Avoid over-concentration risks

In our research for value companies, we usually do a lot of peer comparison and reading on the sector news. As a result, we might overexposed ourselves in a particular sector or country, or even classification of company.

Under my radar of companies, I have SGX, Singarmas Land, LKH, Acendas Reit, SATS and QAF. With the exception of SGX, SATS and QAF, buying any of the rest will results in over-concentration either in Indonesia or the property sector. SGX look fairly valued at $7, I was hoping to get it below $7, but alas, it was not meant to be, it briefing traded at 6.95 a few months back and the never look back. QAF has a weak pig rearing business segment, and I would need a good margin of safety before I get into this.

In terms of classification of companies, I am hoping to buy into a "slow grower" and find a potential "super grower", but till the fact that the SIngapore Market is so small, it is very difficult to apply Peterlynch method of using local knowledge to find great products that are selling well, but still have low market penetration rate. (If a product is highly successful, it doesn't take long to have a big market presence in SIngapore, then where is the potential growth?)

Of course, we should not diversify for the sake of diversifying, and knowledge & research is still the best hedge against risk, but to reduce risk, I do hope to find a SIngapore Company that is Cyclical, or slow grower. Property prices are at their height, but I am not sure about property cycles for developers. Actually, I believe SATS might fit into the description of a slow grower, but the price is just too high.

Anyone has an SIngapore Company to share?? =p =p

Yangzijiang- Is there still meat left?- updated

Yangzijiang shares price has risen about 20% in the bast 2 weeks and about 30% from its low of 80 cents. Is there still meat left, or should we start taking profits?

Well, I have no idea if the market will correct tomorrow or YZJ will be sold down over the next few weeks, I know I bought into this company waiting for a turnaround, and the cycle is far from the peak.

A few indicators:

BDI low: 660, Current BDI: 1860, BDI Peak: >11000

Orderbook:



Global orderbook is dropping not increasing, although deliveries are still high.

China shipyards consolidation is still going on, building capacity is being controlled.

We are talking about market cycle here, I do not think we are anywhere near the peak, although we might be leaving the bottom behind us. I would definitely not try to get off at the peak, that would be impossible, but maybe when orderbook starts to build up again, and BDI is in the 6000 range perhaps?

(http://www.hellenicshippingnews.com/News.aspx?ElementId=e0e466d6-1768-4c08-9178-20e4719aaeb9)

Latest news (20-9); China shipbuilding orderbook is actually already increasing, it was "72 million deadweight tonnages (dwt) of orders for new vessels year-to-date, exceeding the 54 million dwt of orders last year."

Lets talk about industry trend, if I have been reading correctly, eco-ships, mega-container ships and LPG carriers are all the "in" things in the industry now. YZJ has been building eco-design bulk carriers for several years now, there are many skeptics about such technology and whether if its value for money. Well, I take comfort in the following quote:

quote from http://www.carisbrookeshipping.net/newsa...=240&src=:
“At GL we see the EEDI as a powerful driver of innovation within the maritime industry, both in terms of shipyards and designers focusing more on energy efficiency and taking advantage of new computational tools and ship owners who now have a clear guide to rely on in ordering new ships,” said Dr Pierre C. Sames, SVP Research and Rule Development of GL Maritime Services. “Our calculations show that these new vessels are some 30% below the reference EEDI line, which is a reflection of the commitment that Carisbrooke has made to invest in an extremely efficient vessel.”

And YZJ build those ships(Carisbrook is a major customer of YZJ), there are some comments online that chinese yards claim of energy efficiency level are scam, that should put that to rest. There are also views that eco-ships technology will leap and bound in the years ahead, so the ships build currently, might not be as efficient as those in the future, this is one risk, I think I have to bear. As for LPG carriers, YZJ in a interview with The Edge, mentioned about negotiating for such deals, was rather disappointed that the recent update of ship building contracts did not include those.

Now, lets talk about YZJ itself.

I have shared a lot about YZJ numbers, and also the risk and merits of this counter through a guest blog at ASSI, I have a hunch visitors of my humble blog are diverted from there, so I shall not repeat what is said there. Instead, I would like to talk about management.

I learn about 3R approach from Yeoman capital management through the valuebuddies forum, and the concept of right people have stuck in my head since. (http://www.yeomancap.com/images/Yeoman-FundPresen-Jun13.pdf)

We want executives of the companies to own shares of the company, YZJ's chairman Ren Yuanlin owns 26% of the company. That does not look like a lot or significant at first glace, but if you study YZJ history, the company is not build solely by Ren Yuanlin, it underwent several acquisitions and/ or mergers before it current form. The pioneers of the various shipyards are the executive directors of the company now. The Top 3 stake holders, are Ren Yuanlin, Xiang JIanJun & Wang Dong, and Chang Liang, who combined stake amount to some 45% of the company, are all executives of the company. Another non-executive director Yu Ke Bin holds some 54,876,000 shares, a 1.43% stake of the company and is the 11th largest shareholder

Even lead independent director from SIngapore, Teo Yi-Dar own a small stake of 150,000 shares.

So, YZJ is definitely not a "nobody child"

For the last 4 years, the remuneration of the directors and top executives have remained unchanged. Although details are lacking, but not exceeding 250k for directors and not exceeding 150k for top executives for the past 4 years do not come across to me as exorbitant.

Then how have they been treating shareholders?

They have been giving increasing dividends since IPO, with the only fall in dividends from 5.5 cents to 5 cents in 2012, but payout ratio is consistent at around 30%, 2012 is the highest at 30%. I would say they have been rather fair to shareholders thus far.

Also, when the shares were trading at a low of around 77 cents in 2011, YZJ did rather massive shares buyback.

When I first bought YZJ, many frowns, now there is a flurry of research reports for buy calls. Many now seems to think that YZJ will win a lot more orders and even orders of fatter margins. For me, I do not count the eggs before they are hatched. I will only take confirmed order book as calculation. So, if you are purely looking at existing orderbook and margins of existing contracts, YZJ look fairly valued at this point, and not actually a screaming buy. But if you are patient to wait for the industry to turn, it should sail forward with fatter margins.

But because it is a cyclical, remember to get off the boat before it is too late. But its too early for that, I will sit back and enjoy the ride as long as nothing fundamentally changes.

My fact-finding into Sabana's managment response.

After reading into the IR response, I again questioned the "wisdom" of paying full price for "future" rental collection.

If the 67 million, or 59 million without admin costs is brokered at fire-sale price, or the discounted cash flow method to value the 59 million is based of 50% occupancy, perhaps it is a wise pay. BUT is that so?

I look out data from sq foot research:(https://www.squarefoot.com.sg/ ; logged in required)



The 22 august transaction is the Sabana's transaction, hardly look like a sale to me.

Next, I look at the medium rent in the area:



Lets assume the medium rental of $1.5 and AMD rent 50% of the building.

SO:

1.5x12 (months in year) x 145000 (Half of NLA) = 2.61 million gross rent.

SInce they are looking for sub-tenant, so its not a triple net lease, so lets give a 0.85 margin for NPI

You will get 2.21 million.

Subtract the management fees, trustee fees and taking 1/4 of the cut (the usual amount left for distribution according to the latest quarter reports)

You will have 1.66 million left for distribution

Gross Rev Yield = 3.9%

NPI yield = 3.3%

Distribution yield = 2.5%

If the building is almost fully leased, I would say its quite a good purchase, if they managed to get it 100% lease in the near future, I would say they clear the mess that they make.

BUT, the fact is, they rushed into this acquisition, which until now, I still find it mind boggling.

1) One, it doesn't look like a sale to me.

2) If NPI yield is 4% onwards for half the building, I might still think its a good deal, as its rather difficult to find 8% yielding investment, so they work hard on their own to achieve this good yield. But at 3.3%, I do not think its such a tall order to find a fully occupy industrial building yielding 6.6%. You pay now, and subject yourself to the risk of finding tenants when industrial supply is increasing over the next few years and if things turn out as you have planned, (roll drums....)you will GET...  6.6% thereabout yield. HUH??

Obviously, I do not know what is on the management mind, but value for money is definitely one of them when rental yield is concerned. Also, I also believed in this: IF there is nothing compelling to buy, DON"T buy! Give a big discount to private investors through placement to fund a non-compelling buy, even more pissing...

IMPT NOTE:

I am complaining about the management, not the value of the counter. This is no to say Sabana Reit is Junk Grade, the high yield has lead Sabana price to rebound.

What I am saying, this is a negative in my checklist of assessing a counter, and if another better counter come along, it will not take much for me to jump ship.

Sabana's IR response to my questions

My questions, their response:

-----------------------------

 

Sabana announced not too long ago about a MTN programme,so why do placement? Why not drawn down loans?

 

• ·         Tapping the established MTN programme (debt funding) at this point would be too costly. In addition, the MTN programme is feasible only if it involves an amount of at least S$50 million, which is higher than what we required (about S$30 million).

I am fully aware that with the $60 million acquisition, gearing will go above 40%, 40.5% if my calculation is correct. Then my next question, why not a rights issue so that existing shareholders can participate in it without dilution and enjoy a discounted price.

 

• ·         The funds (equity) were raised to partially finance the acquisition of 508 Chai Chee Lane.  The vendor of the property is a third-party, unrelated to the sponsor. This therefore means a less flexible timeline to complete the acquisition.
• ·         We believe that 508 Chai Chee Lane is a good quality asset to be added to our existing portfolio that will help generate attractive and stable DPU for Unitholders over time.
• ·         We had evaluated relevant funding methods and concluded that for an amount of S$40 million, it would be more practical to raise funds via a share placement (for equity portion) in order to meet the timeline given by the vendor. Fund raising via a rights issue, for example, would take longer than what is acceptable to the third party vendor.
• ·         The balance of about S$30 million will be funded by debt.
• ·         We do not expect the overall gearing to reach 40%.

 

Lastly, why a discount of more than 9% and more than 10% to last traded price of 1.125? Please be mindful that Acendas reit, Ascott reit, and Aim industrial reits recent placements are all at discount of below 5%. If the discount is necessary to attract investors at such unfavorable terms, then back to the first question, why not a rights issue at 5% discount? Or for the case of rights, a 10% discount will be welcomed. Pardon my bluntness, such exercise come across to me as opportunistic and shareholder unfriendly. 

 

• ·         The pricing of the share placement reflects the prevailing market sentiment and expectation of investors given the uncertainties in Syria and the upcoming FOMC Meeting scheduled for 17-18 Sep 2013.

 

Lastly, UOBKayhian mentioned that your proposed acquisition of Chai Chee is a half vacant building. Why buy a half vacant building when URA figure shows supply pressure. If the report is accurate, you purchase yield will be 2.5% - 4.5% using the average of your portfolio rents. Hardly a value purchase or yield accretive one? 

 

• ·         The property at 508 Chai Chee Lane is approximately 11.0 years old, with balance land tenure of 46.5 years, longer than Sabana REIT’s existing portfolio of approximately 38.8 years. It is strategically located next to the Pan Island Expressway (PIE) and is about five minutes’ drive from Bedok and Kembangan MRT Stations on the East‐West Line. Long‐term leaseback to the Vendor provides initial income stream and potential access to increasing market rentals for balance of space leased to third party tenants. Given the excellent location and good building specifications of 508 Chai Chee Lane, we are confident of filling up the remaining 50% occupancy.
• ·         Based on our projected occupancy assumptions, the initial yield is likely to be higher than our estimated wacc (weighted average cost of capital) of sub-7%. Hence, from this perspective, the acquisition is attractive.

 

-----------------------------------------------------------

 

My thoughts:

I appreciate the reply from management, but I felt a rushed deal it seldom a good deal.

I am not a industrial property guru, so I reserve comments on how good the buy is, but given new supply coming online in the next 2-3 years, and industrial rent index starting to trend down, why the rush to buy the building and adhered to the harsh timeline?

Drawing down loans to meet the timeline, and explain the rationale for momentarily breach of self-imposed 40% gearing and get rights to bring it down, seems more reasonable. 

Thoughts after reading "One up on Wall Street"

One of the main takeaways from reading this book are:

1) Using local knowledge

2) After which you need to classify the company into his 6 categories and start developing the  story, each story from each category should have different focuses, perhaps (my interpretation) just  like their are different genres of writing, and hence the stories should rightly be different.

What left a dent in my mind are the following questions:

1) What is my circle of competency of these 6 groups?

I know I bought into a few cyclicals, I know given I am just a retail investor, I do not have local knowledge in these industries, but I do know what I am looking for in a cyclicals, what are the markers that will tell you we are in mid-cycle and perhaps nearing the top.

I also know I am very bad at identifying growers, especially super growers.

I do wish to have some skills at identifying stalwarts at reasonable price, I know we should be looking at Blue-Chips in Singapore, but at what price. I thought SPH makes sense to me, but apparently it does not provide any MOS for some very experienced bloggers.

I am also very bad at turnarounds, and asset plays. I have some experince with property counters, I was vested in CES before and at one point of time have Hiap Hoe, Heeton, Wingtai and LKH in my radar. (After the run starts, I stop looking, LKH is looking attractive again though)

The book mentioned about some diversification into all 6 groups, of course, he advised against diversifying for the sake of diversifying and one must have full confidence in what one is buying.

-------

There is one thing which I think I do not really agree, but at least I think I would not be following in the near future. That is staying full vested through the ups and downs of the markets. He mentioned about switching from one group to another, and even between one company to the next within the next company. However, I felt Singapore bourse is shallow as compared to the US, and when the market sours, all counters will fall, and without a war chest, I might not fully exploit the benefits, but it does answer some questions of actually how much cash to put aside.

Also, those buying a company for income or yield, will properly fall into the Category of Stalwart or Slow growers, but there is no mention of Reits. Hmm...I wonder why?

NOTE:

I do not claim to fully understand what the book is trying to teach, the above is my interpretation only, if you have different view or opinion, or do not agree with what I say, please drop a comment

Golden agri - impact of pending changes to Indonesia bourse laws

Other commodities may fall under Jakarta's bourse rule

http://www.businesstimes.com.sg/premium/indonesia/other-commodities-may-fall-under-jakartas-bourse-rule-20130913

Palm oil will defintely come to mind if they want to extend the restriction to other commodity.

What will be the impact? Well, we need more details, it might be election Sabre-rattling. Indonesia rules sometime flip faster than our prata man flip roti-prata, given elections are near, potential investors of Indonesia plays should be mindful.

Sabana placement - updated!

I am disappointed with the selfish placement, they should have done a rights issue at $1, i will definitely subscript to it.

Below is what I posted at VB forum:

Did a quick calculation.

I use the lower 2.7 million increase in distribution due to acquisition. (Refer to earlier post 274). I use the lower estimated figure.

I account for the acquisition fees of 670k already, performance fees, they are not going to get it as my final calculation of DPU after dilution is 9.5 cents. (As compared to 9.6 cents now, without acquisition.)

So net net, given I cannot participate in this discount YET, (I think market will punish this counter), we are worse off with this deal.

But then, at 1.080, yield will will be 8.7%.

So I willl keep my cool, let the price drop further and accumulate after the placements unit come into play.

At $1, yield will be 9%.

Ok, not sure angry now. BUt what the F***, issue rights la, whats the rush!!

Other numbers:
They are still 27 million short for their acquisition, they do not have 27 m in cash, so most prob still need 20 m loans. But it does not make a big difference to gearing, its within 1% point.

NOTE: Income for distribution increase is from my conservative estimates only. IF they champion and buy a property that is more than 10% vacant, then the figures will be wrong.

I just note that the AMD building is half vacant! So my figures are all wrong, dilution effect will result in 9 cents DPU annually, versus the 9.6 cents now...

I have send an email to management asking some questions, will posted it here if I get a reply