Reminders of things to do before I initiate a position

This is a reminder for myself to do due diligence before initiating a position. Sometimes I like a company from the first review and I might buy something on impulse, or what some will say, be trigger happen.

1) Check latest important metrics.

-Gearing level, assets levels, FCF, earning resilience, and depending on what  is the story of the company and reason for buy, the dividend yield, PE, PB or FCF.

2) Excel list for numbers

-Trend for capex

-Trend for revenue, GP, NP, margins for all segments 

- Quarters inventories, receivables, parables 

3) Read all announcements made by company in the last five years. Look for 

- Shares sale

-Corporate actions

-Acquisitions and disposals

-Renewal of contracts, update of order books

-Management movement; resignations and designations

4) Read the AR and the accompanying footnotes.

- Capital management

- Management pay

- Business review and future plans (Track their track records)

5) Read the prospectus, particularly important if it has history of less than 5 years. 

- Risks

- Major customers

- Reits (Fees structure)

 

Well, there is no end to it, keep digging and will understand the story better. 

The problem is, I am a lazy person, I usually do all 5 after I buy, motivation to move, muhahaha... Stupid, isn't it

Lippomall - Overshooting to the downside

We all know market tends to overshoots, exuberance will cost a company shares price to jump above whatever value any good development might have on the company, and being overly pessimistic above the future will also cause the price to drop beyond any fair justifications.

The fact that Reits has corrected due to impending interest rate hike in the future is justified, in fact, I felt most reits are overvalued during May when most just yield between 5-6%. Thus, it is important to do quantitative analysis to guage the impact on bad news and judge for yourself to see if its overdone.  

Then tapering announcement happens, and many reits experienced a free-fall, I initial a position at 7.5% yield.

 

This is what I posted at valuebuddies.com (13th June) then:  

"Was looking closely at lippomall again when yield reach 7.5%. It seems like a reasonable yield and taking into consideration the following.

Pluit village mall settled the messy ligitation with carrefour, I am not sure how the out of court settlement terms are, but the trust is insured against such losses if I read correctly. Carrefour has a floor area of about 13000m2 before the issue starts, and carrefour keep to the same area, the occupancy rate at pluit village will improve to above 90% and contribute 3.8 million NPI in a year, which works out to be 0.001772195 cents. Not significant but the amount is like a buffer to protect against rise in fiance cost as a result of interest hike, which everyone is talking about.

Up till 2014, the only floating rate that LMIR is exposed to is for amount of 75 million at a rate of 4.3% They still have 425 million fund not drawn from their MTN. Assume they use it to retire the 147.5million bank loan, and the interest that have to pay become 6.3% (the highest trance of MTN notes is 5.875% due 2017) , the correspond increase in finance cost is only 3 million. 

seem like the 7.5% yield is "quite safe" till 2015 at least."

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Then another experienced and seasoned forumer pointed out to me that I didn't account for currency risk. Well, I did get punished for not doing a detailed research and when capital outflow begin in Indonesia, the currency start to fall, and all Indonesia property counters listed in SIngapore get a heavy selldown.

This time round, I look deeper and currency risk, and realized currency affect finance costs too, since loans are in SGD dollars but revenue is collected rupiah. But I realised a 15% fall in currency will only lead to a 5% dent in distribution,  so forward annual DPU should be around 3.5 cents. So when with this reduced DPU, and I still managed to get a 8.6% yield, I decided to average down. Luckily, price has rebounded, and I now have a small margin of safety

With more investment in this counter, I continue to dig deeper, to see if there is any impact on revenue, and as mentioned in my previous post, there do not seem to be any impact on revenue or NPI during volatile period of 2008 and 2009. In fact, due to the hedging of exchange forward contract, the greater the fall in rupiah, the bigger the unrealized profits in forward exchange contract, and all these are non-cash items that will not affect distribution.

This time round, I play safe and consult the Gurus at valuebuddies again, and ask why is there such an issue with currency depreiciation. Another kind soul point out the pitfalls to me, here is what AlphaQuant says:

"1) interest payment: repayment in SGD will translate into a higher equivalent in IDR
2) debt rollover: given the assets are in indonesia, how likely are they able to secure debt rollover from Singapore based funding sources on favorable terms (at worst, using their malls as collateral) - failure to get good rates means
a) equity raising via rights/placements
b) idr funding sources - note 10y IDR bonds are now at 8.5% vs SGD @ 2.7. This translates into a higher funding costs if SGD funds cannot be secured.
Will the IDR depreciation lead to loss of confidence in Sg banks to lend to them?"

3) Is the foreign capital outflow + raising of FASBI rates going to choke off domestic growth hence domestic consumption demand? Inflation in indonesia is now at 8.8% - is the economy heading into a situation of stagflation? Malls afterall, are only as good as the ability of the locals to spend, and if consumer confidence gets hit, tenant vacancies will rise. Think of the ghost malls during AFC.

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Point 1 accounted for as mentioned in the lower DPU.

2a is not a issue, we should always set aside money to participate in rights issue when we invest in reits.

2b is a value issue, I have accounted for a 2% increase in interest rate in 2014, I think that is highly aggressive already, next is the question, will SIngapore banks not lend, since Indonesia properties are of lower value due to currency fall. I believe there is a price for everything and every risk, 68% of LMIRT’s S$1.772 billion asset portfolio remains unencumbered, so that means 1.2 billion can be pledge to secure loans, even at firesale price of 50%, that will be 600 million, how not to get a loan of 147.5 million in 2014 with 600 million?

3) is a valid concern, if 3 is to happen, all bets are off, since with higher vancancy, NPI will fall and valuation of properties will fall too. SO point 3 is indeed a risk you must bear when you buy lippo-malls.

With a average yield of 8% until 2015 at least, do I feel compensated enough? Well, I do, how about you?

I would like to acknowledge the many online forummers or bloggers who have selflessly share their ideas and comment on others, so that we can all get a better picture. NOthing is free, but good advice and comments online come free many a time =P

Accounting for risks

Whenever I find a company I like, maybe due to a blogger suggestion, a research report, or a trigger such as constant shares buyback. I will go through some checklists before I do detailed digging. I look for some red flags, or more accurately absence of red flags.

1) High Gearing.

How high is high, well, property and construction sector will likely to see high gearing, but even with these capital intensive businesses, gross gearing of 1 and above is too much for me.

Otherwise, I would look for gross gearing of below 0.5. Why? You have to remember you need to discount for assets, inventories might not sell, receivable might not be collectible, cash is the only King. BUT, you cannot discount liabilities, especially banks loans.

2) FCF

I don't need FCF every year, although I would very much prefer that. But I cannot stand companies burning cash faster than making profits consecutively for years.

3) Red flags

I look for frequent fund raising, if there is a rights/placement exercise, what is the funds used for? It is used as management planned? Is there any big stake sell-off by insiders, especially the directors or business owners? Is there frequent movement of key personnel like the CFO in particular, frequent change of audit company, etc

4) Can I understand their business model?

Most business plans are not that hard to understand, except those in the semi-conductors industry, I really blurred when this one is concerned, I used to own UMS, but sold out after the Founder sell a significant stake for a second time. The price went up after that, but no regrets.

5) Net Margins

I can accept low margins, but not anything lower than 5%. I also will not risk my money with companies that have margins that seems too good to be true or looks like a loser when compared to it competitors. A few percentage difference is fine, but if the difference is in the tens, I would look again carefully.

6) Earning records

I am very bad at identifying strong growers, I usually buy cyclicals or stalwarts,  so profit resilience is very important here. I need to see their profits even during downturns.  Unless I am buying a turnaround, (My record also super bad with this ), I usually is rather unforgiving with losses

If the company pass the above 6 pointers, then I will proceed to dig deeper. I will start reading the prospectus,  learn about their major customers and competitors/peers. Look at the fine prints of their AR, basically there is no end to research. If after some preliminary digging, I still like what I see, I will start with a small stake, and that will usually motivate me to work even harder to find out about the business, both qualitative and quantitative.

Please leave a comment, if you have some other ways of looking at a company

 

  

Penny trading

 

I have sworn off penny trading.

But, when I saw high easy it is for someone to make 100% gain in a single day, a perhaps get a few baggers with days or weeks, I can't help but get envy.

I know Envy is a sin, I am just being honest with myself here.

I know of the pitfalls of penny trading, you win fast and big, and you get go the other direction too. I also know I do not have the knowledge and skills, and perhaps the guts and capital to make penny trading work for me.

So all I can do, is to stick with my own strategies, and wait out my gains.

Delayed gratifications in investment, well, there are some are skillful traders or lucky stars that get very close to instant gratification in shares investment too.

Ok, back to digging and saving up for investment. I realized how envy make me such a terrible person,I secretly have the thoughts of the traders getting their fingers burned when the tide turn for penny traders. Evil me!! I know, I know, its just a flicker of thought, and I chide myself liao

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currency impact on lippo

It seems to me that volatility of Indonesia rupee does not have an big impact on DPU, will post more as I find out more. 2008 Q4 and 2009 Q2 are the 2 periods with the sharpest fall and raise, but realized foreign exchange forward contract are always kept to a minimum.

Sabana REIT

There are a few issues with this REIT, the top two being the renewal of leases and weak sponsor.

Well, there is nothing we can do about the sponsor but I think that has been priced in.

as for renewal of leases, in order not to appear talking in hindsight, I decided to blog about it now. It should not resulted in significant fall in revenue, definitely less than the 7.2 % projected regardless of expiry of leases. There are sub tenants in the leases, so to become multi- tenant are a non issue. It will be an issue if Ye anchor tenant are movin out together with the expiry of master lease, that is highly unlikely too since there is no reason to negotiate till the eleventh hour if this is such the case, there should be confirmation of non-renewal as it takes time to find another tenant.

if negotiation is going on tough, is it going to be bad deal for shareholders or tenants. Half of the leases have no build in positive rent adjustment, while industry rent are beginning to fall, there is no cases of negative renewal of rents from other industry reits, and given the low base of rent 3 years ago, net net sabana should get a better deal.

3 more months and we shall see if I am right

Reflection on investing

As with life, market goes in cycles, the only difference is in markets, you get a second chance, and maybe even a third chance or fourth.

Wealth is made when one fully exploit the full cycle of a bull and bear market.

What do you need to make the most of markets. Below are what I think are the important ingredients.

1) You need capital, you need to save more than you spend, you need to save more for investment and at a regular basis.

2) You need luck, you need the cycle to arrive not at your most vulnerable period, e.g. Hugh expenses required for hospitalization, kids, or holidays.

3) You need knowledge, you need to buy companies that will survive to see the sun, strong enough to recover from the down cycle.

4) You need a secure job that generate constant income stream that are stable, you never know how long a bear market will last, keep investing, keep piling money into the right instruments.  

5) You need extensive research, you need to look how different is this market cycle from the previous, what are some of the causes of effects?

In order to address the 5,

I need to have a warchest, I need to divert income from investment, or capital gain into that account.

I need to manage my expenses, I already did one round of slimming exercise, cut down unnecessary expenses, but there are expenses that are related to the family that are necessary for harmony, even if excessive. (If you know what I mean)

Slimming exercises include:

1) Getting the most basic smart phone plan

2) Get rid of my mobile data plan

3) Change my credit card to UOB one to earn cashback