conscious of the volatility recently. Remember, money in the bank doesn't earn anything. I remember Warren Buffet who says the first rule of investing is "Do not lose money". The second rule is "Remember the first rule".

For 1H10, MIIF announced a distribution of 1.5 cents per share which will be paid on Sept 9. The fund has no borrowings at the corporate level, cash of 36 cents per share, and NAV is 80 cents. Dividends for 2H10 are expected to be maintained.

They have a 38% stake in Changshu Xinghua Port (Jiangsu), an 81% interest in Hua Nan Expressway in Guangdong, 20% stake in Taiwan Broadband Communications (TBC) and a 100% stake in Miaoli Wind, a wind farm in Taiwan. They have divested all the non-Asian assets.This means I am only paying 14.09 cents for the three major Asian assets (Miaoli Wind is assigned a zero asset value in the B/S - I think a mistake they made in the past with this acquisition). The book value for the three Asian assets is 44cents/shr.

MiiF track record before I made my purchase was spotty partly due to timing (2008/2009 crisis) and partly management lack focus and strategy. But, I am buying at an average price of 0.509 when the IPO price is $1. There are no rights or dilution in between my purchase and IPO. However, I could sense from recent statements that management have realise their mistakes into making too many minority stake purchases all over the globe with a small Fund.

I also check the composition of the board. I think I have quite a bit of buffer on this one.

I must admit that I did not check on the debt status of the underlying assets though. Sometimes, it is possible for the Fund to be debt free but the underlying assets may be overloaded with debt.

Thursday, September 2, 2010

Understanding ROA/ROE/ROIC

When you go through company annual or quarterly reports, you will encounter things like ROA/ROE and ROIC. It is important to have an inkling what they are especially when you have thousands of dollars vested in them.

Return of Assets (ROA). It is basically a measure of a company efficieny in translating assets into profits.

ROA = Net Margin * Asset Turnover where

Net Margin = Net Income / Sales and
Asset Turnover = Sales / Assets

Net Margin tells you how much each dollar of sales a company keeps as earnings after paying all the cost of doing business
Asset Turnover tells us roughly how efficient a company is at generating sales from each dollar of asset.

With ROA, there are two routes to operation profitability either by charging higher prices (high net margin) or turning over assets quickly. But ROA if fine if companies are just a pile of assets but in reality, many companies are partially finance by debt, which gives their return a leverage component which need to be taken into account.

Return on Equity (ROE)
Return on Equity is a measure of a company's profitability based on its efficiency with which the company is using shareholder's equity.

ROE = ROA * Financial Leverage where

Financial Leverage = Assets / Shareholder's Equity

Financial Leverage is a measure of how much debt a company carries relative to shareholder's equity.

Hence, ROE = Net Margin * Asset Turnover * Financial Leverage

There are three levers that can boost ROE - Net Margin, Asset Turnover an Financial Leverage. Utilities, is a good example of companies using Financial Leverage to boost ROE (CitySpring, SP Ausnet in my portfolio are all classic examples)

Return on Invested Capital (ROIC)
ROIC improves on ROA and ROE because it put the debt and equity financing on an equal footage. It removes the debt-related distortion that can make highly leveraged company looks very profitable when using ROE.

ROIC = Net Operating Profit After Taxes (NOPAT) / Invested Capital

Invested Capital = Total Assets - Non-interest bearing current liabilities (ie A/P) - Excess Cash (not needed in day-to-day ops) - Goodwill

Wednesday, September 1, 2010

Investment Return & Speculative Return

The stock market has risen quite a bit in the last to days. I thought it may be apt to talk about the above.

Typically, investment return is the appreciation of a stock because of its dividend yield and subsequent earnings growth, whereas speculative return comes from the impact of changes in the P/E ratio.

Let's take a stock that trades for $30 per share, earns $1.50 per share and pays $1.00 in annual dividend. Assuming that earnings and dividends grow at 6% percent per year, and initial P/E ratio of 20 does not change.

After 5 years, earnings will be $2.01. So the stock should trade at $2.01 * 20 =
$40.20. Also, received in total $5.64 dividends. This work out to an annualized return of 8.8%, which is the investment return. Speculative return is zero because P/E did not change.

However, if earnings and dividends grow at the same rate, but P/E ratio decreases from $20 to $15. Then we will still have $2.01 in earnings after 5 years. The stock should trade at $2.01 * 15 = $30.15. Add in the $5.64 dividends which remain unchanged, the annualized return shrink to 3.6%. Conversely, a rise in P/E from 20 to 25 whould yield a fat annualized return of 13.3%

Conclusion, if you buy an excellent company which spits out consistently earnings and dividends like a clockwork but at a high price ie high P/E ratio, you will still suffer with a speculative decline when P/E ratio shrinks due to revaulation process. The dotcom bubble is a classic example when P/E steered into stratospheric regions without regard for fundamental valuation.

You should always pay for an asset less than your estimate of its value and not based on the hope that there will be someone willing to pay a higher price for it some time in the future.