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.    

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