Tuesday, May 23, 2017

How I Research and Select My Stocks

I've been getting increasing number of queries from readers on emails on how I research and select my stocks. I have to admit that it's extremely difficult to organize your thoughts in that split second and reply to readers in a single email. It's been so natural for me to think about it in real time because I have done it so many times myself unconsciously but to put words into perspectives can be a real challenge.

I'm going to try and do that in this article and hope I am able to articulate well on my thoughts. Once I do that, I'm going to pin the article up in one of my pages so I can refer to at any time and refine the process when it is necessary to do so. New readers can also refer to that if you want to know how I select stocks.




The first and foremost disclosure that I have to make is that I am not the traditional value investor like Warren Buffet and Charlie Munger that many people adore and follow. Neither am I using the traditional value investing methodology that many people went to courses and get their learning from.

I have my own unique style that fits my profile and character.

To me, everyone in my eyes are a value investor by default. If you are winning, then technically you are getting some sort of value out there. So you are value investing. I'm really not too concerned about the term.

Okay, so let's get started.

My first screening is usually through undergoing a series of news, articles or stories about the underlying nature of the company. This is just done leisurely through reading your favorite newspaper, talking to your supplier or networking through your peers who come from specific industry. It usually comes as a natural to me and I get lots of variation inputs and understanding about the company itself. No hassle and hustling about this first step.

Once I get interested in a particular industry or company because of its competitive edge or moats, this is where I get my hands dirty by going through their last 4 quarterly financial statements and also at least reading their last 3 annual reports. I chose the last 4 quarterly statements because it is important to see the seasonality of the business and if there is a one-off to take note. If I'm still interested to go on at this point, I would then take an hour or two and compile the company's last financial metrics for the last 10 years, preferably covering a year or two before the big crash in 2008 when most company's earnings are showing a trough. This is where you get the idea of how the company is performing during a crisis mode. It is very important on this step. You can refer to what I did for my Kingsmen example for instance.

The second part of the research would focus on the peer comparison.

Generally, I tried to pick as many as I would like to but it is often difficult to find a similar peers in the same industry in a small market like Singapore. Hence, the closest I can find is to go regional with countries such as Hong kong, Thailand or Indonesia as the next destination.

From here, this is where I tried comparing some important operating and financial metrics like the gross profit margins, enterprise value to EBITDA or EBIT, free cash flow yield, cash turnover ratio, working capital efficiency, return on equity (roe), etc etc. If I'm still excited and awake at this point, I tried to dig deeper by going into the Dupont analysis of the roe, one of my personal favorite metrics to look out for. For those who are not familiar with the dupont roe, you can refer to my fellow blogger, LP who consistently bully the bear out of the blue with teaching materials articles like this.

If you have access to Capital IQ or paid access elsewhere like Morning Star premium, you can easily get all the metrics at one simple click to go. If not, you'd have to dig deeper on finding these metrics. They are all nothing but a function of mathematical formula which you can get those numbers from the financial statements, if you know what you are doing.

I've been wanting to incorporate a higher level of thinking at this point by finding out the company's business divisions or segments return on invested capital (roic) for each acquisitions or investment that they've made but I've been very lazy to do this since I became a father. This step is not as evident as much of the steps I've written above and you'd have to really browse through the devils to get the details. But I believe this is where you separate the great from the good.

The third part of the research would focus on the historical comparison on valuation.

After compiling the past 10 year data on step 1, this is where you start looking at trough and peak valuation to see the trend. For instance, if I'm looking at Micro-Mechanics (vested) trough and peak valuation, you'd find that they tend to trade at the range of 4x to 13x earnings multiple. It is not as simple as saying that 4x multiple is cheap and 13x multiple is expensive. The question to ask is what warrants them to trade at 13x earnings at this point. Does that mean growth in future can substantiate and justify this sort of current valuations? Or the market has priced in too much optimism at this point in time expecting future growth to materialize?

Since I have all the data available from step 1, I can easily plug the numbers to simulate certain growth and multiple scenarios into the financial model and see where it takes me from there. You can find how I did it here for example.

The fourth step of the research would focus on getting a step ahead of the analyst.

As most people know, analyst tend to cover companies in their research report after companies have reported their earnings or when there are catalysts that they are expecting to materialize.

The key is to get a step ahead of what the analyst thinks and will write on their report which will impact the share price once it has gone public. You may not believe it but if you generally buy only after the analyst has cover in their report, most of the meat would have probably been gone. It does not mean necessarily you will lose money, but everyone is already on the boat so you will have less margin of safety or meats to play for.

I would also usually think about what kind of valuation that is appropriate for the companies. For instance, banks are usually valued based on their Price to Book value while developers are usually valued based on their RNAV. Developers typically have low return on assets since the turnover is much slower hence the rnav of the companies tend to increase much slower. The rnav of the companies usually tend to increase the fastest through revaluation of the properties, which is a non-cash items but since everyone is valuing it via the rnav, it must be important to take note. Similarly for banks who are valued based on the Price to Book value, having a double digit Return on Equity (ROE) means that you are indirectly holding onto a company which gives you double digit percentage"growth" from a valuation perspective. 

The fifth step of the research would focus on the market depth of the company.

This is a newly found damn good information for me which I love it very much since there is a free trial across most brokerage until the 30th Jun.

By this point, I would have known very well the fundamentals of the company that I wanted to be getting and the range of valuations that I would be aiming for. Having the market depth information of the buy and sell gives me that extra edge because I am able to enter at the lowest range I am comfortable to be buying and I am also able to sell at the highest range I am comfortable to be selling.

I have done this successfully in recent months with Sabana, Far East Hospitality Trust (FEHT), Comfortdelgro, Singtel, M1 and Fraser Commercial Trust (FCOT). I've either bought at the lowest of the range or sell at the highest of the range I am comfortable at. 

To illustrate, I recently thought of accumulating more FCOT into my portfolio and found the current range valuation to be decent. When I checked the market depth information, it has a 1.7m buy queue at a share price of $1.33 (you can verify this yourself tomorrow). It is an extremely strong support line with very few volume transacted at that price. So, I went ahead and proceeded to buy at a single bid higher which is at $1.335 and got it. So if I want to buy, I won't queue at 1.34 or 1.325 for instance.

Every little bit of cents matters if you are buying in big bulks especially.

Again, if you want to read more about the guide to market depth, you can refer to LP post here.



Final Thoughts

This is really what I have to share about what I generally did for my research and how I select my stocks.

Okay,  if you are going for a course out there,  you probably get a similar nature of what I have covered here.  It's just more structured and they have designed templates for your easy learning.  But otherwise,  it's effort effort and effort.

This method which I have used has worked miraculously well for me for the past 6 years, returning me an average of about 20% per annum from 2011 till to date.

I know it sounds a lot easier in theory than it is in practice but it is only through many refining of the process that I am able to do this consistently on my own. You definitely need to put in a lot of practice and it is only after many trials and errors you'd be able to know where you are weak at. We have not even talked about the psychological impact to investing.

I am also 101% sure that there are better practices than what I am doing here so it is really never about comparing which method is the best but which method fits an individual investor the best.

I hope this helps most that emails me about my thinking process.

If you are interested to read more about my thoughts, you can refer to my two previous thoughts which I have archived below for your easy reference.



Okay, just by writing this post alone it took me 2 hours. So I guess it's really about how much effort you've got to put in for successful investing. Otherwise, you may want to choose passive investing with little or no stress.






Saturday, May 20, 2017

"May 17" - SG Transactions & Portfolio Update"

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
CDL Hospitality Trust
60,000
1.61
96,600.00
16.0%
2.
Fraser Logistic Trust
80,000
0.99
79,200.00
13.0%
3.
M1
35,000
2.25
78,750.00
13.0%
4.
IReit Global
73,000
0.755
55,115.00
9.0%
5.
Fraser Comm Trust
40,000
1.365
54,600.00
9.0%
6.
Singtel
10,000
3.73
37,300.00
6.0%
7.
LippoMall Trust
80,000
0.42
33,600.00
6.0%
8.
Elec & Eltek
15,000
1.37*
28,770.00
5.0%
9.
Comfortdelgro
11,000
2.42
26,620.00
4.0%
10.
Far East Hospitality Trust
40,000
0.615
24,600.00
4.0%
11.
Micro-Mechanics
15,000
1.275
19,125.00
3.0%
12.
Keppel DC Reit
13,000
1.255
16,315.00
2.0%
14.
First Reit
8,134
1.35
10,981.00
1.0%
15.
OCBC
34
10.41
     354.00
1.0%
16.
Warchest*
38,000.00
6.0%
Total SGD
599,930.00
100.00%

It's been a very eventful month of May and I continue to be grateful for what's been given. I'm always a bit wary when things went so well for me. I've got to prepare mentally for rainy times.

The STI market continues to pick up stronger as it moves towards halfway through the year. Banks have been a big beneficiaries of the stronger STI performance and I clearly missed the opportunity by having little to no exposure on banks and have laggard performances in the telcos.

The Reits continue to push much stronger than my expectation and it continues to contribute a lot onto the increase in the portfolio, with CDLHT and FCOT mainly leading the way.

I'll quickly briefed through some portfolio movements from the last update to this one.



First, I accumulated more positions in Singtel as I believe the weakness is largely overdone and it should be a beneficiary should the STI trends higher. As it is, when they announced their full year results, it proves that the share of associates and its investments are paying off to help mitigate some of the local weakness in the ARPU.

I also accumulated a lot more positions in M1 under the same previous thesis that I believe it represents cheap valuation at a price near $2. The share price has since gone up 10% since my accumulation under what they called the "strategic review". I believe this will still happen at a premium higher than today and I think I have a good enough exposure in the company to take advantage of that.

I sold my UOL at a price of $7.19 for some very small profits on the back of their full year results. I like what the company is doing with most of the investment properties and believe the commercial sectors will benefit in the next few years to come though the low yield payout that they are distributing has made me think twice in recent times. 

I also added a new position in Elec & Eltek, a company which I used to own in the past. The share price has been going north strongly since they announced a turnaround in 2016 and a strong Q1 performance in 2017. Still, with the recent acquisitions of Kingsboard, the EV/forward EBITDA valuation of Elec & Eltek does seem to look cheap from that view and the main reason I added a small position to the company to monitor their progress. The company seems to also manage a nice product mix this year so it'll be nice to see if they can continue to hit the momentum for the rest of the 9 months ahead. I also reckon an interim dividend to be restored back this year on the back of a strong first quarter.

I also sold and bought back Comfortdelgro which I wrote a separate article here. When I divested at $2.73, I was expecting them to have a poor quarter and I managed to add them back when it drops after the results. Never did I thought for them to have such a strong reaction to the results which I have elaborated on the post itself. It's a keep for now, I think it easily represents a good long term value.

Last but not least, I also averaged up Fraser Commercial Trust (FCOT) on the back of a stronger commercial play in the next few years. I have also decided to take the dividends for this as a scrip so the intention is to have this as one of my core play in the next few years. The HP tenancy is always going to lead the headlines but I think as Reit managers, they would have expected this and plan for contingency, which I think they did. This applies to all Reits managers as well. 

Dividends

This is a month of a bumper dividends coming in which I have updated here.

I've received about half from cashflow view so far, and will be awaiting for the other half in the next month payout. This will be included in the next month portfolio update.

Other "Investment"

This is the other big one concluding this month.

Back in Jan, I mentioned putting some of my funds in Chelsea as one of my conviction play "punting" for this year.

Not to shy away from the nature of the gambling itself, I did due diligence on my own risk management by writing off the entire amount which I can tolerate.





The result of Chelsea winning the EPL means I manage to add $40,050 back into the portfolio as part of that warchest.

The cost of capital is somewhere in the region of $24,000 with an average return of about 68%. This is high risk (binary decision of winning or losing) and high return.

Net Worth Portfolio

The portfolio has grown from the previous month of $523,890 to $599,930 this month (+14.5% increase month on month; +42.5% year on year). This includes capital injection.


In terms of equity performance (excl. cash), it is running slightly stronger than the STI at 21.7% (TWR) thus far. This will be reviewed once a month just to see where it is heading.

STI seems to be heading towards the selling in recent days so it could well be a good opportunity or a coming correction that's to come.

Stay vigilant. Thanks for reading.

How's May doing for you so far?



Wednesday, May 17, 2017

Recent Action - Comfortdelgro

Just wanted to do a quick update on Comfort recent quarter results and also some activities regarding Comfortdelgro in my portfolio.

I bought Comfortdelgro back in Feb at an average price of $2.42 and managed to divest the shares on the 9th May at $2.73 for a profits of 13% (inclusive of dividend). I bought back the same shares back on the 15th May after they announced their results at $2.55, thinking the support would hold. It was breached rather easily and now am getting caught catching a falling knife. Oh well, that's life.




I'll do a quick thoughts on their recent quarterly results.

On paper, net profits are up 12.4% but this was due to one of special dividends of $11.1m from Cabcharge Australia, which the company has acquired the rest of the minority shareholdings in the company.

Overall, we know that operating environment across all sectors have a tough outlook, and this includes the taxi, inspection, automotive engineering service that they operate. Operating profits as a result are down at about 9% yoy. I don't think this comes as a big surprise.

Taxi idle capacity increased from 1% to 3% and this lower rental income brought about the lower revenue due to lower volume of diesel sold to the taxi drivers under the automotive services segment. The inspection service is also down from what we already know from Vicom.

If there's any consolation, it's the increase in bus revenue from the SBS Transit under the new contracting model and the transit rail revenue from higher ridership on the DTL and NEL/LRT and the upcoming new DTL2.

Their concentration of revenue are bigger in UK than in Australia, hence the exchange rate movement of weaker pounds impact them unfavorably.

I think too much emphasis negativity is still being put on the taxi segment. I actually don't think the fall is that significant if we strip out the exchange rate impact.

Not many people noticed but from a cashflow point of view, the company is able to save $20m in a quarter on the capex savings realized due to the contracting model. This sums up to about $80m in a year in maintenance capex alone. From a cashflow point of view, Comfort is actually doing better than what it was a year ago, not taking into account the changes in working capital. 

I am lazy to do an exercise but from a dcf point of view I think it's actually going to be better. One caveat is the taxi segment need to stop falling more drastically which I think they will not. I think we already know how much competition they are out there so I don't think we will suddenly see a surge of car rental fleets all running to uber/grab or other competitors.

From an earnings point of view, they are decently valued at about 16-17x earnings, which is about fair based on their historical average. SMRT gets delisted at 22x PER and peers like MTR in HK or BTS in Thailand are trading at 32x and 25x respectively.

M&A are also always Comfort stronghold wild card which they will always engage as a growing conglomerate. I think this hasn't been fully taken into account and appreciated from investors.


Tuesday, May 16, 2017

Dividend Income Updates - Q2 FY2017

It's the time of the year again where I try to tabulate all the dividend income received in the quarter and see where I stand in terms of passive income cashflow.

I am terming it as passive income because it's the closest to passive as I can get. Naturally it means having the management takes good care of the company and then we reap in the rewards as a shareholders of what's left in the profits.

The theme of this post will be based on my understanding of the advantage of dividend investing and that is to compound dividends for as early as we can, for as long as we live.

I wrote about this theme not too long ago which you can refer here.




I am sure by now many of you have heard the common saying of “Sell in May and Go Away” phenomenon that has been going around, lurking and prompting investors to sell their portfolio holdings and seek a hideout until the bear comes out.

While there are some truth in this, do note that they are not bound for absolute certainty given how some years they’ve turned out otherwise. They are noises to stir around the emotion of an individual, to test and see if they are investors who have a developed mind of their own or simply buying and selling based on what they heard on the street.

Now, if you decide to sell them based on the above reason, you will soon find yourself to be in an extremely difficult position to allocate the capital you have at hand as you have to find a better company with a better valuation, which does not come across too often. I’ve shared in my previous post (Link Here) how difficult it can be for an individual to sell and buyback and unless you’re a proven winner in this category, you are better off compounding those dividends you receive from your company as much, as early and as long as you can. I think that’s a slower but a pretty high success rate in the long term.

Ideally, I hope this will one day overtake what I am earning from my active income so it'll give me a peace of mind financially towards having more option on what I can do with my money and life.

Without further ado, here is the dividend income received in the 2nd Quarter of 2017.


CountersAmount (S$)Payable Date
Fraser Logistics Trust2,792.00 23-Jun
M11,180.00 28-Apr
LMIRT712.00 30-May
Comfortdelgro666.00 15-May
Fraser Comm Trust (scrip)501.00 30-May
First Reit174.00 26-May
Far East Hospitality Trust372.00 27-Jun
Elec & Eltek1,260.00 26-May
OCBC6.00 5-Jun
Total 7,663.00

That's a decent $7,663 of dividend income received in the second quarter which will give a big boost to the cashflow.

The amount drops slightly from previous year due to my undertaking of more Reits which gives out quarterly dividend so this will bump up the next 2 quarters.




I am treating this dividend income as part of my cashflow which would be reinvested into the market that will give me a higher dividend income in the future and this continues to compound for as long as I can afford to.

If you think that this strategy interests you, do give it a try for at least one year and then check back how it is. I think it’s a pretty addictive exercise to try out.


Sunday, May 14, 2017

Featured - Me & My Money Series & Thoughts

I've been a big fan of reading the investing section of the "Me & My Money Series" for a very long time. Hence, I was grateful and honored to be invited over for the interview feature which you can refer to the link here.

I'd also like to use this chance to thank in particular Rachael and Chee Siong for their hard work and professionalism. They've been a very nice personnel to work with during the course of this time.

The interview itself wasn't very comprehensive because obviously there was limitations to how much I can explain myself in details in the one-page interview itself. Blog however is a totally different thing and across the past 600 articles I have written I think I have expressed myself quite clearly on some of the stance I am taking.

Also, I think I needed to highlight to new readers that the intention here was not to flaunt and compare across peers on who is doing better financially. The intention here is to inspire one another to do better than who we are ourselves the day before. I think if we look at the objective this way, it's a very achievable target for everyone.




I received a few feedback from friends, colleagues and readers who has emailed me on some of the questions. I thought I could also cover it here in more detail on my thoughts.

Question 1

It was mentioned that you are currently a financial controller, so your pay must be very high? What about your expenses now that you have 2 children to add to those expenses?

B: First of all, I think what is high or not is subjective on its own.

If I was looking at it from an individual point of view, I do earn above the average median salary paygrade. However, if I were looking at it from the household point of view, it is usually nothing more than a combined husband-wife working for a median salary paygrade. My wife is technically a housewife and she runs her own business so the profits usually go back to expand the business.

For expenses, I've previously mentioned in my monthly updates that cashflow is very tight. I think the most contributing factor has got to be the education, the milk powder, the diapers and I've also engaged 2 domestic helper where I have to pay both their levy and salaries every month. These days I even hop onto the neighboring countries to buy the milk powders. It's definitely a tight play in terms of expenses here.

Question 2

You talked about the human capital as one of your best investment decision. Can you elaborate on that?

B: I previously shared an article (link here) about the importance of human capital and how I transition from one to another.

In essence, human capital is our ability to churn out returns based on the physical presence or activity that we do. Most of us started off as salaried employees the moment we graduate from the university. It is important to recognize the the amount of potential future value that we can churn out just by working until the age of 65. The faster we are able to focus our energy towards increasing this value, the faster we are able to save a part of those income which we can then compound it via the investing method.

A 5% gain on a $1m portfolio will ultimately be better than a 20% gain on a $20k portfolio. I think that's basically the idea.

Question 3

I saw you mentioned in the article that it was a mistake to buy whole life insurance. May I know the reason why as I am considering to buy one in future given that it will help to provide some relief if anything happens to me .


B: I wrote an article here not too long ago when I surrendered my whole life policy.

I think it is important to acknowledge that products like ILP and WL are not bad on its own. I must admit that they do cater to different people with different personalities and they can be an important part of the personal finance portfolio to have.

The only reason why I mentioned ILP and WL as one of my worst investing mistake is because I could have done better with a term life earlier on in my life, paid lesser premium and I could have the flexibility to terminate it as and when I do not need them.

At this point, I believe our family are sufficiently covered in terms of the financial need should anything happens to me. I believe additional items like CPF (where I have done my CPF Nomination) and company 18 months salary death benefits payout will also be a huge help for the family. But that's just about me.

I'm also a big advocate of having offense as a good form of defense.

Question 4

The interview shows that you are making a return of 19.2% over the past 6 years. Is that sustainable? What about the losses? Are there any?

B: As much as I'd like to keep the high returns momentum going, I'm not naive enough to think this will continue forever. I'm also not going to spin a story and says how good I am to be able to churn out that sort of returns thus far like most marketing gimmicks.

One thing I can say for certain is that the returns will drop at some stage and it is not wonder to see why.

I'd love to also reflect on past losses and have made many throughout my investing decision. On top of my head, I can already think of Kingsmen, ISOTeam, Silverlake, Accordia and Ascendas Hospitality Trust.

I'd also love to reflect on past winners that I have made a profits on that I think makes a bad investment on hindsight. Sometimes, it's so hard to distinguish if it's luck that's helping you or skills that you are getting out of.

Nothing is certain, that's the fun element about investing.

Question 5

Your portfolio looks pretty concentrated and it is also only covering the SGX market. Are you not afraid of over-concentration?

B: At the moment, I do not see it much of a problem yet.

I like the governance that covers most of Singapore companies and it cannot be said to be totally the same if we start looking into unknown territories.

The US market is an interesting one but I have always find it to be expensive on valuation basis. I think during a deep recession like we had in 2008, it's a very good opportunity to start looking at some big cap companies over there.


Final Thoughts

I reminded about this at the start of the article but I'd like to remind again at the end that it's ultimately about becoming a better person, both spiritually and financially than who you were the day before. It is never the intention to compare one status and keeping up with the jones.

If you are still constantly keeping up with the jones, you may want to read this article here which is pretty self explanatory on why there are always things and someone who are better than you.

Last but not least, I'd like to express my gratitude to all the fellow bloggers - the senpai whom had achieved financially great status but still remain humble, the 12 immortals in our chatgroup as well as all the friends and readers who have been supportive of me since the very start. I think it is important that we keep giving each other strength so we can move on to a better level scale together on this very journey.


Wednesday, May 10, 2017

My Thought Process When Selecting Reits

Previously, I wrote an article on my thought process when selecting stocks in general and how I would deconstruct the required return I need by segregating them into X + Y + Z when putting my thinking cap. If you miss them, you can refer to the article here.

Once in a while, I try to dissipate what I have in my mind, especially knowing they are so disorganized up there and I am trying to organize them properly by documenting them down like this. The intention is to share some of my thought process and hopefully from there, we'll get active interaction and try to improve from there.

I've been asked many times by readers on why I select a particular Reit. People asked me why I bought into Far East Hospitality Trust (FEHT) when all the fundamentals and share price did was to keep going down. The same was asked with Sabana Reit when I bought them previously. And the same was asked with Ireit. 

I hope this article will help to answer some of those questions you have right now or if not at least stimulate your thinking process.





There are basically 3 types of strategies that I usually use for my selection of Reits. 

*Before I start, I need to remind that some of the case I put out will question some of the conventional wisdom about Reits that you might know in the past.

1.) The first strategy is what I defined as the "Premium Selection".

Some of the examples that falls under this category are companies like First Reit, PLife, Ascendas Reit, Ireit, Mapletree Comm and Keppel DC.

These are companies that are often trading at a premium to their NAV and have most people avoided them because they think these companies are "overvalued". Hence, their arguments are always surrounding this idea of waiting for it to drop below their NAV before they would start looking at it.

While that isn't technically wrong, it is not the most effective way of looking at it.

The most important characteristics that many people have missed are that these companies in this category often has a strong organic growth ability, decent management and optimum capital allocation that leads to the most efficient use of financial engineering that would benefits both the Reits and unitholders.

For instance, the performance of Plife and First Reit are usually structured with defensive long term lease with downside protection and an organic rental reversion through CPI linked indicators. What this means is that even if they distributed out 100% as dividends to shareholders and retained none, the portfolio would still be able to grow their earnings power organically because of the unique structure. This itself warrants the huge premium they are trading to their NAV.

On the optimum allocation of capital, many people also had this idea that gearing (debt) is bad and management should always go for as low as possible since interest rate is rising.

First of all, we should deconstruct what cost of capital is and what all companies are expected to pay on their WACC.

If you are a finance graduates, you would be familiar that there are usually only 2 ways the companies can fund its operation needs. One is via the debt and another is via the issuance of equity. The other one is of course to go in with all cash but it's quite unlikely for a big market size.




Here's the truth: Cost of equity is almost always more expensive than the cost of debt.

If you do your capital asset pricing model (capm), you'd know that your required rate of return is always adding up the risk premium on top of your risk free rate you can get on the street.

What I am trying to say here is that high gearing isn't necessarily bad if you look at it from this way because as an asset manager, you either have to gear up or do an equity issuance if you want to grow either way. 

If the assets have the supernatural power of Plife or First Reit, then that's great but other than that, even an organic growth for retail or hospitality reits also need asset enhancement (AEI) and that often requires funds.

If you look at my table below, the best optimal capital allocation strategy as an asset manager is to sensibly use as much debt as possible if the cost of debt is low, bump up a sustainable DPU growth and with the share price increase, only then you start issuing rights for equity. In a perfect world where there are no disruptions, this would create a heavenly circular path that will keep going on.

George Soros in his book "The Philosophy of an Elite Investor" called this method an upward spiraling cycle which will multiple wealth and create shareholders value by many times. Those interested can try to google them and check out his philosophy.

P.S: I'll talk in my 2nd point below later about why if an asset manager is doing this in a forcefully wrong way, it can have a completely devastating effects.




2.) The second strategy is what I would defined as the "Bottoming Up"

Some of the examples that falls under this category are companies like Far East Hospitality Trust (FEHT), Sabana Reit, OUE Comm Reit.

This strategy takes advantage of the fact that things look reasonably cheap on real value and not cheap because of inflated value.

By cheap on real value, it is when share price keeps going down because of sectors cyclical performance and not manager's incompetency and valuation of the properties remain solid.

I'll break this down for more clarity.

Sectors cyclical performance - This is when we believe that the company's performance is falling because of the cyclical nature of the sectors, and that with time, the tide will turn in our favor.

Manager's competency - This is when the management doesn't destroy value by acquiring companies at a high valuation and/or doubling this by issuing equity rights when share price is low. In the above example that I shared, the optimum capital allocation in that table works best with the issuance of rights when the share price is at its peak, but when it is done when the share price is languishing at its low, its a total destroyer. We've seen this in the past with Sabana, LMIRT and many more. 

Valuation of the properties - For those that aren't familiar with how independent valuers come up with the valuation properties, they would usually choose 3 or 4 methods like comparison methods or discounted cash flows to come up with the average. The most common ones is still based on discounted cash flows as it is easy to put onto the model with the assumptions they have to make. If earnings are going down, or costs of interests are going up, or if growth is slowing down, or a combination of all of those, then the valuation of the properties will be impacted unfavorably.

When I bought my Sabana shares at 34 cents a few months ago, it is based on the thinking process that they have become too cheap from the valuation point of view. They have obviously failed on the manager's competency part so I was waiting for it to go extremely cheap before entering. I have since divested it at 51 cents for a 50% profit. You can read my thoughts when I bought them here.

When I bought my CDLHT shares at an average price of $1.32 and making it my top position, I was thinking of the above few factors I have written. Of course, there would be some other factors too that I had to take into consideration and I can't list them down all here, but that's basically the geez of what's going through my head. I am currently sitting on a 22% paper gain based on the last closing price.

When I bought my FEHT shares at an average price of 59 cents, I had to be very frank that I had the exact same idea as when I bought CDLHT. I went to their agm (here) and didn't find any indications that the management was incompetent in any way and are destroying value. I understand that there's a lot of resentments from the public complaining about management being incompetent but I didn't see any evidence of it yet. I actually like that the management did not issue any rights by buying unnecessary additions at this time and that the shares are trading at a 0.67x price to book value. I should be adding more to this when I have fresh funds next month. At this moment, I am currently sitting on a 4% paper gain based on the last closing price.


3.) The third strategy is what I would called the "Reversion to the mean".

I usually apply this strategy to more stable companies like the blue chip CapitaMall Trust, CapitaComm Trust, Suntec Reit and such.

What this strategy is basically saying is that if we take the past 10 years information and this can be in the form of dividend yield or NAV or some other metrics, I would usually buy them if the risk reward is tilted more in my favor in the hope that reversion of the mean takes place. A 75th percentile is usually good enough to make a very decent return and it is also when I would go in big.

To illustrate, if we take the past 10 year information for Capitamall Trust (CMT) and the mean is at 1.1x Price to book value, the high at 1.3x and low at 0.8x, and if the company is now trading at 1x, then I would be considering to go in. At 0.9x, it is better and I would be going with more confidence.

Think of it from the Confidence Interval methodology that you study in high school, that's basically the idea.

One caveat to take note is that things can still go wrong but you would have done the required due diligence in the first place.

P.S: I usually do this only when I am trying to enter for short term and it is also applicable to some of the other blue chips I bought in the past like ST Engineering and Comfortdelgro more recently.




Final Thoughts

I am not really a fan when people try to come up with a spreadsheet and they had to complete all the necessary information as if there is a formula to it.

For instance, the spreadsheet may specify that if the Reit has a current gearing > 40% and DPU has been going down for the past 3 years, then you should avoid this Reit. That is First level thinking.

First level thinking advocates that if a Reit has a low gearing, discount to NAV, high dividend yield, then that warrants a buy. If the contrary is true, then avoid (or sell).

If you are one of those who are following such system strictly based on what is being taught, then you would be considered to be just that slightly better than an amateur but lack the second level of thinking.

You would probably be doing just fine for your investment but you'll never be able to outperform because your mind has the same conventional wisdom thought of what everyone has.

Second level thinking is deep, complex and convoluted and it needs to constantly question the conventional wisdom of what everyone already knows. 

I hope my sharing helps stimulate your thought process too when making the right decisions.


Monday, May 8, 2017

Vicom - Q1 FY17 Results & My Thoughts

I used to update Vicom results on my spreadsheet until I got lazy last year after I divested the shares.

That's the problem when you have no vested interest in the company. You started losing track of its progress by simply flipping through the quarterly results but didn't really track at the numbers.

So here I am restarting my update to the numbers on my spreadsheet since I have the time to do so today.

Both revenue and profits continue to drop in this quarter by 4.9% and 6.4% year on year after management stated more deregistering to come in the next few quarters.

One thing which I think they have done quite impressive is to immediately bring down the salary related costs almost equally as the drop in the topline. I think this is a provision to the bonus they might be getting rather than a cut in headcount. The rest are pretty much standard.




In terms of balance sheet, cash continues to grow (almost sounds like a broken recorder by now) and latest it has broken the 60% level of the total asset. I think the fall this quarter has subsided (unlike in 2016 where EPS drops by double digit) and my take is they will probably maintain the dividend as last year given the huge amount of cash they have on their hand. The next quarter interim will show some guidance to it.




My Thoughts

There are not much guidance from the management as to how they are going to utilize the cash, nor anything much about the Setsco segmentation of the business. 

There are also no indication that they are going to raise the price of the testing so it looks like it'll be a pretty much muted year results for them in the next 9 months.

I'm still monitoring on this company and will probably check out the progress until there are further catalyst.

*Not vested as of writing


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