Sold two portfolio stalwarts - Berkshire Hathaway and Keppel Corp

We sold our 50 shares in Berkshire Hathaway 'B' on the 25th of January (US$82.65) and our remaining 351 shares in Keppel Corp on 27 January. While these two companies embody many positive things which we look for in a stock (good management, strong business franchise(s) etc) and should be considered portfolio stalwarts, we have eliminated both positions for different reasons.

Berkshire Hathaway - Buffett's stable of businessess are solid companies in most senses of the word, but the growth of these underlying companies are too dependent on the US economy and considering our relatively large exposure to Wells Fargo, a bank which is almost solely dependent on the US economy, we would prefer businesses which generate a bit more revenue from overseas. In addition, growth is likely to be slow for the "lumbering" holding company, where incremental additions of small companies are unlikely to add significant value to the overall stock.

Keppel Corp - The stock has seen strong investor interest given the strong flow of contracts, but it still appears likely that the company has seen peak profitability already - we do not expect future contract wins to match the 2003-2007 cycle. Having run up considerably over the past month or two, the stock does not look attractive if one looks at normalised profits, and we have thus taken profits on our holding.

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.

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.

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.

Portfolio flat in February

Our portfolio dipped marginally by 0.3% in February, bringing year-to-date performance (as at end February 2010) to -2.5%. On an NAV basis, the portfolio ended Feb 2010 at $0.975. In comparison, the STI (total return) gained 0.3% in February, but has declined 5% on a year-to-date basis.

Noble Group was the strongest performer, returning 10.1% as sentiment improved on commodity plays while Berkshire Hathaway benefited from the increased liquidity following a 50 for 1 share split. Tat Hong was the worst performer, losing 8.6% as investors discounted a weaker outlook for crane demand and increased costs for the construction sector after announcements of increases in foreign worker levies in the 2010 Singapore budget.

Stock Feb'10 Returns (%) in SGD


NOBLE GRP 10.1%

TAT HONG W130802 9.1%

BERKSHIRE HATH-B 4.8%

CAPITAMALL 4.7%

FRASER AND NEAVE 2.4%

KEPPELCORP 0.5%

SPH 0.3%

JOHNSON & JOHNSON 0.2%

BEST WORLD 0.0%

WBL Corp -0.2%

STI ETF -0.4%

ASCENDAS I-TRUST -0.5%

GUOCOLEISURE -1.6%

Capitaland -2.1%

JARDINE STRATEGIC -3.1%

CAMBRIDGE -3.3%

SGX -3.5%

WELLS FARGO -3.9%

TAT HONG -8.6%

February Sharebuilder additions

Added the following via the POEMS sharebuilder:

Date Security Name Qty Price($) Investment Amt ($)


18/02/2010 FRASER & NEAVE 24 4.12000 98.88

18/02/2010 KEPPELCORP 17 8.39000 142.63

18/02/2010 SPH 64 3.75000 240.00

18/02/2010 STI ETF 35 2.83000 99.05

Portfolio down 2.2% in January; commodity price impact on Noble's earnings

Equities generally had a rather poor January, leading to a 2.2% decline in the portfolio for the month. Assuming the portfolio started 2010 at $1.000, each unit ended the month at $0.979. Still, this was significantly better than the 6% decline in the Straits Times Index, or the MSCI World's 4.3% decline.

BERKSHIRE HATH-B	+16.5%
WELLS FARGO	+5.5%
SPH	+3.5%
CAMBRIDGE	+2.2%
KEPPELCORP	+1.7%

CAPITAMALL	-6.1%
TAT HONG	-6.2%
GUOCOLEISURE	-7.9%
CAPITAMALLS ASIA	-8.7%
NOBLE GRP	-11.4%

Berkshire Hathaway was the outstanding performer, jumping 16.5% as investors piled into the stock in anticipation of its addition into the S&P 500 (replacing Burlington Northern). Wells Fargo turned in a respectable performance (+5.5%) while SPH also gained on better-than-expected profits.

Noble Group was the worst performer, falling 11.4% as commodity prices wavered. Noble's dependence on commodity prices is often overestimated by most investors, who choose to lump the company together with other commodity producers who suffer a large hit to earnings when commodity prices decline. Noble's business model involves hedging inventory as it is passed along the supply chain, which involves little exposure to commodity prices. 

Noble's earnings hardly fluttered as commodity prices went from boom to bust in the 2008-2009 crisis, indicating a relatively low dependence on an appreciation in commodity prices. High prices require Noble to post more collateral to hedge, a drain on cash resources, which means that Noble would prefer lower, or at least less volatile commodity prices.

Despite the sharp declines, the stock is not terribly cheap as the market attempts to factor in strong future earnings growth (Richard Elman has been quoted as targeting US$1 billion in profit sometime over the next few years). The company has excellent management and is extremely focused on shareholder value, which has resulted in the stock being the best performer on the STI in 2009. As one of the few companies in the STI with truly strong earnings growth potential, we will want to accumulate more Noble shares, but will wait patiently for a better entry level to add to our existing position.

Initial Portfolio Holdings

On 31 December 2009, we held stocks worth $104,789.07, along with cash of $4,879.03.