Excess Cambridge Rights

In the recent Cambridge 1-for-8 rights issue (at $0.429 a share), we subscribed for excess units (920 more) to bring our holdings in the REIT to a round lot multiple. On 15 April, we received all our excess units, and now hold 29 lots of the trust.We are looking forward to receiving about $350 each quarter from our holdings, based on an estimated $0.012 quarterly distribution.

 

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.

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.

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%

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.