Thursday, December 18, 2014

4 Reasons Why You Should Stay Vested And Not Panic Out

With the recent market volatility, many are shouting out for another crisis. There are many investors who are waiting for a 20-50% market crash before putting any money into the stock market. While there are also investors like me who are mostly vested and wondering if they should continued to stay vested or not.

If you are still mostly holding on to cash and waiting for the next big cash, then I would advise you to stop reading, maybe just hide under your blanket. If you are vested and worried of a major market decline then here are the 4 big reasons why should you not sell out in fear.

1) Dividends

By staying vested, you still stand to collect dividends from your blue chips, reits or whatsoever stocks that you hold. Especially if the companies that you hold are still doing well and continue to maintain or increase earnings! Therefore do expect dividends to be maintained or increased too. Imagine just sitting still and collecting a 5% dividend yield, isn't that pretty good a result already?

But if you are only holding on to a basket of S-Chips thinking they are value stocks because they trade at half book value but pays no dividends, then only god can save you. Good luck with that!

2) Market Timing

Your broker might be telling you that markets are heading lower, just sell your holdings now and later you can buy back at a lower price, say 20% cheaper. Well, but how sure of you that a 20% correction will happen? What if you sell now and the market rallies up 20% instead??  I'm pretty sure no one can be 100% accurate in telling when the market bottom is. As a value investor, I'll just close my eyes and buy when stocks are cheap... like semb corp industries, keppel corp or any other solid blue chips that are selling for 10 times earnings or less and that's all I need to do. Profits are made when you buy, not when you sell~ so when its cheap just go ahead and buy already, you never know when the discount season will end.

3) Inflation

Imagine those holding cash and shouting bear since 2009 till now~ Cash doesn't pay dividends but instead loses value due to inflation! As your chicken rice, HDB flats and taxi fares get more expensive the same 50 dollar notes gives u less of them. If we take a 4% inflation over 5 years of waiting for a crash, these fools that were holding cash already loss 20% before trying to make a profit in the stock market!

4) In The Long Run Stocks Always Increase in Value!

Over the past century, stocks have delivered investors a compounded return of 8-10% (depending on which region US/Europe/Asia Pac etc) while bonds returned 6%, so well I still think stocks are the best long term investments you can have, cheers ^^

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." - Peter Lynch

"Do you know what investing for the long run but listening to market news everyday is like? It's like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill." - Alan Abelson

Saturday, December 6, 2014

China's Super Bull Run! - 2823.HK Up 40% in Under 6 Months!

In the middle of the year I had spoken a lot about how cheap the china market was as it was selling for only 7 times earnings while the HK index was selling 11 times earnings, both seem to be undervalued as compared to STI at 14 and US at 20 times earnings.

An initial research report on 2823.HK by OCBC research also solidified my bet in this highly unpopular market. Coincidentally my bet on OCBC also turned out very well.

2823.HK has since made a super rally of 40% within just a short period of under 6 months!! With all the sudden hype into china banks due to the loosening of policies by the Central Government, the China CSI 300 index currently trades at 13 times earning, which seems comparable with the STI (fairly priced).

I have since exited both my positions in OCBC and the China market as I wanted to lock in the profits before going into 2015. Both of them may continue to surge higher but I'm comfortable being certain of a decent result rather than try risking it to hit a home run. Its like holding pockets Aces on a drawish flop, you just wanna scoop the juicy pot  right now rather than play it down till the river. However if a major correction does comes in 2015, I do hope to pick them up again.

Meanwhile going into 2015 I'll still be sitting on my 3 core positions, namely Challenger(PE 11,Yield 5%), Semb Corp Industries(PE 10, Yield 4%) and Starhub(PE 20, Yield 5%), overall their yields are still pretty decent so I'll just sit tight, slowly collect the dividends and continue to look for undervalued stocks or great ideas for 2015.

"You only have to do a very few things right in your life so long as you don't do too many things wrong." - Warren Buffett

Saturday, November 29, 2014

Year End Review - OCBC, Semb Corp Industries & 2828.HK

Over the last few years, I have learnt to focus on just a few good ideas a year. As I mentioned before, I tend to follow a style of focus and I often only hold 3-5 stocks in my portfolio, which is vastly different from other full time investors who may diversify into 20 or more holdings. For this year my 3 main ideas were OCBC, Semb Corp Ind and the China Market. Lets review them one by one.

In the beginning of the year I wrote about how cheap banks were and OCBC was trading at around $9.30. It was one of the most hated blue chip due to its announcement of the Wing Hang Bank acquisition, investors were fearful of a potentially large rights issue. Valuations were insanely cheap! I was expecting them to make around 90 cents per share, so at close to 10 times earnings I felt there was enough margin of safety. It turned out to be one of my best bet for the year, as I gained close to 10% and have since exit this position.

During the mid of the year I got interested in SCI, which I wrote about it here. What I liked most about SCI was its stable Utilities business that generates close to half its earnings and I was also comfortable with its Marine business which provides the other half of its earnings. However I made a major mistake of underestimating the riskiness of the Marine segment and its strong correlation with Oil prices.

Oil has since fell close to 40% from $100++ to the current $65 level, while Semb Marine has fallen 25% this year. SCI being more defensive due to its Utilities business took a lesser hit but still declined close to 15%. In regards to this mega Oil bear I do think that exploration and production companies will definitely be hit very hard especially if their cost is way higher than $65. However for SCI I do not think that their Utilities business will be affected at all since they usually lock-in their output via long term contracts with their clients. The Marine business currently has a solid order book of over 12 billion stretching into 2019, so in the near term (say 1-2 years) earnings should be fine. However if Oil continues to stay low for an extended period of time (say over a year), Semb Marine would probably pick up less orders in 2015 and 2016 thus hurting future earnings.

As the price when southwards, valuations looked even cheaper at 10 times earnings, so I managed to pick up more shares at a lower cost. SCI is now one of my core holdings along side Challenger and Starhub which I had held both for over 5 years. I think SCI should be able to pay full year dividends of 15-20 cents, thus a yield of 3-4% which is pretty decent.

Lastly towards the end of the year I wrote about how cheap the China Market was, as it was selling for only 7 times earnings!  and also the HK index at 11 times earnings.

The China government has since started taking a looser monetary policy by lowering repo and lending rates and this had sent the Shanghai Index into a rally. Even though I'm still sitting on some decent paper gains(over 5%), I'll probably continue holding 2828 for a much longer time. I still believe that the China market is greatly undervalued with strong potential (GDP growth rates still over 7%)  and given its historical average PE of 15 times I do hope that in a few years time I may be able to double my money from this highly unpopular bet.

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right. - Warren Buffett

Risk comes from not knowing what you're doing. - Warren Buffett

Wednesday, November 19, 2014

ST Engineering - A Good Business But A Lousy Stock, Why???

Over the last 5 years, ST Engineering has only provided its shareholders with a 10% capital gain! That's really a miserable return compared to STI's 20% gain over the same period which is almost double of STE!

One may argue that STE pays better dividends, but its only slightly better at around 4% while the index paid close to 3%. If we take a simple maths of 1% extra dividends over 5 years, that 5% extra still didn't help the STE to beat the index. STE still under performed the index by roughly 5% during the 5 year cycle.

So what was wrong?
Well lets take another look at STE using the 4 M approach (taken from Phil Town's Rule #1, an amazing book for all new investors)

- STI Component
- Government Backed
- Widely Covered by Analysts
- Solid Defense Industry
- High Barrier of Entry
- Patented Technology
- Established Track Record
- Long History of Dividend Payouts
Margin of Safety
- High ROE (20-30%)
- High PE (20 times up)
- High PB (5 times up)
- Low Dividend Yield (4%)

Of the 4 areas, I think all of them are excellent except for the Margin of Safety part, STE was simply trading at too high of a price! At over 20 times earnings investors were blindly over paying for this darling and this resulted in very low future returns.

If the investors had paid like say 15 times earnings with a 5% yield, they would most probably had outperformed the index over that 5 year period. Currently many of our blue chips are trading at high multiples too , take for example SGX, Starhub, Thaibev, ComfortDelgro and SIA Engg. The lesson here is that when one pays too much for a stock, even for a very good business, it may take too long of a time to get his money back.

Price is what you pay, Value is what you get

- Ben Graham

Tuesday, November 18, 2014

City Spring Infrastructure + Keppel Infrastructure Trust - The Utimate SG Utility Play!

City Spring Infrastructure(CIT) will be merging with Keppel Infrastructure Trust(KIT), this will result into the biggest pure utility stock on sgx with over 4 billion worth of assets!

So how will it be done? CIT will absorb KIT and post deal it will be renamed as KIT.
The swap ratio would be 2.106 CIT shares for 1 original KIT shares

So basically if you currently hold 1000 shares of CIT, your total shares will remain the same and the counter will be renamed into KIT at the end of the deal.
If you currently hold 1000 shares of KIT, your shares will be multiplied into 2106 shares of the new KIT.

Trading Opportunity
CIT currently trades at 2.5 times book value, with a dividend yield of 6.4% and has lots of debt
KIT currently trades at 1.08 times book value, with a dividend yield of 6% and has zero debt

In my view this deal greatly favors CIT shareholders, due to the big difference in book values and that the swap ratio was fixed using market price instead.

Looking at post deal numbers, the NAV of CIT shareholders will increase from 0.23 cents to 0.37 due to the gap I mentioned. Taking the last trading price of 51 cents, it would result in a price to book of 1.37 times.

I think that post deal, the new KIT could easily trade at around 1.5 times or higher, given the weak global economy (Mediocre Europe, Recession Japan and Hard-Landing China), the demand for utility assets that provide stable dividends will definitely be very high.

At book value, the assets yields close to 10% and if it ends up trading at say 1.5 times book the yield would be around 6.66% (this is just my estimate, as in the current environment utility stocks are priced at around 6% yield, example Ausnet Services, formally known as Singapore Power Ausnet)

However if you have a high risk appetite then you should consider buying Semb Corp Industries instead as its Utility business is only trading at 9 times earnings and below book value, however this comes along with a much riskier Marine business which trades at 12 times earnings and 2.5 times book value. As a whole Semb Corp Industries trades at 10 times earnings and 1.5 times book value, a risky but very good deal for the brave hearts.

Warren Buffett loves his Utility businesses, well so do we~

Felix Leong

Wednesday, November 12, 2014

Trans-cab Holdings IPO - Riding Beside The Big Boys Comfort Delgro and SMRT

Offering Price: S$0.68 per Share

12 November 2014: Opening of the Offering
18 November 2014, 12.00 noon: Close of the Offering
19 November 2014: Balloting of applications, if necessary (in the event of an oversubscription for the Public Offer Shares)
20 November 2014, 9.00 a.m. : Commence trading on a “ready” basis
25 November 2014: Settlement date for all trades done on a “ready” basis

I don't really talk about IPOs at all as most of them are pretty speculative and definitely not recommended for value investors. However Trans-cab falls in the transport industry which got me pretty interested as I previously blogged and invested in Comfort Delgro. I had since sold for a small profit and sadly it continued raging upwards! 

While transport companies such as SMRT and Comfort Delgro currently trade at excessive valuations of 20 times earnings upwards, new Trans-cab shares will be sold at just around 14 times earnings. Their core business is in the operation of taxis while branching out to other services such as repair/maintenance, diesel pump stations and call centre operations.

Revenues and earnings trends looks good (like in every other prospectus), however do note that in 2013 total assets declined sharply due to restructuring and they booked a gain from the sale of  assets(mainly the scraping of older taxis) which helped boost FY13's earnings.

One important thing that new investors coming in should take note would be the dilution in NAV. Pre-IPO the NAV is only 14.2 cents per share! as new investors come in at 68 cents a piece, this boosts the old shareholders while diluting the new comers.

Post IPO the NAV per share would be 25.5 cents which gives it a price to book ratio of close to 2.6 times. The initial feel is that this figure seems a bit excessive, however compared to Comfort Delgro which trades at 2.5 times and SMRT at 2.8 times, this seems in line.

Lastly post-IPO, if we take the  full year unaudited 2013's earnings of 4.9 cents (a conservative measure), with its IPO price of 68 cents it would trade at close to 14 times earnings. I think that the valuation is pretty reasonable, leaving it with a small upside on initial trading (probably selling for 15 times earnings upwards).


From a value investing point of view it doesn't really look cheap but more towards fairly priced. There's a lack of margin of safety due to the high price to book, and PE wise you really wanna just pay like 12 times or less for such a slow grower(for the transport industry I estimate a growth rate of 3-5% only, since its pretty matured already).

However from a trading point of view this looks like a good bet! With all the hype in transport stocks that had sent CD and SMRT soaring to 20 times earnings, TCH could easily fall within the 15-20 times range. I think the IPO will be heavily subscribed and lucky punters that got allocated would be happy selling out at around say 72-80 cents.

Good luck! ^_^