A query of my post about SGX

Dear readers,

I receive an query email from a reader. I think I need to explain myself. When I write, I am thinking aloud and I do not proof read that many times.

So I might be confusing at times, or it could be due to my command of the language. ( I am better at Chinese than English)

The query go like this:

Actually, i have a quesiton regarding your analysis out of interest sake. I am an investor myself. You calculated SGX intrinsic value to be $4.2 and the current price is $7 (6.8 now) and yet you call for a Buy. Why would you buy when intrinsic value is below market price?

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Of which this is my reply:

Oh no, am I so misleading?

In short, what I am trying to say:

1) intrinsic value of 4.2 is based in very conservative assumption of 9% discount rate and 3% growth.

2) but working backwards for SPH, for its price to hover around $4. It is a trading at discount rate of 6% and 3% growth.

3) if I use such lofty assumption for SGX too, intrinsic value then is $8.4 and applying 20% margin of safety, we get 6.8. So perhaps we have now a fair value of SGX.

4) I question if indeed monopoly business is worth so much, or so high a valuation.

5) in short, I think it might to worth accumulating if SGX start trading between 4.2 and 6.8, especially if market correction allow a good sale, say $6 or less.

Hope that's clarified.

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In short, I dun have a buy call for SGX. I do think it is worthy to take a close look if the price continue to head south.

Personally, I will be very interested to buy if it get closer to $6. I am willing to pay fair price, if it goes lower than that, I accumulate.

Anyone, feel free to pop questions or point out any errors/ or confusing parts in my blog by leaving a comment.

I am no guru, but I give honest answers. If I made an mistake, I will admit it.

I thanks the reader for pointing out the possible misleading part.

Have a good start to the Horse Year, may your shares price gallop north

Happy Lunar New Year

My favorite.. Happy new year, may all your wishes come true

What price monopoly?

Readers would have know I have been practicing DCF model just to get a "gut feel" of the valuation of the price.

SGX caught me attention when it went below $7.

So I took the average of 268 mio of FCF over the past 7 years (any earlier before meager would be meaningless), to work the sum. I thought 9% discount rate and 3% growth would be prudent and reasonable.

Turn out without applying MOS of 20%, its intrinsic value is $4.2.

That would be a yield of 6.7%, PE 15. Any serious investor would know its a screaming BUY!

I though no matter how I play around with the numbers $4.2 is really far from the $6.95 a day ago, although before calculation, I thought I would try my luck at $6.9, but decide against it.

result, it did fall to $6.9 today, but rebounded to close at$7.

Then I remember for SPH to trade at $4, it also commands lofty discount rate of only 6% and growth rate of 3%.

I thought SGX is a better company than SPH, in terms of predictability of business, yes it is cyclical, but trading volume is at the bottom, and the derviatives arm offer some hope of growth, upturn of sentiments offer hope of growth, increase penetration rate of retail participation (most difficult), will also offer some possibility of growth.

I key in 6% discount rate and 3% growth rate, and I got $8.4 intrinsic value and when apply a discount of 20%, it is $6.8.

Apparently the market deem it reasonable valuation.

SGX and SPH are both currently enjoying monopoly status in their respective market.

My doubt is, is a monopoly really worth such high lofty valuation?

I bought SPH at $4, but refused to buy SGX at $6.9, am I mad? Of course there is a 1.5% yield gap.

I will be watching SGX closely, in case Mr Market decide to give a wonderful discount. Although I felt it is highly unlikely.

Random thoughts - feeling nostalgic

The MV images still manage to tug some strings... Which version do you like? i still like the orginal（first）, got 烟酒味，沧桑感。

http://www.youtube.com/watch?v=4A9f54sILHk

http://www.youtube.com/watch?v=AEMfXBZHlio

BO liao? Chill... As the market go down, stay cool. =P

Sabana REIT- misjudgment of management, what to do next

In my earlier posts, I overestimated the management of sabana.

They had make acquisitions that are yield accretive with decent yield of 6-7%.

They have a performance fees structure that will only payout performance when DPU increase by 10%. If DPU increase 10%, I seriously do not have problem with them claiming their due rewards.

But alas, it's quite obvious the management interest are not aligned with the minority shareholders and the capability is questionable too.

First, a placement that dilute existing shareholders holding, to buy a half vacant AMD building.

The results:

Pathetic increase of about 3 million gross revenue income that is matched by 3 million increase in property expenses, due mainly to the fact that Chai Chee property is a multi-tenant lease and 5 other become multi-tenant when the master lease didn't renew master lease.

So it is very obvious that sabana is not able to exact good rental revisions even when it now operate a multi-tenant lease.

Also base management fees an trust fees will increase, due to the increase of asset valuation under management.

"Good job", doing nothing would be far better than doing a expensive placement to buy an half vacant AMD when the industry space will see more supply over the next few years. Again it is quite clear that management would muddle along to squeeze more fees out of these value destroying exercise. They also also immediately cash out on their units in lieu of payment. Not interested in holding longer term.

So, what should I do?

It is definitely not a buy. It is a sell? Well, if u bought at 80 cents and is sitting on nice profits, it might be good to lock in profits and search for better options too.

It is sell even if its at a loss? Can they further destroy within the next year?

Well, I just need to collect this dividend and the next to break even if the price can be kept at 1.065.

Logically, I should hold. But the price might tumble even more. They have refinancing this year, and over the next 3 years. Would they do something stupid again?

To be fair, they did managed to increase the sub tenants by 5 over the last 3 months.

I think barring a increase in vacancy rate, the current yield of 8% is safe for the year.

I will hold for the time being. There is no attractive alternative that I can buy anyway either for yield or capital gains, at least not now.

Random thoughts- why are the young competing with the old for units at retirement village

I read with bewilderment that there are those in 20s and 30s buying units at the retirement village, the first in Singapore. All the 281 units were sold out within hours.

I am not sure if those 20s and 30s are shopping for a unit for their elderly. If they are shopping on behalf of their elderly. I would say they are quite sweet in providing lodging for their old.

I am not sure if there are rules to check the age of occupants.

My logical thoughts are: maybe there should be a minimum age of at least 45 of 1 occupant. 60 years lease, so they will be 105 years, possible but unlikely. Anyone younger might outlived it.

Second, the brisk demand will push up prices, is there resale restriction? It will be indeed very sad and unethical if a young flip the property for a profit at the expense of a old, regardless how rich they are. The real rich won't buy a unit there anyway, it's meant for the well-off but not filthy rich. Why would a young need those medical services at their doorstep?

Developer should not worried as the underlying motive is profits, but if the rules are not robust enough, shouldn't the regulator, MND be concerned?

Random thoughts- strange how my preferences change so much with age?

I just realized my taste and preferences change a lot.

I listen to FM 88.3 now, and pay a lot of attention to the lyrics and the instruments behind the music. I used to just like the rhythm and the "feeling" behind it.

I loved to go KTV and sing, now I just like listening to oldies. Would u believe if I tell u I actually went youtube to listen to Michael's smooth criminal again just last month.

I used to find music boring, I needed pop songs. I like the sing of flute and string instruments now. ( I dun even know what it is called, nope it's not violin, it is bigger, Chairlo??). I say I listen and enjoy it, I didn't say I know how to appreciate it.

During my university days, there is a module on Chinese philosophy, I really enjoy that, It broaden my perspectives. I however really read it to ace my exam, I didn't touch them after the exams. Now, I actually google dao de Jin to refresh my memory a few days ago. Some phrases which didn't make sense suddenly make some sense to me. I even read in details one chapter today, but I realized my understanding differ that of the translation and explanation quite a bit.

Hmm.. It is my age or the investment journey?

What is the most precious commodity after kinship and health? Time.

Live and appreciate the present now.

My thoughts after reading Nam Lee Metals AR

After reading up on the AR, I find a few interesting points:

Information about major customers (p88):
"In the current financial year, revenue from two major customers amounted to $77 million (2012: $89 million) arising from sales by the aluminium segment and $25 million (2012: $11 million) arising from sales by the aluminium and mild steel segment respectively"

Its quite obvious 77 million come from carrier (pure aluminium business), and 25 million come from HDB (Both aluminium and mildsteel).
Orders from HDB increase, which is what they have been saying, but orders from carrier is falling, or they are being futher squeezed.

Under corporate governance p18:
"Dependence on relationship with a major customer
A major customer accounts for a substantial portion of our revenue. We are therefore dependent, to certain extent, on this major customer, as any cancellation of its sales and purchases would have an impact on
our operations. Although we have long-term contract with our major customer, it may alter its present arrangements with us to our disadvantage, which would in turn have an impact on our operating income, business and financial position and consequently, our operating profits may, to a material extent, be adversely affected. "

Hmm... Benefits of long term contract is rather limited, given the terms can be negotiated to Nam Lee disadvantage.

Now lets look at 3rd quarter performance of UT, especially their climate control segment,of which carrier is a part:



 

(source: http://www.utc.com/StaticFiles/UTC/StaticFiles/2013-q3_financial_tables.pdf)

9 months sale fall but yet profits increase, it means COS is lower compared to 2012. Although UTC climate, control and security consist of more than just carrier group, but since there is no further break down, this is the best we can do. A lower cost of sales, would mean lower business for Nam Lee.



(source: http://www.utc.com/StaticFiles/UTC/StaticFiles/2013-10-22_earnings.pdf )

Orders have been increasing since 4Q12, but sales is falling, I find this puzzling. But Q3 saw a spike in order which translate to stronger sales in Q3, will the numbers flow to Nam Lee?

I expect business and profit numbers to improve over the next few quarters. The high inventory of finished goods, and receivables should collect cash, and given the cost overrun for one particular project is significant complete.

However,I expect the cash burn to continue in Q1, and affect 2014 FY FCF. Because "On 31 October 2013, the Group completed the purchase of a leasehold property located at 21 Sungei Kadut Street 4 at a purchase consideration of $6.35 million. The leasehold property is intended to be used primarily as a factory and office and will be held as property, plant and equipment.," not considering whatever spending on equipment, the 6 million price tax is already the highest PPE in last 10 years.

My thoughts:

Nam Lee is a net cash company with decent earnings, and with trailing PE <9, it is not overvalued either.

But the attractiveness of this investment is starting to fall. Mainly due to the following concerns:

1) No update of renewal of contract with carrier, not to mention weak bargaining position with carrier.

2) HDB tapering its supply

3) Unlikely of higher special dividend in 2014, as I expect capex to remain high in 2014 due to the moving of factory premises.

I will continue to ponder if the opportunity cost of holding NL is too high, as I wait to collect its dividends. In the meantime, I will continue monitor United Technology Q4 and Nam Lee Q1 results. I would most probably reach a decision by then.

 

Random thoughts- shouldn't Singpost and SPH consider working together?

Just some random thoughts here.

Singpost and SPH both have Hugh distribution network.

Singpost wanted to go big on online retail, wanted to sign online franchise, SPH has hardwarezone and advertising is but a small variable cost.

SPH help in advertising, add e-commerce depth to Singpost, singpost deliver both posts and newspaper. Parcel can be collected at both singpost outlets as well as Buzz pods. This will give buzz pod some retail depth and increase singpost retail distribution reach.

When singpost go newspaper delivering, parcel for posts can be given to the delivery man using Pre-paid packages or containers?

Wouldn't there be some cost savings and cross selling effect? SPH subscribers would get promotional rate for the e-commerce product of singpost, those bartering at hardwarezone can use singpost services, the sgcarmart can divert car loans applicants to ge money of singpost.

Singpost underdeveloped properties to be sold to SPH REIT and retail space further enhanced, especially the paya Lebar headquarters?

Am I making sense at all? This is a random thoughts series post, don't take me too seriously.

Limitations of some numbers and ratios

Just a beginner blog of some of the limitations of some numbers and ratios.

PE.

There is limitations if the company you are looking at is highly cyclical. It my be at the peak of the cycle and hence PE is at the lowest, but earnings might fall, and PE increase.

Earnings of core operations might not be that high, earnings might be very high due to revaluation of assets (properties or biological). Palm oil companies have good revaluation of their plantations due to the increasing CPO prices. Such revaluation might be one-off and are unsustainable. 

If you are looking to invest in a good turnaround company, you might still buy into a company with high PE anyway.

So, one might look at the industry and company, and compare average PE with another peer and think about PEG for PE to be useful.

P/B

Not all assets are equal. Freehold properties in SIngapore have a really good chance of appreciation over time, leasehold factories, and machinery (PPE), might need a big discount. Even if you are looking at cash and receivables, you have to consider if the receivable can be collected (ever-increasing receivables increasing at a rate higher than revenue consistently is a red flag), as for cash, is the next capex cycle coming, which will reduce it significantly?

Hence there is a reason why, so many are looking at FCF.

How about ROE?

It can be boasted by increasing bank loans. Also, we should not be too damning or demanding if a company with a good record of profitability and FCF, but start to have low ROE, and ROA because they start to return the cash to shareholder and not piling it back to work because they see nothing worthwhile for the time being.

Yield (Dividends)

Yield need to be seen with payout ratio, track record of payout, and sustainability of payout. If a company is paying close to 100% of FCF or earnings, and have no obvious growth drivers, chances are it might be sustained.

That is why, graham who uses numbers and ratio extensively talk about having qualitative explanation of the numbers. Are the numbers stable, are the operating environment stable. That why his disciples, one of whom is warren buffet, talks about economic moats. Economic moats, according to Pat Dorsey can be wide, or narrow, can be around for a long time or ceded territory to competition after a few years. Porter 5 forces can make one ask important questions and make sense of the long prospectus one is reading.

Anyone, anything to add? 

 

 

 

 

APTT - 2nd practice of new model

For APTT, I have already establish its economic moat and earning power in an previous blog

http://sillyinvestor.wordpress.com/2013/12/17/aptt-is-distribution-sustainable/

APTT is a media company with regulation constraints/protection, with the rezoning of frachase areas, APTT will start to face competition from 2015 onward, but as mentioned in the previous blog, competition if any, will not be highly corrosive, as the pie (penetration rate low enough) is big enough, and competition will most probably be restricted to 2 per zone, since any more competition will most likely be suicidal due to the highly capital intensiveness of the business.

Growth in  APTT, can come in several areas:

1) Cross selling of  products (upgrade to prenium TV, bundle with broadband)

2) Organic expansion in the TaiChung Franchase area

The regulator wanted digitization, and depend/ required the TV operators to meet such targets, of which APTT has responded by giving new setup boxes. With the digitization, the premium TV market which is largely untapped, might be ready for  plucking.

However, given the rezoning challenge, I will still give a conservative 2% growth despite the good track records, as evident in the low churn rate, increasing RGUs etc.

As for FCF, instead of using FCF= OCF- PPE, I use FCF = OCF - PPE - Interest costs(with hedging at 4%) - taxes, since I am more interested in distribution than FCF alone, as it is a trust, not a company. So there is some discounting in place already. The FCF i used is 105 million.

Given the risk of competition is lower as compared to those of other sector (highly regulated); and that FCF is already discounted, I assign discount rate of 10% and 11%.

Share per value is 98 cents and 87 cents respectively.

Apply MOS of 20%, you get

78 cents and 69 cents.

Great, it seems I finally got something that I didn't overpay for.

Barring

1) natural disaster knocking out infrastructure

2) Poor settlement of tax settlement issue

3) fast and furious increase in interest rate especially in 2016 onwards (Time where they will start looking to refinance)

4) Aggressive price war from competitors for turf

5) Regulation changes affecting pricing(need legislative approval, and hence will not happen soon ) or renewal of license

APTT does seem OK as an investment, if you take into the consideration the 10.7% dividend you will collect every year if the 1)-4) do not happen.

 

Lee metals - 1st practice of DCF valuation after reading Pat Dorsey

Well, no rocket science, but here goes. First, if the operating numbers make any sense to go further.   Most importantly, FCF, the lifeblood of DCF calculation is reasonable stable   Only 2 years of negative FCF, which is more than offset by the other years, with the average FCF of the last 8 years to be 15 mio and the peak at 53 mio. To estimate the new year FCF, I use 15 mio, with a growth rate of 2%, 3% and 4%, which will be 18 mio, 19.5 mio, 21.3 mio respectively in 10 years time, conservative enough. The problematic part is the discount rate. Pat Dorsey suggest 10.5% for average firms, and use 14% for AMD, personally, I don't think Lee metals is worse than AMD in terms of operating numbers, so the range should be around 11 to 13. I calculate the numbers that show operation efficiency according to the book, and Lee metals didn't do badly.   If you look at debts, it is decreasing as the merchandising arm business slows, and the need for bank bill falls. Non-current debts also get paid down, this is happening on the backdrop of Lee Metals expanding the capacity of the manufacturing and Fabrication arm for the past 2 years. As for CCC, FATO, TATO, inventory turnover etc, there isn't big red flag. I said this because I compare Lee metals with BRC asia, a competitor, which fare lower than Lee metals in almost every metric, especially the negative FCF, irregular increase of debt, while ROE, ROA are comparable,other metric like TATO, FATO etc lost out significantly, until I think it made no sense to go further. Quite clearly, Lee metals performance is not sub-par.While revenue is decreasing, net profits have been increasing. Until thus far, I think it is still reasonable to go on, although as a cyclical in the industrial sector, the book did mention it is no easy to find companies with Moat. From their prospectus: We are a “Mill-less One-stop Shop” providing a range of Reinforcement Steel Products without the need to make heavy capital investments in steel mills. We have also moved into higher value-added manufacturing of Steel Welded Mesh Products. We have developed a network of suppliers as well as land and marine logistics capabilities. Our ability to procure steel products from and supply SRM to our network of regional steel mills have strengthened our relationship with these mills and enabled us to obtain competitive prices for the purchase of steel products from them.   I however, doubt the cost advantage of such business, as their merchandising arm sales is doing very badly (as with the industry trend), I wonder how much cheaper can they get their supplies as compared to competitors, although for the 7-8 steel companies that I researched on, none seem to have such a model. I also wonder why no one replicate this model if it does bring cost advantage. Had I have numbers of tonnage, I will be able to better ascertain if there is indeed a durable cost advantage, but such numbers are not available. If you look at margin, then Lee metals did not do any significantly better than others. If we are the low end of the business cycle, there perhaps is less risk of worsening conditions going forward, but Lee metals have benefited from the local construction sector, which has been going through a boom for the past few years. So although the merchandising arm is already in doldrums, we do not know when the local construction will turn down. If I read its business correctly, the high demand for steel, which is good for the merchandising arm, will also lead to higher steel prices, which is bad for its manufacturing and fabrication arm, at least in the short term. Also, the margins for the merchandising arm is really low, which range from 1-2%, whereas the manufacturing arm margin range from 6-10%, if we talk about good allocation of capital, it made sense that Lee metals squeeze as much as possible from the manufacturing arm when the going is good.It is hard to gauge, net net, if the merchandising arm improve, the net impact is positive or negative. So, it is unlikely that Lee metals will fire at both cylinders, but it is possible to be hit with downturns at both arms, which will then push it to a loss. As such, any gains is capped, but losses unlimited. However, in the bigger overall industry, Singapore local Construction is expected to continue to be resilient. While HDB might be tapering its supply, the MRT will provide the work. BCA estimate for 2014-2016   Just a year ago, BCA is still forceasting 20-28 billion for 2014. I believe the increase is due to the fact that MRT projects are starting. Since BCA start giving projections in 2010, they have been way too conservative except in 2010. The preliminary construction demand since 2010 - 2013  are 25.7b ; 32b ; 28.1b ; 35.8 b Again it seems that we might have hit a peak, although demand is unlikely to fall badly to affect the business of Lee metals. A lower-end construction demand of 31 billion and 29 billion should keep Lee metals business going well. And we are not accounting the profits of Austville. In conclusion, sound company with good track records, and a bountiful 2014 boast by Austville earnings. But risk increase significantly from 2015 onwards, should lets give a discount rate of 12% The share per price should be 31.5c, 35.2c and 39.6c respectively with growth of 2%, 3%, and 4% With a MOS of 20%, the price are 25c, 28c and 31c 31c happen to be the NAV price too. Oops... Overpaid. Lets hope the Austville earnings lead to a special dividend, and I am out of here.

Random thoughts - Sad slave to a paid salary

sigh...

This is a complaint and whinny post, if you are having low energy too, stop reading

I work with bosses with last minute requests.

Ok, thats common.

But they flip-flop on their last minute instructions.

Ok, endure for that salary.

They have no back-bone, and retract their orders because they felt the pressures.

I despise...

They have the cheek to say my good colleague who is slogging her guts out that she need to learn?!!

Puit!! (Spitting)

Bureaucracy in Ivory Tower! Hey, if you cannot support our core business, stay out of the way! Our passion already is in a constant need for self-revival, please do not bombarded us with your silly requests, like everything in capital letter, like change the whole thing, only to tell us to follow this format to standardize when we finished your work!

I tell you, you don't listen, then you ask me why? I told you, send you email, what more you want? Huh? You still don't know, hey, that's not my problem!

Hey your little pleasures add no value to our core business, do your paper work to please your superiors, and get out of my way!

I am Zen, be glad that I kena only 4 out of the 6 complaints, I didn't kena the Capital Letter thingy, I don't have to see the smug face of asking me to learn, just angry for my colleague.

Enjoy the process, look to my core business... To the hell with the rest!

Book review- "The Five Rules for Successful Stock Investing" by Pat Dorsey

I spend the past week finding whatever free time I had to read the book, which is recommended by musicwhiz.

It is amazing how easy it is to navigate the book. The author should really be given credits for able to explain complex concepts in a clear and simple language.

First of all, I always have difficulty understanding the concept of DCF, and also is skeptical of the discount rate and growth rate assumption. After reading the book, I found the whole framework clear and meaningful.

The first chapter of the book talk about economic moats, which is really enlightening after the porter's 5 forces framework. They talk about dept and width of economic moat by looking at cashflow numbers, ROA, ROE, ROIC, and also identifying the source of Moats. Product differentiation, Brand, Cost competitiveness, Locking customers through high switching costs, high barriers to success and thus locking out competitors.

Thereafter, if you already know the basic, you can go straight into chapter 11, on how the quantitative data and qualitative numbers merged.

I found the whole concept by Pat Dorsey, while not new, is an excellent framework to anchor all the nuggets of knowledge I already have.

For example, the qualitative analysis of company will affect the assumption you made on the discount rate, and also the growth rate. Since I am investing for yield, some of the reits and trusts have rather stable and predictable cashflow, so it really made sense to make use of DCF to calculate the intrinsic value.

I will use this framework to review all my purchases to see if I overpay for any of them. But first, I would like to work backwards with SPH, I see SPH having a fair value at $4. Maybe not a price with MOS, but with $4, what discount rate would it be at, if I set growth at 1%, 2% and 3%. So that I will give a higher discount for companies with lesser moats. (although the book mention 10% as average, and higher than 10% for lesser companies, and below 10 for companies with significant moat)

I should then be able to come up with a range of intrinsic value. Watch out for my subsequent review result of the companies in my portfolio.