Sold Hotung for a quick profit!

We bought Hotung at US$0.11 on 5 March. On the strength of liquidity provided by the company's share buybacks, the stock rose to a recent high of US$0.135, and we were able to sell our 15,000 shares at US$0.13 on 30 April for a quick profit. Admitedly, the US dollar has weakened against the SGD on the back of MAS monetary policy tightening, but the stock also went ex-dividend (approximately US$0.0076 per share) on 29 April, which means we are collecting a further $150 in dividends.

1Q 2010 results - CMT, CIT, WFC

CapitaMall Trust

CapitaMall Trust reported 1Q 10 distributable income of S$71.1 million, or about 2.23 cents per share. Actual amount available for distribution was S$80.6 million (approximately 2.54 cents per share) so assuming no retained income (100% distribution), we can expect an annualised DPU of about 10 cents.

Asset enhancement projects are underway (Raffles City basement extension, Jurong Entertainment Centre) which provide a form of organic growth without having to resort to further acquisitions. The incremental net property income expected from the JEC project (construction contract below budgeted amount) is S$16.1 million per annum, which could potentially increase annual DPU by as much as 0.5 cents, or 5% of DPU.

Cambridge Industrial Trust

CIT reported net property income of S$16.3 million, down q-o-q due to the divestment of 32 strata units at 48 Toh Guan East (Enterprise Hub). Distributable income was S$11.1 million, down from S$11.9 million in 4Q 09 and translates to DPU of 1.274 cents.

Long term debt (S$390.1 million, expiring Feb 2012) has been swapped to fixed from variable, which will probably result in higher interest expense over the subsequent quarters (and hence lower DPU). Gearing was at 42.6%, and the Managers have highlighted a preference to bring this down to around 38% by the end of the year. Longer term, target gearing is between 30-35%.

We continue to like CIT for its stable income, high occupancy rate and relatively long average lease term (approximately 4.4 years, with just 6.9% of rentals expiring before 2013). SGD assets which yield close to 10% are impossible to find at this juncture, but we are also mindful of the various risks which the REIT entails. The fiasco with AIMS AMP Capital Industrial REIT is particulary troubling, and cost us unnecessary money. Unfortunately, we do not have any viable alternatives at this juncture (CACHE Logistics Trust was interesting, but we prefer not to invest in IPOs), and will retain our rather large position in CIT for the steady source of quarterly income.

Wells Fargo

Wells Fargo reported net income of US$2.5 billion for 1Q 10, or EPS of US$0.45, ahead of the US$0.42 expected by the consensus. PTPP (Pre-tax Pre-provision profit) was US$9.3 billion for the quarter, an indication of the immense earning power of WFC. Tier 1 capital rose to 10%, considered a relatively healthy position while loss provisions rose slightly to US$25.1 billion, up from US$24.5 billion in the previous quarter. As an indication that banks are turning the corner, WFC's Chief Credit and Risk officer believes that quarterly provision expenses and credit losses have peaked, while non-performing assets which commonly lag credit losses are still expected to increase, but will peak before year end.

WFC managed a 4.27% net interest margin for the quarter (easily the highest among large US banks), translating to net interest income of US$11.3 billion. Much of this can be attributed to the strong (sticky) deposit base, where total interest-bearing deposits of US$632 billion cost the bank just 0.47% to borrow! The low cost (and also stable source) of borrowing is WFC's competitive edge, as opposed to short-term borrowings which are currently cheap, but can cause a bank's downfall should a crisis emerge and short-term financing dries up.

Third Avenue Management LLC nominates WBL director

 SGX-listed WBL Corporation Limited (Wearnes) – an international conglomerate with key businesses in technology, automotive, property and engineering & distribution – today announced the appointment of Benjamin C. Duster, IV, Esquire, as Non-Executive and Non-Independent Director with effect from 19 April 2010.

Mr Duster is currently Executive Managing Director of Watermark Advisors, LLC, a US-based strategic advisory firm specialising in mergers and acquisitions, private capital raises, strategic valuations and financial modeling. Prior to this, he was with Masson & Company, LLC; Wachovia Securities, where he was Managing Director; and Salomon Brothers, where he worked for 16 years. Currently Chairman of the Compensation Committee of Toronto Stock Exchange-listed pulp and paper producer Catalyst Paper Corporation, Mr Duster has also chaired various board committees of companies listed in Canada, New York and Poland. Mr Duster holds a Juris Doctor-MBA from Harvard University and a Bachelor of Arts (cum laude) in Economics from Yale College. He was admitted to the Illinois Bar in 1985 and is a registered representative of the National Association of Securities Dealers.

Mr Ng Ser Miang, Chairman of Wearnes, said, "The Board welcomes Mr Duster, who brings with him a wealth of experience in the legal, corporate finance and corporate strategy & development aspects of many global businesses. His domain knowledge, international perspectives and cross-border network will be added assets to the Group." 

"Mr Duster is nominated by Third Avenue Management LLC, a substantial shareholder of the Company. The Nominating Committee of the Company reviewed his nomination and based on his qualifications and experience, recommended his appointment to the Board of Directors. "

Considering that Third Avenue Management owns 17.47% of WBL Corp, it is a positive indication that the investment firm has nominated a director on board. WBL has a huge asset base, but it may take some experienced "prodding" to realise some of this value.

Gloucester-Macarthur merger: Noble shareholders vote "No"

19 April 2010, Hong Kong


"Noble Group wishes to announce that the merger proposal between Macarthur and Gloucester was soundly defeated by shareholders in a vote held in Hong Kong at 2.30pm today."
 

The Noble-Peabody-New Hope tussle for Macarthur Coal took another strange twist today, as Noble shareholders voted down the merger of Gloucester and Macarthur, a deal which would see Noble own almost a quarter of the new entity. Considering that the proposal was "soundly defeated", this strongly suggests that Noble's management has other plans in mind (Richard Elman's trust still owns a controlling stake while CIC would not jeopardise the company's expansionary plans, not after acquiring such a substantial stake).

 

Certainly, after being so close to sealing the deal, there is no way that Noble will give up Macarthur (and its assets) so easily, and the voting down of the proposal simply indicates that a new strategy is in place, perhaps a hostile one. Noble owns 30% of Middlemount Mine, a significant asset in the Macarthur portfolio of mining assets, and has the option to raise this stake to 50% for A$100 million. Also, Noble owns 10% of the Monto project, of which Macarthur remains the majority owner. There could also be options attached to Noble's stake in Monto, which upon exercising could reduce the attractiveness of  Macarthur to Peabody (Noble highlighted its interest in both projects in a warning note directed at Peabody on 5 April, saying its quiver is "far from empty").

 

We look forward with great excitement to see what Noble has up its sleeves in this game of M&A chess.

Sharebuilder purchases for today (19 Apr 2010):
32 shares of STI ETF at $2.9989, 20 shares of Fraser and Neave at $4.84

Euphoria, but not in the stock market....yet

As we approach the 3,000 point barrier on the STI, a key question arises- is the stock market peaking? If broad-based sentiment is any indicator, we are getting close. Some troubling observable indications:

• Skyrocketing COE prices (but maybe just a manifestation of the "kiasu-ism" on the reduction in availability) 
• An increasingly excited domestic property market (just count the huge number of ads in the Saturday edition of the Straits Times)
• A huge number of IPOs (11 so far this year, and we're only in April)
• High over-subscription for IPOs (CACHE's placement tranche was 7.2X subscribed, while the public tranche was about 20X subscribed)
• A disconnect between large cap and small cap stock price movements (small cap stocks have recently found favour)

We do not profess to be excellent market timers, but these indications may be seen as "early warning signs". Nevertheless, we note that the largest gains are often had at the later stages of a market rally. Moreover, valuations of the stock market in general does not appear too stretched, which suggests that an impending sell-off (if any) may not be too substantial. We invest for the long-term, and as long as valuations of our holdings remain reasonable, we are reluctant to sell core parts of the portfolio based on any perceived notion of where the general stock market is headed. 

We will be looking to trim positions in non-core holdings should the market display signs of "irrational exuburance", but current conditions are hardly euphoric yet.

Added Mermaid Maritime to the portfolio

Added 5,000 shares (at $0.725) of Mermaid Maritime, the Thai offshore company. Company owns two tender rigs and has a third to be delivered later this year. Currently, one existing tender rig is awaiting a new contract; strong oil prices could see the rig secure a higher charter rate, which could be a catalyst for share price performance in the near term. The stock trades slightly below book, has a long track record of specialisation in the area of offshore services, and has a strong parent (Thoresen Thai Agencies), so corporate governance issues are unlikely to arise.

Strong rebound in March 2010

The portfolio rebounded strongly in March, gaining 4.9% (net of an accrued performance fee of 20% based on a 6% annual targeted return), bringing NAV to $1.023, up 2.3% YTD. In comparison, the STI on a total return basis gained 5.2% in March, and is essentially flat YTD.

On a percentage basis, Best World was the strongest performer, with a 36.2% monthly return. The announcement of expansionary plans in the Phillipines was enough to incite trading in the stock. Renewed investor interest in Jardine Strategic Holdings sent the stock rising 21% for the month, a huge boost to the overall portfolio (JSH is our largest single position in the portfolio). As previously mentioned, we view the underlying businesses as highly attractive in their own right, and the parent holding company simply offers the opportunity to purchase the whole basket at a substantial discount to market value. Another notable performer was Wells Fargo, which gained 14% for the month (also a substantial holding for us). Worries over financial reform in the US appear to have subsided for the moment, and investors are beginning to focus on P/E multiples for bank valuations, instead of book value. Wells Fargo currently trades at a forward PE of 11.3X, which leaves much upside potential based on a PE multiple re-rating alone.

Noble was the chief laggard in the portfolio, as concerns over a director's share sale and uncertainty over the merger of subsidiary Gloucester Coal and Macarthur Coal weighed on stock performance. US coal giant Peabody recently made a takeover offer for Macarthur Coal on the condition that its proposed merger with Gloucester Coal does not go through. At stake for Noble is a near 25% stake in the consolidated Macarthur, which is poised to benefit from steel production in China. While uncertainty still lingers, a second refuted bid by Peabody suggests that Noble has the upper hand, but we will be watching developments closely over the next week or so (Macarthur shareholders vote for the Gloucester-Macarthur merger on 12 April).    

BEST WORLD 36.2%

JARDINE STRATEGIC 21.0%

Hotung Investment Holdings 18.3%

FRASER AND NEAVE 16.9%

WELLS FARGO 14.0%

KEPPELCORP 12.2%

GUOCOLEISURE 8.7%

Capitaland 6.9%

STI ETF 6.1%

CAMBRIDGE 4.5%

SPH 3.0%

CAPITAMALL 1.7%

BERKSHIRE HATH-B 1.3%

ASCENDAS I-TRUST 1.0%

SGX 0.3%

WBL Corp -2.8%

TAT HONG -3.3%

NOBLE GRP -3.5%


$6,000 of new money was added into the portfolio, resulting in the creation of 5865.10 new units on 31 March 2010.

Bought some Memtech International

Bought some Memtech International today (25,000 shares at $0.12). Stock trades at a steep discount to NAV but comes with low liquidity (and low investor interest). The company has been a laggard as other smaller-cap technology companies have rebounded strongly, and could be a beneficiary of a turnaround in the sector. While profitability has remained sluggish so far, profits and revenue could rebound strongly in subsequent quarters, driving share performance. 

Bill Miller of Legg Mason Value and the "collateral-driven" banking crisis of 2007-2009

I had the privilege to hear from legendary fund manager Bill Miller last week at the Ritz Carlton, where Legg Mason held an investment forum. Bill Miller's Legg Mason Value fund is most famous for having beaten the S&P500 for 15 consecutive years. Unfortunately, Bill has been in the news more recently in 2008 for his then-disastrous bets on financial institutions (some may recall the comparisons made with Bill Gross of Pimco, who placed bets on the debt of Freddie Mac and Fannie Mae, while Miller held the stocks. The government's bailout immensely benefited the debt holders of these enterprises, while shareholders took massive hits).

While he "returned to form" with an outperformance of the S&P 500 in 2009, his explanation of how he incorrectly read the recent financial crisis was far more poignant for some in the audience (like myself). He talked about how the 2007-2009 banking crisis was a "collateral-based" problem, while the 1987 crash was precipitated by a "liquidity" problem. He bought financial stocks when the Fed first injected liquidity in 2007, a grave mistake as the crisis was collateral-driven, which meant that the assets backing the deposits held by banks were actually turning sour, resuling in bank capital continuing to shrink until the prices of the colletaral (sub-prime, mortgage backed securities etc.) were actually propped up to prevent further falls. This only occurred in early 2009, which was the perfect time to be buying bank stocks.