More Buying For The Portfolio As Markets Remain Weak

We added CapitaMall Trust to our holdings today on general market weakness (3 lots at $1.73). We estimate that the annual dividend yield of 5.5% (based on $0.095 p.a.) is sustainable, and that rate has potential to expand as J-Cube completes and begins contributing to the trust. The recent acquisition of Illuma looks like a shrewd move - The mall's full potential was not being realised by the previous owners (thus they were selling relatively cheap), and CapitaMall's management should be able to ride on synergy between Bugis Junction and Illuma.

Recall that we sold CapitaMall Trust in July 2010 on the basis that a 4.5% yield was not a sufficient reward for holding the stock, despite the trust holding many prime assets. The stock has since corrected almost 15%, with the running yield now about 5.5%, 100bps higher than when we sold it.

We also added to Wells Fargo (50 shares, US$30.75) as the stock was slumping even as the broader market rose. There was no apparent reason for the sell-off, and with more clarity on the stock's ability to pay dividends soon to come, there could be some upside potential in the near-term. Nevertheless, the longer-term prospects for the bank continue to look bright, and we believe that the stock could trade nearer the $45-$50 range once bright sunny skies are upon us once again.

Portfolio up 3% in July, STI up 5.4%

Our portfolio gained 3% in July (to $1.03), underperforming the 5.4% gain in the STI (on a total return basis). As of 31 July 2010, 23.8% of the portfolio's assets were held in cash, which weighed on the portfolio's overall return. Despite the substantial cash position, the portfolio managed to capture some of the market upside. YTD, the portfolio is also 3% higher (STI: +4.8%).

In July, we sold CapitaMall Trust on the basis that the estimated yield (approximately 4.5%) was not sufficient to satisfy the portfolio's 6% annual target, and we saw little potential for upside from capital appreciation near the $2 mark. We also received bonus Best World International warrants, and may look to accumulate more should the premium to the mother share narrow.

Guocoleisure was the best performer in the portfolio for July, gaining 14.4% on little news other than a series of open market purchases by Quek Leng Chan. After being one of the worst-performing STI components, Capitaland capped July with a strong 12.5% rebound, while KepCorp also gained 10.6%. The main detractors to the portfolio were Best World (-5.9%), Berkshire Hathaway (-5.1%) and WBL Corp (-2.1%).

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.  

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.

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%

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.