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! ^_^

Saturday, November 8, 2014

The Sim Lim Saga - Solidifying My Conviction on Challenger Technologies

Recently there had been many heated discussions online regarding the unethical business practices of certain stores at Sim Lim Square.

For news details please visit

I still remember that 5 years ago after making my initial purchase in Challenger Technologies, I was constantly discouraged by many. One of the most common remarks that I get is "Challenger things so expensive, I rather go Sim Lim and buy cheaper. This company really no good la, why you go buy?"

I was pretty much a nerdy guy who liked purchasing IT gadgets, I was familiar shopping at Sim Lim, Courts, Best Denki and Challenger. But in the end where did I buy my stuff from? Challenger of course! Mainly because I too had bad experiences in Sim Lim before and in the end all I wanted was a peace of mind on my purchase.

The second most common remark that I often get is "Nowadays everyone buying from online liao, so cheap. Challenger will go out of business for sure leh"

First of all, yeah there is some truth in this statement. Young professionals who are savvy often just shop online for the IT stuffs they need, however they are not really Challenger's targeted core customers! Challenger's main consumers are actually the Uncles and Aunties (age 40 and above) as well as students. Generally these elderly people are less savvy, often require technical assistance, prefer shopping physically and most importantly are not so price sensitive (they have saved a lot and are now pretty rich actually, to them peace of mind is highly more important as compared to price), as for students they don't have a credit card so they can't really shop online and they are mostly using their parent's money (thus less price sensitive, I've seen school girls paying 35 bucks just for a hello kitty handphone casing!)

Lastly the power of brand and membership, look at NTUC fairprice... the supermarket business is so competitive (aggressive rivals such as Sheng Shiong and Dairy Farm), yet they continue to do so well. Have you ever wondered why is it so?

Challenger currently has over 500,000 members, meaning that close to 1 out of every 10 people in Singapore is a Challenger member. Over 80% of Challenger's business comes from repeated customers, one must not underestimate the power of brand and loyalty.

Nowadays IT retailing is not too much different from supermarkets, consumers can also choose to purchase their groceries online from websites such as redmart, but why do we still have long queues to check out our groceries? Its simply that we have malls so close to us that often Singaporeans are just too used to spending their weekends at the mall watching a good movie, dining at a fancy restaurant and doing a bit of shopping.

"A Brand is not a product or a promise or a feeling. It's the sum of all the experiences you have with a company."
– Amir Kassaei

Friday, October 31, 2014

The Japanese Super Saiya QE

The Bank of Japan surprised investors by announcing it would increase its bond and asset purchases by between 10 trillion yen and 20 trillion yen ($90.7 billion to $181.3 billion) to about 80 trillion yen ($725 billion) annually!!!

This sent the Japanese market up 5% and world wide markets into a crazy rally! Currently the Nikkei is in its 7 year high after gaining over 75% in just 2 years time!

Meanwhile the Dow has also hit a new all time high! Gaining over 30% in the last 2 years.

So the big big question here is, did you use your spare cash during the recent correction?

or were you holding cash and forever waiting for a much bigger market decline?

Well its only the brave that gets rewarded, if your missed the boat then do some reflection and learn from your mistakes. During the recent correction, there were obviously many good deals that one could had picked up with comfortable margin of safety.

When oil hit a low of around 80 dollars I mentioned a couple of times of how it was time to be greedy while other are fearful, and that Marine related blue chips were trading at only 10-11 times earnings and banks were trading at only 10-12 times earnings. I personally managed to add more Semb Corp Industries and OCBC Bank into my portfolio so I give myself a pat at the shoulder that I managed to pull the trigger and fire at the bear while many others were frozen and didn't know what to do.

It turned out that all 3 of our local banks reported results that were better than analyst estimated, sending them to a quick rally. Kepcorp results were slightly disappointing due to the drag from its property segment, this is an area which I tend to dislike as property is a low ROE and highly geared business. However Kepcorp's Marine and Infrastructure businesses are still great, I do expect them to continue making around 15% ROE overall.

Sembcorp will announce its results on 6th Nov

Sembcorp has opened its second state-of-the-art cogeneration plant in Singapore. The plant increases Sembcorp’s combined gross power generating capacity in Singapore by 50% to 1,215 megawatts.

Currently the Utilities segment contributes close to half its earnings, I think it should be able to generate a solid stream of recurring income along with some growth from the incoming 2 power plants in India that will come online in 2015 and 2016 respectively. Overall power capacity will grow by 76% in the 3 year period 2014-2016 while the Sembcorp still remains in a solid net cash position and is likely to continue delivering solid ROE of about 15%.

Given that the market's recent run up and that I have depleted most of my cash reserves. I shall refrain from an further purchase of equities. Now lets sit back and enjoy the ride.

A rising tide, lifts all boats

- John F. Kennedy

Wednesday, October 29, 2014

OCBC - Good Set of Results, Value Buy!

OCBC released 3rd quarter earnings this morning, with net profits up 62% year over year, excluding one time gains, core net profits was up 11%, still pretty decent growth I must say. I do expect our local banks to grow earnings organically at a 5-10% clip for the years to come.

Net interest margins improved from 1.63% to 1.69%, this is the spread in which they borrow and lend $$. Since the FEDs have ended QE(bond buying), long term interest rates would slowly move up, as a result banks would be able to lend out at a higher rate (think of 30 year housing loans and 10 year car loans), while short term interest rates (borrowing cost) would likely to remain low (say 1% to 1.5% for fixed deposits). Overall I definitely see net interest margins moving upwards, probably towards a more normal level of 2%, this would greatly improve banks earnings.

ROE (return on equity), a very important metric as I mentioned in my previous article, jumped to 14.3% from 11.5% before, I think that going forward OCBC would likely hold ROE at around the 12% level, which is pretty decent and above the 10% average.

Earnings per share came in at 85 cents which beat my estimate. I thought they would make around 90 cents per share this year, but now I think they are likely to make around $1 for the full year of 2014 instead, which is really great for shareholders. Valuations wise OCBC is only trading at around 10 times estimated earnings, definitely not expensive for such an amazing blue chip with a solid track record!

Looking at the Book value of $9.18 (valuation surplus excludes the burden of perpetual securities and  includes adjusted real estate values, do note that OCBC does sit on a lot of properties, for details check out its annual report),  it would provide shareholders with a comfortable margin of safety and price support (a likely limited 5-10% downside) in case of a major decline. Banks rarely trade below Book value, the only period when they did go slightly below Book as I could recall was during the Asian Financial Crisis and the Global Financial Crisis which happens probably once in a decade (1997, 2007 maybe 2017 next? I really can't predict)

Lastly the potential catalyst for shareholders would be the sale of UE, I think its a wise move by management to clear away its low ROE non-core businesses. My estimate is that this sale should be completed around year end leaving OCBC with a solid balance sheet going into a new year of 2015.

Investors that are having capital commitment problems buying 1 full lot of OCBC(close to 10k) fear not, in two more months we would be able to trade in 100 shares per lot, which makes purchasing bank stocks more "affordable" to retail investors. Even I have problems when trying to nibble up the big boys like UOB(22K+) and DBS(18k+), when they become more bite size I would definitely look forward to picking up UOB&DBS shares too, especially if they still trade at decent valuations of 10-12 times earnings or less.


"You can't win by betting on every hand, there will be hands that you win or lose. But when you pick up a big hand like Aces, Kings or Queens~ don't be afraid to bet big"

Felix Leong