Dec 10 Sharebuilder additions

16 shares of F&N at $6.17 and 31 shares of STI ETF at $3.22

Sold Gallant Venture

We sold our 10,000 shares of Gallant Venture on 10 December 2010 at $0.37 apiece, representing a 37% gain from our investment price of $0.27 in October this year. Gallant Venture has been a "hot" stock recently, with Kim Eng citing a $0.75 target price. While the stock looks still looks cheap relative to book value, we are not terribly confident about management's ability to translate its undervalued landbank into cashflow over the next few years, that is to say, our investment in Gallant Venture was slightly speculative.

While we tend to avoid speculative purchases, our investment in Gallant Venture appeared to have sufficient downside protection, with substantial upside potential should positive newsflow trigger a re-rating. The company does not have the quality which will render it a longer-term investment prospect in our opinion, and we are also mindful that the company does not have a solid business model. The strong gains have come over just under 2 months, and we find this 37% return sufficient to justify a sell.

 

Portfolio gains 0.5% in Nov 10, STI up 0.2%

In a largely flat month for the benchmark Straits Times Index, our portfolio gained 0.5% in November 2010, outpacing the 0.2% return for the STI. This comes even as we hold 13.7% of the portfolio's assets in cash, and on a year-to-date basis, the portfolio is up 6.2% (net of accrued performance fees), attaining its 6% annual target one month early.

Noble Group was a strong contributor to the portfolio, gaining 10.2% in November, while Memtech rose 9.5%. Keppel Corp benefitted from renewed interest in the offshore drilling segment, while Tat Hong and Mermaid suffered with declines of 10.7% and 11% respectively. Wells Fargo remains our second-largest holding, and gained 6.6% in the month.

Nov 10 Sharebuilder additions

30 shares of STI ETF at $3.265 and 15 shares of F&N at $6.43 on 18 November 2010

Portfolio rises 1% in October, STI gains 1.5%

The portfolio gained 1% in October, slightly underperforming the STI's 1.5% rise. On a YTD basis, we are up 5.7% (assuming accrual of a 20% performance fee on outperformance of a 6% annual hurdle rate). The STI is 11.2% higher over the same period.

Portfolio Changes

Other than our monthly Sharebuilder additions, we added Gallant Venture to the portfolio, on the basis of low valuations (on a Price to book basis) and the potential for multi-fold gains as the company's Bintan landbank is carried at cost, while land sales have been locked in at prices far higher.

We did not sell any holdings in the month, while Guocoleisure and Cambridge Industrial Trust went ex-dividend in the month of October. CIT's distribution includes an advance distribution due to the Trust's plan to issue new units to existing investors (1 per 25, at $0.531 a unit), as well as via a private placement. We applied for excess units to top up our holdings to 25,000 units.

Performance Discussion

PAN UNITED	14.1%
KEPPELCORP	11.1%
TAT HONG W130802	11.1%
ASCENDAS I-TRUST	4.0%
MERMAID MARITIME	3.4%
GUOCOLEISURE	3.0%
TAT HONG	2.9%
COURAGE MARINE	2.6%
STI ETF	2.2%
WELLS FARGO	2.0%
BEST WORLD	1.7%
WBL Corp	0.2%
CAMBRIDGE	0.0%
MEMTECH	0.0%
K-Green Trust	-0.9%
NOBLE GRP	-1.6%
SPH	-2.4%
FRASER AND NEAVE	-4.0%
Capitaland	-4.2%
BERKSHIRE HATH-B	-5.4%
Best World W130705	-13.3%

Our new addition, Pan United Corp, returned 14.1% in the month of October, while Keppel Corp benefitted from strong oil prices. Capitaland fell amidst widespread weakness in property stocks. Cash is now 14.2% of the portfolio, and will weigh on returns against the benchmark if the market continues to trend up strongly, but we are comfortable with adopting a more cautious stance when asset prices rise too quickly. A pull-back at this juncture may be seen as healthy, and will allow the market to consolidate for further gains.

SGX to merge with ASX, to take on debt

SGX has announced a takeover offer for ASX which will see each ASX shareholder receiving a mixture of cash and shares in the new combined entity.

Under the terms of the Scheme, ASX shareholders as at a record date to be determined will be paid, in relation to each ASX Share, a combination of:
• A$22.00 (approximately S$28.04) in cash (the “Cash Consideration”); and
• 3.473 new SGX Shares (the “Share Consideration”).

The aggregate value of the Share Consideration is S$5.8 billion (approximately A$4.6 billion), based on the last traded price of SGX Shares as at the Latest Practicable Date, and S$5.8 billion (approximately A$4.6 billion), based on the volume-weighted average price (“VWAP”) of SGX Shares transacted on the Latest Practicable Date.
Accordingly, the value of the aggregate consideration payable for the Proposed Combination (the “Scheme Consideration”), based on the aggregate Cash Consideration and the aggregate value of the Share Consideration (determined by reference to the last traded price of SGX Shares as at the Latest Practicable Date), is approximately A$8.4 billion (approximately S$10.7 billion), or approximately A$48.00 approximately S$61.17) for each ASX Share.

The value of the Scheme Consideration based on the aggregate Cash Consideration and the aggregate value of the Share Consideration (determined by reference to the VWAP of SGX Shares transacted on the Latest Practicable Date), is approximately A$8.4 billion (approximately S$10.8 billion).

The move will see SGX coughing up about S$4.9 billion in cash, which will inevitably see the combined entity take on between S$3-4 billion in debt. Depending on the cost of debt, we estimate that interest could cost SGX as much as $150 million a year, which will eat into earnings (and dividends!).


We have maintained that SGX looks terribly expensive at current levels, and it is fantastic that management can utilise the expensive stock to purchase a choice asset (ASX in this case) to benefit shareholders. However, the deal would have made much more sense if an all-stock offer was utilised. By offering cash and taking on debt, it appears that the EPS-accretion (as SGX touts the deal to be, EPS of $0.3008 to $0.3612) will be difficult to achieve after factoring in interest payments.

Mermaid buys rigs, price appears a good deal

Mermaid Maritime today announced that it has entered into a letter of intent for the construction of two new jack-up rigs with Keppel Corp, under a proposed new entity “Asia Offshore Drilling Limited” (AOD). The contract is for US$360 million, which works out to about US$180 per rig, and is based on Keppel FELS proprietary Mod V-B class of jack-up rigs. Mermaid is in the process of seeking other investors to form a JV under AOD, and will likely be the major shareholder of the new entity.

We have talked about Mermaid’s huge cash reserves, and the company has now indicated its intent to invest in new rigs to form an offshore drilling entity, likely focused in the Asian region. Is the price paid too high? We dug out old contract values for similar (or identical) Mod V-B class jack-up rigs from Keppel Corp:

On a price basis, the US$180 million per rig price tag appears substantially lower (a 30.5% discount) compared to the US$259 million average paid by other customers from 2005 to 2010. Relative to the price of WTI Crude oil (taken as a simple ratio of rig price in USD millions to oil price in USD), the low ratio for the AOD deal suggests that Mermaid got a good deal on this one. We are slightly puzzled by the disparity in the contract value; the rig appears to be of the same make (under Keppel FELS’ Class B design) as others detailed in prior contracts. With oil prices above US$80, we would also assume that Keppel Corp would have more pricing power.

We own both Keppel Corp and Mermaid Maritime in our portfolio, and read this as a positive development for Mermaid, as the company has now indicated its intent to deploy cash in an area within its expertise. The price paid also appears cheap in comparison with other similar rig contracts. While it looks like Keppel Corp makes out worse on this one, the deal will add to Keppel Corp’s rapidly declining order book, and the positive sentiment associated with the contract is possibly more important than the associated profit.

Oct 10 Sharebuilder Additions

15 shares of F&N at $6.385 each, and 29 shares of STI ETF at $3.27 each on 18 Oct 2010

Asset bubbles forming in Asia? Not yet, but early indications are there

We have talked about the potential for asset bubbles forming in the Chinese property market, highlighting that as a key risk to global stock markets. The potential problem appears even more dire, with Asian (and EM) assets the likely beneficiaries of waves of liquidity flowing out of developed markets.

The current situation: while developed economies (most notably the US) are required to keep interest rates low to stimulate their domestic economies, the emerging markets (and Asia in particular) are booming once again. Output is at record-high levels, while consumers on the ground hardly feel the recessionary chill of the Western world.

A quick look around us in Singapore emphasises this: Bustling car showrooms, packed shopping malls, an extremely tight labour market (a JobsDB email I receive daily highlighting jobs in the financial sector is noticeably longer, compared to a year ago). The IPO market is booming once again, with the latest IPO of GIobal Logistic Properties 12 times subscribed, and Mapletree Industrial Trust set to join in the fray. These are all indications that sentiment is turning positive again, with the STI recently climbing to new 2-year highs. 

With Asia and Emerging Markets the obvious forerunners in the post-Lehman world, investors in the US are more than happy to borrow at near-zero rates to participate in the tremendous growth opportunities in the emerging market regions. The expected appreciation of Asian currencies is an added bonus, and also the result of strong inflows of capital into the region. Singapore recently tightened monetary policy further, which will add to upward pressure on the SGD against the USD.

As with all asset bubbles, the flight of capital will be swift, and many investors will be left nursing their wounds in the aftermath. Fortunately, stock market valuations still appear fair at the moment, despite the onslaught of new capital inflows from the West into Asia. Several segments of the Asian stock market appear slightly expensive (Indonesian and Indian equities, consumer discretionary stocks in China and India, as well as hospitality/leisure plays in Singapore), but the overall market is generally fairly valued at present. We will maintain our exposure to the stock market within the portfolio, but will be keenly watching out for bubble-like symptoms which we expect to develop at some stage over the next few years.

Foreclosed Homeowners Break Into Former Home

CNBC.com Article: Foreclosed Homeowners Break Into Former Home

The investors sold the home, but before the new owner could move in, the Earls had the locks changed and moved back in themselves. "Why should we lay down?" she says her husband asked her. "We need to fight back."

Full Story:
http://www.cnbc.com/id/39726698

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

Foreclosure woes have hit US bank stocks (and notably our holding in WFC) as investors worry that banks will have problems evicting homeowners due to a lack of proper paperwork.

It appears ridiculous that some homeowners believe they should be allowed to stay in their homes after failing to service their mortgages, on the basis of legal technicalities. If the courts ultimately rule that banks cannot foreclose the majority of properties due to improper paperwork, we may be looking at mass mayhem. Why should anyone pay their mortgages then?

More likely, some punitive action will be taken on improper bank practices. People who have borrowed money to buy a home MUST service their mortgage; there is no free lunch here 

New position: Gallant Venture

We bought 10,000 shares (at $0.27) of Gallant Venture today. Amidst the general rise in the stock market, Gallant Venture stands out as a clear underperformer, with rather depressed valuations. The stock trades at a seep 47% discount to its book value of $0.5125 per share, while that book value is similarly understated as the company's landbank is carried at cost.

The company's massive 18,200 ha landbank in Bintan is carried on the books at about $541 million, which works out to about $0.28 psf. While land sales in Bintan have been rather slow, the selling prices have been in the region of between $6 to $29 psf, representing 22-100 fold increases in realisable value. Obviously, there are costs involved in the development of the land into habitable living space, and Bintan is hardly the most popular or sought-after resort destination. We admit that there are huge risks in our investment - much of the land may never be sold. However, we think that with the stock trading at half of an understated book value, we are getting the landbank cheap and are prepared to wait for potential catalysts for a stock re-rating.

Looking at cash balances of S-Chips just ain't enough

A recent examination of the US technology sector's huge cash balances highlights an interesting parallel with locally-listed S-Chips. The connection? Cash balances aren't what they appear to be. What does this mean?

A recent comment by Vitaliy N. Katsenelson suggests that Microsoft's debt issuance makes zero economic sense, as the company has approximately US$39 billion in cash and short term securities on which it is earning lower interest that what it pays for newly issued debt. The move appears to be destroying shareholder value by increasing interest costs without any apparent benefit to the company. Or is this so?

• $1 billion of 0.875 percent notes due Sept. 25, 2013

• $1.75 billion of 1.625 percent notes due Sept. 25, 2015

• $1 billion of 3.000 percent notes due Oct. 1, 2020

• $1 billion of 4.500 percent notes due Oct. 1, 2040

"Microsoft intends to use the net proceeds from the offering for general corporate purposes, which may include funding for working capital, capital expenditures, repurchases of stock and acquisitions." - Microsoft.com

Now why would a company with almost US$39 billion at its disposal need to raise US$4.75 billion to fund things like stock repurchases? The answer may lie with the location of the company's cash balances - a significant proportion of Microsoft's cash may be offshore (ie. not in the US), and repatriation of that cash back to the US could induce substantial taxes. So by raising additional capital from the bond market (which sports extremely low interest rates by the way), Microsoft is able to fund things like dividend increases and share buybacks without having to repatriate cash from overseas subsidiaries. In addition, based on balance sheet strength, the company's financial position is hardly impacted by the bond issuance, given its huge (theoretical) cash horde. 

Now, how does this relate to S-Chips? We have seen various instances of S-Chip companies which have cash holdings in excess of their debt (most are usually debt-free), and even after paying off their liabilities, the company still has a cash balance which even surpasses the company's market capitalisation. On that basis, the company can theoretically purchase all its outstanding shares with its cash holdings, leaving the management with full ownership of the company at no additional cost. Now why have we not seen this happening?

A 5 Jan 2010 announcement by one of the S-Chips (China Milk) may offer some clues:

"The Board wishes to advise that the Company is still currently awaiting clearance from the State Administration of Foreign Exchange (“SAFE”) of the People’s Republic of China (the “PRC”) for the remittance out of the PRC of approximately US$170.56 million, being for the full settlement of the Early Redemption at the Option of the Bondholders (including interest). The Company believes the delay is administrative and procedural in nature and there is no legal obstacle to the remittance of the same.

  

China Milk was in default of its convertible debt obligations to the tune of approximately US$146 million in early 2010, and with the company yet to resolve this issue, the stock still remains suspended today. The company had a rather strong balance sheet, with sufficient cash to repay its impending puttable debt obligation. The company's bonds even traded above par prior to the default, suggesting that investors believed the company would be able to redeem the bonds.

However, facing remittance issues, China Milk has yet to settle payment with bondholders, which sends a strong message to investors who are looking for S-Chips which appear cheap based on their balance sheets. The cost (and difficulties) faced with remittance of cash held offshore may mean that cash balances on balance sheets are not what they seem. Some of this cash balances may never be able to fund a share buyback programme, or a hefty dividend payout. Sometimes, a dollar in hand (or in this case, held onshore) may be worth more than two in a bush.

Sep 10 Sharebuilder additions

Sharebuilder additions on 20 September 2010:

Added 31 shares of STI ETF at an average cost of $3.13 per share, and 16 shares of F&N at an average cost of $6.12 per share.

Jardine Strategic, the one that got away

Investment and emotions tend to get mixed, ultimately resulting in poor investment decisions. Our experience with Jardine Strategic is a case in point:

We sold the stock in June as the stock floated around new record highs, despite the generally weak market sentiment at the time. Our investment thesis was that market technicals were weak and we were more comfortable holding a larger cash position to capitalise on temporary weakness in the market.

The stock did slump temporarily thereafter, providing a short window of opportunity to re-enter (which we failed to do), and then rocketed out of reach.

What went wrong?

We unfortunately let our emotions get the better of us, and the urge to take profit on a stock in a slumping market was too tempting to resist. We failed to relook our investment thesis for the stock (which was a compelling buy despite being at a record high), and we ended up selling an extremely high-conviction stock idea. We also had no predetermined re-entry target price, which meant that we failed to load up when the stock declined.

A mistake which we will try not to repeat:

• Never sell higher conviction ideas; always start with the lowest conviction stocks

Even now, we would be hard-pressed to find a compelling alternative to one of the Jardine holding companies, which allow exposure (at a discount still) to their stable of blue-chip franchises. Would we buy the stock at this time? The stock is already one of the best-performing stocks in the STI YTD, and cliched investment mantras relating to chasing hot stocks spring to mind. Patience is a virtue when it comes to investments, and we may prefer to wait for the next crisis (which could be years later!) to time our entry into the stock.

New position : Pan-United Corp

Bought 9,000 shares of Pan United Corp at $0.485 today. The company was listed in 1993 and has a relatively long track of rewarding shareholders with generous dividend payouts. Pan United Corp has three main businesses - Basic building materials, Shipping and Port & Logistics. The company's subsidiary United Cement is a key supplier of ready-mix concrete, and we expect sustained demand for cement in Singapore over the next few years, as a huge supply of newly-built homes come onto the market.

We are less positive on the shipping business, but the company's handysized container vessel has the potential to be sold for a profit, which will provide cash for further investment. On the other hand, the company's 51.3% stake in the Changshu Xinghua port (CXP) looks particularly interesting. According to the company website:

Changshu Xinghua Port Co Ltd (CXP) is one of the main port terminal operator in Eastern and Central China along the Yangtze River. It is among the ten busiest river ports in China. CXP is one of the leading hubs for pulp & paper and steel products in China. In 2009, CXP registered a 6% increase in general cargo volume to 5.6 million tonnes. We are leading hub in pulp&paper, steel and logs.

Location

CXP lies on the southern bank of the Yangtze River just 54 nautical miles from the river mouth. It is strategically located to serve Jiangsu, China's most industralised province, and capitalise on the enormous potential of its hinterland.

Facilities

CXP boasts excellent natural attributes with a constant deep and silt-free water depth of 13-metres.Well sheltered, it has eight berths with a total berth length of 1.7km capable to handle vessels up to 100,000 dwt. CXP's total handling capacity is 10.0m tonnes per annum.

Macquarie International Infrastructure Trust (MIIF) carries its 38% stake in CXP at $92.8 million (last revalued in June 2010), while Pan United Corp's estimated carrying value for its 51.3% stake is a paltry $36.5 million (at cost, according to a DBS report). Based on MIIF's valuation, Pan United's stake in the port should be worth $125 million, or almost $89 million higher.

With 555,366,160 shares outstanding, Pan United's market cap is about $270 million, and CXP's market value is already half of that. The stock is also trading slightly under book value (about $0.50), which means that we are getting a further discount on the underlying subsidiaries. 

Portfolio drops 2.9% in August, STI down 0.6%

After a 3% gain in July, the portfolio fell 2.9% in August, more than the 0.6% decline of the STI. The portfolio's "NAV" ended the month of August at $0.999, a 0.1% decline from the start of the year. Wells Fargo was the worst performing stock in the portfolio, on the back of general weakness in US financial stocks in August. We added to the stock in the month as it dived to 52-week lows.

Even after adding shares of Wells Fargo, the portfolio has 20.6% in cash, and we may be looking to bring down our cash holding to 15% with the addition of one or two more attractively valued-companies to the portfolio.

August 2010 Stock Returns:

FRASER AND NEAVE 1.1%

ASCENDAS I-TRUST 1.1%
BERKSHIRE HATH-B 0.5%
CAMBRIDGE 0.0%
TAT HONG W130802 0.0%
SPH -1.2%
Capitaland -1.3%
STI ETF -1.7%
KEPPELCORP -4.2%
MEMTECH -4.5%
GUOCOLEISURE -4.8%
NOBLE GRP -4.8%
COURAGE MARINE -5.1%
K-Green Trust -5.2%
WBL Corp -6.3%
TAT HONG -8.1%
BEST WORLD -10.9%
MERMAID MARITIME -11.6%
Best World W130705 -14.3%
WELLS FARGO -15.3%


Ex-dividend 
Keppel Corp $0.16
Wells Fargo US$0.05
Tat Hong $0.015
STI ETF $0.03
Cambridge $0.0068
 
 

U.S. Banks: Goldman Sachs Lowers Targets for Bank Earnings - CNBC

U.S. Banks: Goldman Sachs Lowers Targets for Bank Earnings - CNBC

Bought 150 more shares of Wells Fargo & Co. on 20th Aug at US$24.3899 per share, for a total consideration of US$3,658.48. The stock is trading near its 52-week low and also near book value on the back of recent market weakness. WFC has been exceptionally battered, with Goldman Sachs recently citing "higher-than-average" yields on its security portfolio, which are expected to normalise over the next few years (to half the current 6+% yield). While this may be alarming news, the actual numbers are less dramatic. Based on the 2Q10 financial statement, about US$16.2 billion of securities in WFC's portfolio were earning excessively high interest of 6.48%, an insignificant percentage  (just 1.5%) of WFC's total "earning assets" (US$1.069 trillion).

Aug 2010 sharebuilder additions

18 Aug 2010

Fraser and Neave 17 shares at $5.56
STI ETF 54 shares at $2.98

Should Genting Singapore be worth more than Capitaland?

Market Capitalisation in SGD billions

2Q 2010 corporate earnings update - Best World, Courage Marine

Best World International

• Shock loss of $806,000 for 2Q10, down substantially from $3.427 million profit a year ago
• 1H 10 profit of $228,000, versus $5.44 million in 1H 09
• Revenue plunged 52.4% y-o-y, mainly due to 87.2% drop for Indonesia, and 54.5% drop for Malaysia
• Huge amount of cash and equivalents of $36.1 million
• Interim dividend of $0.012, unchanged y-o-y

The latest quarter has been exceptionally poor, largely due to the impact of lowered sales in Malaysia and Indonesia. Indonesia sales have suffered as a result of changes in cosmetic and import regulations, and Management has guided that two key products have received product licenses in 2Q10, and were launched in June. Malaysia sales have also taken a hit from increased competition.

We continue to like Best World International as a proxy to emerging Asian consumption, especially with its presence in Indonesia. Import regulations have hurt revenue in the near term, but we think that things will be substantially better in 2H10 with more product approvals granted. We like the business for its ability to generate strong cashflow, and the quality of management is decent. Management is keenly aware of the near-term negative impact of the news, and to buffer stock downside (and given the huge cash position), an unchanged interim dividend of 1.2 cents has been declared, despite poor 1H10 profits.

Courage Marine

• Posted 2Q10 revenue of US$16,277,000, up 26.6% q-o-q (+168.3% y-o-y)
• Logged US$242,000 disposal gains in 2Q10
• Net profit of US$5,176,000 in 2Q10, up from US$3,025,000 in 1Q10
• Remains net cash, with cash and equivalents of US$21.8 million  
• Utilisation rate about 90% for 2Q10, up from 70% in 2Q09

Courage Marine posted a strong quarter, as the BDI rose to about 4,200 in May. However, the BDI dropped to around 2,000 points in June, indicative of the volatile nature of bulk shipping rates. With the current BDI at around 2,400 points, Courage Marine is looking at a weaker 3Q10.

Management prudence is once again reflected in the latest quarter's income statement. While turnover rose a massive 168% y-o-y, cost of sales rose much less (+68% y-o-y), allowing the company to post a decent profit, even with moderate shipping rates in the quarter. The company's strategy to utilise older vessels is evidently effective, and the even after the recent disposal of a Handysize vessel, the company still has 580,000 dwt in its fleet to capitalise on a rebound in the global economy.

Coruage Marine scraps Handysize vessel

Courage Marine announced that it has sent Jeannie III (a 33 year old, 34,537 Dwt Handysize vessel) for demolition, resulting in proceeds of approximately US$2.6 million. Based on rough estimates, the Jeannie III possibly measured about 5,200 ldt, which translates to a selling price of about US$475 per tonne, up from the reported US$425 per ldt which Courage Marine secured for the disposal of MV Cape Ore in April this year.

The ship is understandably old, and the transaction will actually result in a gain of about US$500,000 for the current year. Once again, the management has shown ability to profit from the disposal of old vessels as steel prices gain, an indication of how the company's focus on older vessels increases business flexibility.

Portfolio up 3% in July, STI up 5.4%

Our portfolio gained 3% in July (to $1.03), underperforming the 5.4% gain in the STI (on a total return basis). As of 31 July 2010, 23.8% of the portfolio's assets were held in cash, which weighed on the portfolio's overall return. Despite the substantial cash position, the portfolio managed to capture some of the market upside. YTD, the portfolio is also 3% higher (STI: +4.8%).

In July, we sold CapitaMall Trust on the basis that the estimated yield (approximately 4.5%) was not sufficient to satisfy the portfolio's 6% annual target, and we saw little potential for upside from capital appreciation near the $2 mark. We also received bonus Best World International warrants, and may look to accumulate more should the premium to the mother share narrow.

Guocoleisure was the best performer in the portfolio for July, gaining 14.4% on little news other than a series of open market purchases by Quek Leng Chan. After being one of the worst-performing STI components, Capitaland capped July with a strong 12.5% rebound, while KepCorp also gained 10.6%. The main detractors to the portfolio were Best World (-5.9%), Berkshire Hathaway (-5.1%) and WBL Corp (-2.1%).

Mermaid secures work for MTR-1

As previously guided by the management, the MTR-1 has secured work as an accommodation barge, at a day rate of US$20,000, paltry compared to the US$80-90,000 which the rig should be able to obtain as a tender rig. Nevertheless, the contract means that the MTR-1 will no longer sit idle for the next 160 days, and will bring in revenue of about US$3.2 million.

Major holdings in portfolio report 2Q 10 earnings

Wells Fargo

• 2Q 10 EPS of US$0.55 (consensus: US$0.48), net income of US$3.06 billion
• Revenue of US$21.4 billion; PTPP of US$8.6 billion
• Net interest margin rose to 4.38%, up from 4.27% in 1Q 10
• Supplied US$150 billion in credit, up from US$128 billion in 1Q 10
• Net charge-offs declined
• "We believe credit quality has indeed turned the corner"

In yet another consensus-beating quarter, Wells Fargo managed net income of US$3.06 billion, even as its peers saw profit being impacted by shaking trading revenue. Net interest margin is the highest amongst the large banks, and even managed to post an increase from 1Q 10. Pre-tax pre-provisions profit (PTPP) weaker than usual (WFC managed about US$40 billion in 2009), due to merger integration costs and severance costs related to Wells Fargo Financial. Little guidance has been offered on the potential impact of regulatory reform; until then, company remains highly profitable with very sticky deposits (US$761.8 billion, up from US$759.2 billion in 1Q 10).

Cambridge Industrial Trust (CIT)

• 99.97% portfolio occupancy
• 37 Tampines Street 92, 27 Pandan Crescent and additional 17 strata units at 48 Toh Guan Road East (Enterprise Hub) disposed, generating a gain on disposal of S$1.1 million for 2Q 10
• Portfolio valued at $831,150,000 as of 30 Jun 2010
• NPI down from $16.3 million in 1Q 10 to $16.1 million in 2Q 10, due to divestments
• Distributable income down from $11.1 million to $10.8 million
• DPU of 1.238 cents, down from 1.274 cents in 1Q 10
• NTA at 59.9 cents, up from 59.3 cents in 1Q 10
• Gearing down from 42.6% to 42.3% in 2Q 10, target below 40% by end FY10

Yet another stable quarter with no surprises from CIT; dividend yield is about 9.9%, should be expected to head lower as more assets are sold to lower gearing. Yield is still substantial, and more than average S-Reits (about 6-7%), while rents have been locked in at low levels and have the potential to be raised in future. We are pleased that the management is taking a prudent approach to lower debt without destroying shareholder value by a dilutive rights issue or placement exercise. Portfolio assets have been revalued upwards; strong rebound in manufacturing sector should have positive implications for industrial rents going forward.

Portfolio changes - Sold CapitaMall Trust

Sold 2000 shares of CapitaMall Trust at $1.99 today, yield has fallen to about 4.5%, not insignificant given the low interest rate environment, but still lower than the yields on other REITs (6%-10%). While we continue to think that CapitaMall Trust is unparalleled in terms of both asset quality and management strength, we see limited upside to the stock at this juncture and would look to invest the proceeds from the sale in a higher-yielding REIT or Trust.  

July 2010 Sharebuilder additions

F&N - 18 shares at $5.44
STI ETF - 34 shares at $3.01

Tat Hong to take Tutt Bryant private

Tat Hong Holdings yesterday announced a takeover bid for Tutt Bryant, a subsidiary listed on the ASX. The company already owns 100,650,051 shares of Tutt Bryant (70.36%), and will offer A$0.92 for the remaining shares it does not own. The offer (which will cost Tat Hong A$39.02 million) will be funded from both internal resources and bank facilities, and is a 46% premium to the traded price on 14 July 2010, the day before the announcement of the offer. The acquisition of Tutt Bryant will boost consolidated earnings, and also book value (the book value of Tutt Bryant is about A$1.12, but NTA approximately A$0.84), while gearing is only expected to rise slightly.

Further disposal by Mermaid Maritime

Mermaid Maritime yesterday announced the disposal of its 22.5% interest in Allied Marine & Equipment Sdn. Bhd., a provider of subsea engineering services to the offshore and gas industry. Mermaid will receive RM75,537,524 for its stake in the company (approximately US$23.4 million), which will result in a gain of about RM38,388,453, a profit of almost US$12 million.

There is certainly serious "house cleaning" going on in Mermaid Maritime, and the proceeds of the sale (expected 15 September 2010) will add to the substantial cash balance. As an investor in the company, we can only hope (and pray) that the management will use the cash well.

Best World W130705

Best World Intl. went ex-dividend today for bonus warrants (1-for-5). The warrant (Best World W130705) expires on 5 July 2013, and has an exercise price of $0.30. The warrants cannot be exercised until six months from the listing date.

Mermaid cuts losses on KM-1

Mermaid Maritime announced on 21 June that it had sold off its stake in the KM-1 tender rig project, which has been plagued with delays. The disposal will result in a loss of US$7.35 million to the company, about a $0.013 hit to tangible book value of approximately $0.72.

The KM-1 was expected to be a key source of earnings going forward, which explains the sharp selloff following the news. While the move is highly disappointing, valuing the company based on its book value (and huge cash horde) shows that the stock now trades at a 35% discount to book (factoring in the loss on KM-1). At such a steep discount, we are reluctant to sell, but we are cognisant that how management deploys its current cash holdings (as well as the cash to be received for the disposal transaction) will be critical to the company's success.

The stock has certainly been a major disappointment, but the company is likely to have over $110 million in cash at the end of 2010 (current market value is $365 million), and we will watch to see what opportunities this cash horde will buy at the end of the year. We are not keen on adding to our small holding in the company given the lower conviction we have in the management (which recently saw the departure of its Managing Director), but will look to see how the company deploys the vast funds it has at its disposal.

Portfolio gains 2.1% in June, STI up by 3%

Our portfolio gained 2.1% in a turbulent June (to $0.999 a unit), underperforming the STI's 3% gain. The portfolio is essentially flat (-0.1%) for 1H 2010, while the STI is 0.6% lower on a total return basis. Key contributors to the portfolio's performance were Memtech International (+15.8%), Berkshire Hathaway (+13%) and Best World International (+11.5%), while Wells Fargo (-10.8%) and Noble Group (-5.5%) were key detractors.

Wells Fargo slugged, but Berkshire Hathaway surges

US equities were some of the worst-performing stocks in June, as economic data largely surprised on the downside. Wells Fargo was a key "beneficiary" of the poor sentiment on the sector which had largely stemmed from fears over European debt crisis contagion effects, and the weak US housing market served to dampen sentiment on the stock even further. With financial reform focusing on credit card issuers (and the maximum interest they are allowed to charge), many expect bank bottomlines to feel some form of negative impact. At US$24.88 (on 2 July 2010), the stock trades at just 1.21X book value and we may scoop up more shares on the cheap if a market panic ensues, perhaps sparked by negative newsflow from European bank stress tests.

On the other hand, Berkshire Hathaway gained 13% in June, as Buffett showed his ability to pick football teams as well as he picks companies. His insurance unit reportedly insured Carrefour against losses (the retailer reportedly had a promotion where they would refund customers of flat screen televisions if France won the World Cup), and avoided a $30 million loss as France exited the competition in the first round.

Interesting to note, but obviously, this was not the reason for the run-up in Berkshire stock in June. The stock was added to the Russell 1000 index on 28 June, and made up about 1.1% of the index upon inception. Fund managers and index funds which track the Russell 1000 had to purchase the stock, driving up the stock's price over the course of June, even as the overall US market slumped. While this was obviously a good time to sell, we continue to like the company's philosophy (and of course, its management) and are reluctant to sell out. The stock may experience weakness after fund managers have had their fill, but we continue to hold the stock for its long term potential, rather than try to benefit from its short term fluctuations.

K-Green Trust dividend in specie

Keppel Corp went ex-dividend for the dividend-in-specie of K-Green Trust shares (1 share per 5 shares of KepCorp). Based on our 351 shares of KepCorp shares, we will receive 70 shares of the new entity.

Best World share buyback

Best World International today announced that it has bought back 131,000 shares at $0.335 per share, for a total consideration of $43,977.75. This is not a huge sum (relative to its cash position of $39.56 million, or $0.1918 per share!), but the buyback dominated the daily trading volume of 299,000 shares, making up 43.8% of total traded shares. Liquidity for the stock is relatively poor, possibly a key factor preventing institutional investors from considering the stock as a potential investment.

In a second announcement today, the company also announced that it has received in-principle approval for the proposed listing of bonus warrants and shares. Further details on the issue will be given at a later date.

"S-Chipped" (Reprise) 2010

The latest Fujian Zhenyun saga is a saddening reprise of the many blow-ups which occured in the S-Chip space in early 2009. FerroChina, Fibrechem, Beauty China, Sino-Environment, Oriental Century, Celestial Nutrifoods, China Milk and China Sun are just some of the troubled companies which have run into trouble, and have since been suspended (or are pending delisting).

Earlier in 2009, S-Chips fell like flies, succumbing to a mix of fraud/accounting irregularities, an inability to meet liabilities or in several cases, the forced sale of shares which had earlier been pledged by a major shareholder of the company (and yet, not disclosed to the Exchange).

An Early Warning in September 2008

In what was to be one of the most timely warnings issued by a brokerage, JP Morgan actually released a report dated 18 September 2008 where 21 S-Shares with a market cap of over US$200 million were screened for potential warning signs - just eight passed without any warning bells (Cosco Corp, Yanlord Land, Delong Holdings, People's Food, China Fishery, Hsu Fu Chi, China Aviation Oil and Epure Intl). Interestingly, all eight are "alive" and relatively healthy today (Delong Holdings appears to be doing the worst, but it was never a great business to begin with, in our opinion).

A 30% hit rate!

The other stocks flagged by JPM were Yangzijiang, China Hongxing, Li Heng Chemical, Centraland Ltd, FerroChina, Synear Food, China Sky Chem, China XLX Fertiliser, Fibrechem Tech, China Milk, Pacific Andes Hldg, Celestial Nutrifoods, Midas Holdings. While some of these 13 stocks have not done too poorly since (YZJ, XLX, Midas), it is shocking that JPM's simple analysis of potential warning bells managed to spot 4 troubled companies (FerroChina, Fibrechem, China Milk and Celestial Nutrifoods), a "hit rate" of over 30%! FerroChina shares were actually suspended in October 2008, less than a month after the report emerged.

DBS Vickers states the obvious

As S-chips continued to implode in early 2009, owning S-chips was akin to stomping around a minefield. If you were lucky (and your company wasn't the one in trouble for any particular day), you merely had to suffer collateral damange as investors fled from the sector (and who can blame them!). A (largely redundant)12 March 2009 report by DBS Vickers ("Navigating a Chinese minefield") only served to rub salt into bleeding wounds; the damage had already been done! Former market darlings like Beauty China, Fibrechem Tech and Sino-Env had already run into trouble by then, while the Celestial's inabiltiy to meet impending liabilities from its putable convertibles was already well-documented by then.

Avoiding the S-Chip space

Our familiarity with most of the S-chip names comes from having actually being invested in a handful (yes, a handful!) of them at some point of time. Naively, we took balance sheets and accounting statements at face value. Low single-digit PEs, net cash exceeding market capitalisation, book values exceeding market value by several multiples - we interpreted this as a buying opportunity of a lifetime. It was indeed a tremendous buying opportunity, but not in S-Chips.

When one is unable to trust financial statements and the management's integrity is suspect, we see absolutely no reason to seek out opportunities in the S-Chip space. While we scrutinise balance sheets to assess financial integrity of companies we invest in, we remain cognizant of our limitations (little or no accessbility to company management). Therefore, most of our investments are in larger-cap established companies where corporate governance is not an issue. For our smaller-cap investments, we prefer to avoid the S-Chip space completely, and prefer to choose companies incorporated in Singapore.

"CONFESSIONS of a S-Chip CEO" is lengthty, but essential reading for those who still seek investments where many fear to tread. Whether the letter is real or a fake is a moot point, but it serves as a warning that in the financial world, money can be made in zero-sum games of financial innovation, and investors will do well to avoid being the patsy in the poker game.

 

Noble invests in palm oil

Noble invests in palm oil origination in Indonesia

14 June 2010, Hong Kong

Noble Group (SGX: N21), a global supplier of agricultural, energy, metals and mineral products, has acquired a 51% stake in PT. Henrison Inti Persada ("Company"). The Company intends to develop approximately 32,500 ha of land for palm oil production in Sorong Regency, West Papua Province, Indonesia.

The transaction is Noble’s first project in the oil palm sector and establishes a strong platform for the Group to expand and increase its investments in this area in the future. The investment enables Noble to expand its edible oil supply chain and secure a continuous flow of crude palm oil.

The Company is to be registered as a member of the Roundtable on Sustainable Palm Oil (“RSPO”). The RSPO are an organisation whose membership is made up of, amongst others, palm growers, palm oil producers, retailers, investors in the sector and environmental/conservation NGOs. The RSPO promotes the production of palm oil in a sustainable manner based on economic, social and environmental criteria.

“We focus our investments on areas that are synergistic with our businesses both in terms of product and geography,” said Noble Group Executive Chairman Richard Elman. “This move into palm oil plantations will complement our global agriculture and energy businesses. Our operating experience in Indonesia should prove to be an asset in helping us manage this and future projects.” He added, “With increasing convergence between agriculture and energy, this investment is a clean fit for the Group’s diversified portfolio.”

This transaction is not material for the purpose of the Singapore Exchange Listing Rules.

Noble Group today announced its investment in palm oil, further diversifiying its agriculture and energy business by acquiring a 51% stake in PT. Henrison Inti Persada (HIP). HIP is one of four palm oil plantation companies which are under the Kayu Lapis Indonesia Group. While the 32,500 ha plantation to be developed may be small in comparison to listed peer's Golden Agri's 427,253 ha (more than 13 times the size!), it will still provide decent revenue potential.

 

A hectare of oil palm can yield between 3.5 to 5 tonnes of crude palm oil a year, so going by this assumption, HIP's site has the potential to produce between 113,750 and 162,500 tonnes of CPO a year, generating revenue of US$84 to US$120 million each year, based on current CPO spot prices of about US$741 a tonne. As a gauge of the value of this investment, a simplified analysis of First Resource's balance sheet yields biological assets carried at US$1,065,800,000; based on 113,000 ha of plantations, this works out to about US$5,000 per hectare, which indicates that PT. Henrison Inti Persada's plantation could be worth about US$162 million. Granted, since the plantation will require further investment for development (it is not yet plantable, and further investments in processing plants will have to be made), Noble's initial investment is likely only a fraction of its estimated US$80 million share.

 

  

 

New position: Courage Marine

We purchased 18,000 shares of Courage Marine today at $0.185, adding a new position to the portfolio. The BDI has fallen from its lofty peaks of 10,000+ points in late 2007 and early 2008, and now resides at about 3,200 points (after hitting a low of 663 in Dec 08). Dry bulk shipping rates have been volatile, and it is not surprising that a shipping firm like Courage Marine which depends on spot rates for charters has seen extreme volatility in its revenues over the past two years. Revenue plunged from US$90.5 million in 2007 to US$27.94 million in 2009 as shipping rates collapsed, and baring some exceptional items, the company was loss-making in 2009.

Given the extremely cyclical and uncertain nature of dry-bulk shipping, why then are we making an investment in this particular company? First, while we are no experts on timing the shipping cycle, it is probably more accurate to say that we are nearer the trough of the cycle than the peak. Most shippers are trading near or below book value, and we have yet to see a convincing return of profitability in the dry bulk segment. The time to buy cyclical stocks is when they trade at extremely high PEs, or when they are loss-making; the time to sell is when they trade at low PEs, indicating that peak earnings have been achieved.

Second, we like the company's conservative and unique approach to dry bulk shipping. Typically, companies choose to lock in long-term COAs when freight rates are high (eg. Mercator Lines), and often purchase newly-builds for such long-term charters. While this appears like a safe way to generate income, the approach fails to account for the potential of reneging by the charterer, especially when rates have plunged substantially. More often that not, the shiponwer is left with little choice but to lower the contracted rate, or face the prospect of fighting a long and expensive lawsuit. Courage Marine deals largely in the spot market, and to a lesser extent with COAs.

However, the company's fleet is exclusively made up of old ships - the average age of its fleet is bearing on 30, which is usually when a ship gets scrapped. Because of its focus on older vessels, the company has avoided overpaying of expensive new vessels, and avoids the long delays for newly-builds to arrive. In a prudent manner, the company has expended its fleet from 4 vessels in 2001 to 10 currently, and yet has maintained its net cash position (think Wheelock Properties Singapore), a rarity in the shipping industry where leverage is often used with reckless abandon.

While having a fleet of older ships comes with higher maintenence costs, the company has managed to keep operating costs low (operating costs rose just 65% in 1Q 10, compared to the 158% increase in revenue). Also, since its ships are depreciated on a 30-year basis, the residual book value of its fleet is minimal, compared to the book value of a much newer fleet (eg. Mercator Lines). It is highly likely that some of the older vessels are being carried at minimal value (since their age exceeds 30, there is only drydocking left to depreciate), despite their ability to generate income. At about 1.2X book, we think that the stock is rather cheap.

While most other shippers were attempting to slash their fleet and cancel newly-build contracts, Courage Marine managed to capitalise on the shipping downturn by purchasing several vessels at fire-sale prices (old ones, of course). The low prices paid mean that the company requires little debt (most vessels are funded by internal resources), and even allows the company the flexibility to scrap vessels when steel prices rise (the company scrapped a capesize vessel for a quick profit of US$400,000 in just a little over a month).  

The company has paid out a healthy stream of dividends since its IPO, and even paid out a US$0.00472 dividend for 2009, a year where the company barely broke even. We anticipate that if shipping rates see a rebound, it will not be surprising if the company is able to fund a dividend in excess of 10% (based on our purchase price).

  

Capitaland - Sprouting more branches with CapitaMalls Malaysia Trust

CapitaMalls Asia, which is 65.5% owned by Capitaland, announced on Friday that it has received approval from the Securities Commission of Malaysia to list a Trust (CapitaMalls Malaysia Trust) on Bursa Malaysia. The trust will consist of 1,350,000,000 units upon IPO, whereby 786,522,000 units will be offered for IPO, leaving CapitaMalls Asia with a 41.74% stake. This could fall to as low as 33% if an over-allotment option is exercised.

The trust will hold CapitaMalls Asia’s Malaysia shopping malls, and three Malaysian shopping mall assets will be injected into the trust upon IPO. These are the Gurney Plaza in Penang, an interest in Sungei Wang Plaza in Kuala Lumpur, and The Mines in Selangor, resulting in a total net lettable area of approximately 1.88 million sq ft for the portfolio. AmTrustee Berhad has been appointed as the trustee for CapitaMalls Malaysia Trust, and has valued the portfolio at approximately RM2,130.0 million (this is substantially different from the RM1,482.48 based on the indicative price of RM1.10 which cornerstone investors EPF Malaysia and Great Eastern Life Assurance have agreed upon, suggesting that some debt may also be injected into the initial portfolio).

This latest proposed listing augments our investment thesis for Capitaland - the company continues its excellent job of asset recycling, which frees up capital much more quickly for further growth. Along the years, Capitaland has created enormous amounts of shareholder value via REIT securitisation of its assets. Still maintaining a stake in each, the company could offload new developments quickly, and utilise the proceeds for further expansion, instead of waiting for years to recoup the development costs. The company also earns recurring income from the management of the trust assets, most of which are being paid for by new shareholders brought in under the REIT structure.

The listing of CapitaMalls Asia allowed Capitaland to monetise part of an important subsidiary for over $2.8 billion, but still retain its majority interest in the subsidiary (65.5%), and this proposed listing of CapitaMalls Malaysia Trust is further indication that the "Macquarie-style" model of asset recycling is very much alive under the Capitaland group.  

WBL continues to streamline operations, sells Applied Engineering

WBL Corp today announced that it has reached a conditional agreement to sell its wholly-owned Applied Engineering Pte Ltd to Advanced Holdings for a cash consideration of $18 million. Applied Engineering specialises in the design and fabrication of process equipment such as pressure vessels, shell & tube heat exchangers and other equipment, and supports the petrochemical, oil and gas industries both in Singapore and the region.

The sale for $18 million looks like a good deal (on WBL's part), given that the book value of Applied Engineering Pte Ltd on WBL's books is only $8.5 million. The sale price is twice of the carrying value, and the proceeds will be in cash, which may be deployed to other parts of the business, or returned to shareholders in the form of a special dividend. $18 million is no paltry sum, especially when there are only about 280 million shares outstanding (assuming full conversion of convertibles and including dilution for ESOS). Currently, there are about 250 million outstanding shares, which means the latest sale represents cash of about $0.072 per share. The company still has a substantial cash horde of $435 million (as of end March 2010), which increases the possibility of a special dividend.

We are hardly worried about the lowered profit contribution from WBL's "Engineering and Distribution" business following the sale, as the segment only contributed earnings of $2.9 million in 1H 2010. Other businesses in the "Engineering and Distribution" segment include Far East Motor (automobile servicing and repair), SPC Wearnes (bottled LPG), Pacific Silica Pty Ltd (silica mining), O’Connor’s (engineering systems), Polytek Engineering (laundry, boiler and washroom equipment and accessories), Wealco Equipment (water jet propulsion) and Welmate (architectural ceiling and partition systems).

While the remaining businesses may not see such generous buyers, it is likely that they may be sold off in the near future as WBL continues to streamline its operations to concentrate on property development and technology.

Sold SGX, a quarter of the portfolio in cash

Singapore Exchange Limited (“SGX”) wishes to announce an investment of $250 million in technology, comprising $70 million for a new securities trading engine and $180 million for infrastructure outsourcing services and data centres, collectively known as the Reach initiative. The investment of $70 million was previously announced by SGX on 4 March 2010.

The investment in the Reach initiative is to create the fastest access to Asia by implementing a new high-performance trading engine, a state-of-the-art data centre, as well as introducing co-location services to its customers. The Reach initiative also includes establishing presence at key data centres in Chicago, London, New York and Tokyo. The infrastructure outsourcing services will enable SGX to benefit from improved access to technical capabilities, implementation of enhanced processes and comprehensive infrastructure management tools. (3 June 2010)

We sold SGX (finally!) at $7.28 today, bringing the portfolio's cash level to almost 25%. We actually bought SGX at around the $4+ level in mid-March 2009, in the belief that the company (and its stock price) were sure beneficiaries of a market recovery. The stock's returns have been decent since, but we see little upside from current levels, despite the hype over the new $250 million trading system which promises to boost revenues. The exchange expects additional annual recurring expenses of $12 million due to this new system, which is paltry compared to the $200+ million operating expenses SGX racks up every year, but we are sceptical that the new trading system will actually provide a substantial boost to revenue.

The problem we have with SGX is that growth for the exchange is difficult to create. The new CEO, Magnus Bocker, is pulling out all the stops to try to increase revenue, and the latest $250 million investment represents a foray into algorithmic trading, which Mr Bocker hopes will drive trading velocity in cash equities trading. In our opinion, it will be difficult to induce algorithmic traders into providing liquidity for a large number of stocks listed on the exchange - either due to a low free float or a distinct lack of buying interest. The small market capitalisation of many counters also compounds the problem. More likely, algorithmic trading will be focused on the usual suspects (the market darlings which adorn the daily top volume list) and some of the larger capitalisation companies. Traders need other buyers and sellers in order to make money, so why focus on low investor interest companies where they have to make a market to induce buyers? As has been the case in the past, higher velocity and investor interest in a select group of stocks will likely drive investors away from others, more like a zero-sum game.

Moreover, Singapore's positioning as a financial hub (and "Asia's exchange") remains in question, given that Hong Kong already enjoys tremendous levels of trading volume. Much of this stems from Hong Kong's proximity to China, whose citizens possess tremendous household wealth. Hong Kong is already facing stiff competition from the Shanghai exchange, and going forward we expect to see Shanghai obtain a more-than-fair share of new large-cap listings. What does this leave SGX? Zilch (except for numerous poor quality third-tier S-Chips).

SGX's monopoly status looks safe at present, with its infrastructure setup preventing other players from quickly stealing market share in the local market. However, with the limited growth from local retail investors, SGX is looking overseas for growth. While this could be a way to boost revenue, SGX already charges one of the highest clearing fees in the world, and there could be downward pressures on pricing, reducing margins. The ASX has recently announced lowered fees as a result of the entrant of new competitors, which could be something that SGX may face further down the road.

Noble buys stake in USEC Inc

Noble Group today reported that it had purchased 5,848,940 shares of USEC Inc, a 5.13% stake in the company. The purchase cost was US$30,194,176.53, which works out to US$5.16 a share, an 8.2% premium to USEC's close of US$4.77 on Monday. USEC Inc is in the nuclear energy business, and supplies low enriched uranium (LEU) to commercial nuclear power plants in the United States and internationally.

Sold Jardine Strategic, market technicals unfavourable

We sold our shares in Jardine Strategic today (500 shares at US$21.22), despite the much anticipated sell-off in the stock market following huge losses on Wall St last Friday. Nonfarm payrolls were poorer that expected, renewing fears that the recovery in the US isn't going to plan. Also, a curious statement from Hungary's ruling party indicating that Hungary would go the way of Greece in terms of its debt problems further fuelled investor worries.

As we have described in a previous post, European debt problems are unlikely to simply disappear, and the likely result would be a sovereign default by one or more European economies. We have yet to see a selling climax, despite the sharp YTD falls in some markets.

While we reiterate that valuations are attractive for the stock market in general, we have to acknowledge the unfavourable market technicals - the Dow Jones and S&P 500 have both fallen below their 200 day moving averages, and the moving average now appears to be a resistance for both indices. With such bearish market technicals coupled with the fact that we have yet to see the market capitulate (or a failure/near-failure of one or two European banks), we have little choice but to err on the side of caution. With our sale of Jardine Strategic Holdings, we have raised the cash level of the portfolio to about 19%. We will also be looking to dispose of SGX to increase cash to about a quarter of the portfolio.

There is a good chance that we may be wrong in our reading of the market, which is why we will remain largely invested, but our larger cash holding will help us to buffer risks to the downside, and will be a useful source of ammunition should distressed opportunities appear.

Liew Mun Leong eats his own cooking

Capitaland CEO Liew Mun Leong has purchased a unit at the Interlace for $3,737,500, while his son has also purchased a $2,467,000 unit in the same development. A discount was not announced for both transactions.

Best World to issue bonus warrants

Best World International yesterday proposed the issuance of bonus warrants (exercise price $0.30) on the basis of 1 warrant for every 5 existing shares, which can be exercised 6 months from their listing and have a "shelf life" of 3 years. The rationale behind the proposed warrant issue was to reward existing shareholders as part of their 20th anniversary celebrations, allowing shareholders to participate in the growth of the company.

A bonus issue at this point of time is a curious step, given that the company has a large cash horde and we would have been happier if the company paid out some of that cash as a bonus dividend. However, a warrant issue is interesting and provides a new dimension to our investment in Best World Intl. We are no experts at valuing options or warrants, but if market conditions continue to be poor, we will not be surprised if the warrant is grossly underpriced by the market (due in part to the poor liquidity expected). We look forward to the listing and will be very happy to scoop up more warrants for leveraged exposure to the stock if the price "warrants" it.

Mermaid Maritime extends contract for MTR-2

Mermaid Maritime (a beleagured performer in our portfolio) today reported an extension of its MTR-2 rig's drilling contract with Chevron in Indonesia. The rig was originally contracted until June 2010, and the rig's services have been extended for another 9 months. The company cited a potential contract value of US$24.5 million, which works out to about a US$90,700 day rate, up slightly from the US$88,814 gross day rate for 2009.

While the day rate was not up substantially, it is comforting to know that Chevron's contract has been extended. MTR-1 remains a disappointment, having not secured any work since September 2009, and the 6-month lull period anticipated by the management has been too optimistic a scenario. However, a third rig (KM-1, 75% owned by Mermaid) is slated for delivery this year (after originally scheduled for a 4Q 09 delivery), and will be contracted for 5 years drilling for Petronas.
 

Portfolio drops 8.1% in May, STI down 6.9%

The portfolio fell 8.1% in May (to $0.978 per unit), against a 6.9% drop for the STI (on a total return basis). On a year-to-date basis (at 31 May 2010), the portfolio is 2.2% lower, compared to the STI's 3.6% decline. The month of May was a very poor month for our investments, as Greek debt fears and Korean tensions compounded negative investor sentiment. Most major markets were lower for the month, while small cap stocks suffered huge losses as investors fled riskier assets.

On a month-to-date basis, F&N, WBL, STI ETF and Capitaland were the best performers, falling 0.8%, 3.1%, 4.7% and 4.8% respectively. The worst performers were Mermaid Maritime (-34.9%), Memtech (-25.1%) and Guocoleisure (-18.5%).

We have obviously made very poor investment decisions with our small cap picks, and our investment in Mermaid Maritime looks particular disasterous. The company reported a larger-than-expected quarterly loss, and its unutilised tender rig now appears to be on the market for use as accommodation (day rates of about US$20-30k, rather than drilling activity (US$70k and up). Coupled with the woes in the gulf of Mexico due to the Deepwater Horizon spill, drillers are not having the best of times despite the relatively high price of oil (which appears to be sustained above US$65). While Mermaid's activities are largely in South East Asia, the poor earnings announcement and negativity on offshore drilling at present are weighing down on the stock. We admit our failure to cut losses on the position, but we are very reluctant to sell the stock at a near-40% discount to book (about $0.77 a share). 

Memtech obviously suffers from a lack of liquidity, and has fallen 25.1% in May on relatively low volume. The business appears to be turning around (the company made US$967,000 in 1Q 10, from a $746,000 loss in 1Q 09). The company continued to generate cash in 1Q 10, and its cash balance stood at US$40.32 million at the end of the quarter, before the payment of the annual dividend. 75.1% of the stock's market cap is covered by cash (after the dividend is deducted), and the stock trades at a 56.5% to NAV.