Friday, June 18, 2010

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.

Wednesday, June 16, 2010

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.


Tuesday, June 15, 2010

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.


Monday, June 14, 2010

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).


Sunday, June 13, 2010

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.  

Friday, June 11, 2010

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.

Wednesday, June 9, 2010

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.

Tuesday, June 8, 2010

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.

Monday, June 7, 2010

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.

Saturday, June 5, 2010

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.

Thursday, June 3, 2010

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.

Tuesday, June 1, 2010

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.    

WBL's 1H '10 profit up 93% to $40 million, declares 5 cent interim dividend

WBL Corp recently announced 1H '10 earnings of $44.4 million ($40.2 million recurring), up from $12 million (after an $8.8 million non-recurring loss) in 1H '09. The company's prefered measure of earnings is operating PATMI (Profit After Tax and Minority Interests), a measure of recurring income to common stockholders.

One-off gains transpired from the disposal of some buildings under Starsauto/Wisma O’Connor’s /Wearnes Electronics Shenyang (+$4.3 million), the provision and disposal of investments under Property Management Co./ Sanguine Microelectronics/Advance Science Lab (+$0.6 million) and the cessation of Starsauto/Kunming Speedling (+$0.8 million). A planned plant closure related to MFLEX's operations in the US resulted in an asset impairment of $1.5 million.

The property business division was the largest PATMI contributor in 1H '10 ($21.2 million), but 2Q '10 profit from property was just $6.5 million, was fewer units were made available for sale in Shanghai and Suzhou. The Chengdu Orchard Villa which was launched in 1Q 10 saw higher sales.

As we have previously highlighted, the Chinese property market has demonstrated speculative tendencies, especially in tier-one cities like Shanghai (where WBL has a presence), and the Chinese government has clamped down on excessive rises in prices by implementing a series of new property regulations. This has had an impact on WBL's Shanghai property sales, but this may also be due to fewer releases of units in response to the Chinese government's actions. Whatever the reason for the drop-off in property revenue, we are glad that our exposure to Chinese property is via a diversified business like WBL's, whose fortunes are not predicated by a strong property market, and can afford to hold its landbank until market conditions improve.