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.