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

Tuesday, October 28, 2014

The Dangers of High PE Stocks!

As you might know, OSIM as of writing has fallen 15% today! as its 3rd quarters results was disastrous, with earnings falling 28%!!

A few years back, growth stocks like OSIM and Super Group started trading at 20 times earnings or so. The big question is, why do investors value them at such high earnings multiples?

Well the primary reason is that these investors expected their earnings to grow rapidly, say 10-20% higher earnings year after year. They also saw the explosive rise in OSIM's and Super's stock prices, clouded by greed they were so confident in paying 20 times earnings as they hoped for the markets to value their shares at even higher multiples!

With such lofty valuations any disappointment would only trigger a sharp sell down. As seen in Super Group's disappointing earnings this year, the stock fell over 40%...From a high of $2.20 level to the current $1.20 level, fools that bought at the peak lost almost half their shirt.

Look at the valuations of our local banks, they are only trading at 10-11 times earnings, 12% ROE and with solid 5-10% earnings growth rates, yet investors are shunning away from them! Investors worry sooo much of the poor property markets which could affect bank loans, as the banks continue to post better results, investors continue to stay further away from it. While Oil trades at the $80 lows, dragging Kep Corp and Semb Corp to trade cheaply at 10-11 times earnings, 15% ROE and 3-5% dividend yields!

Instead investors rush to pick up the next hot stock, paying 20 times earnings for Sheng Siong super market, a highly competitive business against giants like NTUC Fair Price and Dairy Farm. At 30 times earnings for raffles medical group, which only produces an ROE of about 15% but valued as if its ROE is 30-50%. Its like skipping $3 chicken rice just to buy $5 wanton noodles, cause wanton noodles are the in thing!

The lesson learnt here is that the market is often not efficient, instead its irrational due to the emotions of investors. We can be a fool and follow the mad herd or we could simply take advantage of it.

Taken from Warren Buffet -

"Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market‘s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you.

It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market; you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.” (Never invest without knowing your edge.)   Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?

Friday, October 24, 2014

3 Reasons Why I Like These 8 Stocks

Currently these are the counters that I have in my watch list (In alphabetical order)

ARA Asset Management (PE 18, Yield 3%)
Comfort Delgro (PE 19, Yield 3%)
Genting Singapore (PE 19, Yield 1%)
OSIM International (PE 15, Yield 2.5%)
SATS (PE 19, Yield 4%)
Sembcorp Marine (PE 13.5, Yield 3%)
Sheng Siong (PE 20, Yield 4.5%)
Singpost (PE 28, Yield 3%)

So what do they have in common that interest me so much?

1) Net Cash Position

Like my core holdings Semb Corp Industries and Challenger Technologies, I generally prefer companies that have little to no debt. That is also the reason why I usually avoid industries such as commodities, properties and shipping.

With little or no debt, the company cannot go down under as long as its profitable. It also does not have to worry about the increase of interest rate costs (since rates are expected to hit 4% in 2017). In general its just much safer to hold as compared to other stocks that highly geared. Avoiding mistakes is a highly important element towards long term success in investing.

2) High Returns On Equity (ROE)

A stock that generates 10% ROE would be average in my view, I would prefer to hold stocks that have a ROE of 12% or much higher. When a company with high ROE retains its earnings, it would compound a higher long term return to owners.

Example a stock with $10 in assets earnings $1 with an ROE of 10%, if it retains the $1 in earnings, the company is likely to generate an additional $0.10 in earnings next year, bringing next year's earnings per share to $1.10

However a stock with $10 in assets earnings $1 with an ROE of 30%, even if it pays half the earnings as dividends and retains the other half is likely to generate an additional $0.15 in earnings next year, bringing next year's earnings per share to $1.15! This is often why high ROE companies usually trade at a few times their book value.

Among the list, only Genting Singapore has an ROE of below 10%. Its Casino business generates a very high ROE but overall performance is dragged down by its property and hotel segment (That is also why I dislike investing in properties because of the low ROE, something like 5% on average) Like what I mentioned about Semb Corp Industries, I believe a lot of value can be unlocked via a spin off. Especially if they strip out their properties and list it as something like Genting Properties. By removing the low ROE segment, they can focus more on their higher return core business.

3) Track Record of Profitability

Mostly importantly is that the company has to show that its able to maintain or increase earnings per share, year after year (at least over 3 year sample but best is 5-10 years track record). I would often take a deep look at their annual report during years where there was a recession so if it holds well during bad times (example during SARS and the global financial crisis)

Dividend policy is also very important as a consistent payout is one of the best ways for management to reward loyal shareholders. Companies that do not pay dividends at all are the ones that I would avoid. I'm not an accounting expert, as the companies report record or growing earnings I'm not able to tell if it true or not, so the best way for me to verify is by receiving say one third or half the earnings as cash dividends! Accounting earnings can be faked but cash that goes into my bank, its definitely real.


These are the 3 important criteria that I look for when screening for potential stocks to add into my portfolio, but depending on industries there are other factors that I also consider.

In general I am comfortable holding only 3-5 stocks in my portfolio at any give time, this style of investing may not apply well to other investors, who may feel more comfortable being diversed (say 10-30 stocks or more)

At the end of the day which ever the method, what is most important is sticking to what you know best and is comfortable  for you. Sometimes its also not how much you know about stocks, but how much you know about yourself.

"Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. " - Warren Buffett

Wednesday, October 15, 2014

Market Correction and Chicken Rice

I will ask you 2 questions, try to answer it immediately from your heart. (Don't even use your brain to think about it lol)

If you eat chicken rice, and will continue to do so for the 10 years to come. Do you prefer the price of chicken to be higher or lower?

If you currently hold stocks, and will continue to purchase stocks in the next 10 years to come. Do you prefer stocks to trade higher or lower?

The first question is pretty straight forward and your mind probably instantly tells you that you prefer lower prices for chicken. However the 2nd question is not so simple, you will find that most people actually hope for stocks to trade higher! Their thinking is that stocks go up so they can make a profit right?

However if you are a long term investor and will continue to put money into stocks year after year for the coming 10 years, the best for situation for you is that stocks trade lower so that you can have a lower cost on your purchases. 10 years later you will enjoy a much higher dividend payout!

So let us all rejoice that stocks are trading lower! at least for now

The US declined 6% while Europe declined 8% over the past 1 month, just a bit more and we will hit the 10% bear market.

Meanwhile Oil prices has fell from the $100 level to the current $80, a full 20% bear swing!

I personally think that Oil should be able to hold around $80 as this is the breakeven level for the average oil producers, any lower the producers will be making big losses, in which it makes more sense for them not to produce so much, thus reducing supply and pushing up prices.

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” - Warren Buffett

Thursday, October 9, 2014

Core Holdings Hitting One Year Lows - Portfolio Review on Starhub, Challenger & Semb Corp Industries

Starhub fell 7% over the year, as investors fear of interest rates going up to as high as 4% in 2017. Currently it trades at around 20 times earnings with a dividend yield of 5%.

I think its slightly overvalued, as its fair value is probably worth about 15 times earnings for this defensive blue chip. I wouldn't be looking to add more into this position and neither would I wanna sell unless I'm desperate for cash. The 5% yield still feels pretty comfortable for me to hold on to. Starhub has been my core position for 5 years and likely to continue so.

Challenger fell 23% over the year, as first half earning took a dive due to the closure of its 3 Malaysia outlets. The retail industry as a whole has also been facing pressure from areas such as rising labor and rental costs. Meanwhile its closest rival Courts Asia has lost almost half its market value within the year.

In 2013 Challenger made a full year profit of close to 5 cents, at worst case I am expecting full year 2014 earnings decline of 30% to 3.5 cents. On a moderate view I'm expecting 4 cents earnings per share. Full year dividend payout should stay around 2.5 cents.

So at the current price of 43 cents its trading at around 11 to 12 times earning with a dividend yield of 5-6% along with a strong balance sheet of 13 cents cash per share (net cash no long term debt), which is fairly priced for such a small cap stock. Like Starhub, Challenger has been my core position for over 5 years, so I will continue to hold onto it as long as the dividends are not reduced. Instead I might consider adding more to this position if it comes down to say 10 times earning or less.

Lastly my new core position Semb Corp Industries, has declined 4% over the year, off 10% from its  peak of $5.50 and is hovering near its $5 support level.

The recent decline of Oil prices from its $100 peak down to today's $85 has put a lot of pressure on offshore and marine stocks. As Semb Marine which contributes about half of the earnings, declined 18% over the year.

Semb Corp Industries currently trading at around 11 times earnings with a dividend yield of 3%, along with a solid balance sheet of net cash position. I think its Utility business is pretty defensive and also generates a high return of equity of 19%! I'm confident that this area would continue to grow especially its overseas projects in China, India and Middle East where there's very strong demand for energy.

I definitely think that Semb Corp Ind is severely undervalued for such a strong and solid blue chip as the market currently values its Marine business at 13 times earnings and its Utility business at only 10 times earnings!

Its Utility business is still in the growth stage as seen by the pipeline of mega projects, but in the next few years to come management could unlock tremendous value by listing the Utility business like how they did for Semb Marine, it would easily fetch 15 times earnings or more, given comparable listed utilities companies such as SP Ausnet, City Spring Infrastructure & K-Green Trust, all of which trades at much over 15 times earnings.

Portfolio wise, like what I previously mentioned of markets being overvalued, I held around 20% in cash. With the recent sharp decline in global equities, I think its time to put some of the extra cash to work.

Were you prepared for the correction?

Be Greedy When Other Are Fearful - Warren Buffett