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.

Added to Guocoleisure and OCBC

We added 5000 shares of Guocoleisure (at $0.685) today, and a further 250 shares of OCBC (at $9.12). Quek Leng Chan has been consistently buying back shares of Guocoleisure over the past few months, which indicates management confidence in the company's stock. In addition, oil and gas royalties have increased with rising oil prices, which should provide a boost to the company's profits.

Correction continues, adding more

Following the slump in US equity markets overnight, Singapore stocks continued to slide today. Having sold out of lower-conviction stocks in January, the correction in stock markets presents a "welcome" opportunity, and we added 2000 shares of Noble Group (at $2.00) and 1000 shares of Capitaland ($3.29) today amidst the selldown.

Market Correction - Time to buy?

In anticipation of technical downside risks in the market, we actually pared down our holdings in late January to raise cash levels to over 30% of the portfolio. This has worked out rather well as Asian markets have corrected sharply due to concerns over inflation, Chinese policy tightening, as well as fears of an oil shock sparked by tensions in the Middle East. 

We view such developments as short-term overhangs, and we have decided to add to the portfolio in incermental steps. A position was initiated in OCBC, which has a sizable insurance presence via its subsidiary Great Eastern Holdings as well as a strong private banking presence through its acquisition of ING Asia's private banking business in Singapore. While the stock is not cheap, we believe that OCBC will likely deliver the strongest ROE amongst the 3 local banks which should justify a slightly higher price-to-book multiple, and we picked up 250 shares at $9.25 today with a view to add more should the market continue to correct.

We also added 2000 shares of Tat Hong which delivered rather poor quarterly earnings for the most recent quarter. While the company currently faces some headwinds in China as well as Australia, we believe such issues are temporary and with the backing of $0.82 of tangible book value a share, we added 2000 more shares at $0.80.

Sold Mermaid Maritime, a disappointment

We sold our meagre holdings in Mermaid Maritime (5000 shares at $0.41), which has been a disappointment. Since the loss of key management, the company has been trying to restructure as a drilling company with the purchase of two oil rigs from Keppel Corp, but we believe that without credible management, it will be difficult for the new entity to succeed. We have reluctantly cut our losses on the stock, and the experience will serve as a reminder that companies with suspect management should not feature prominently in an investment portfolio.

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.

Jan 11 Sharebuilder Additions

53 shares of STI ETF at $3.32
15 shares of F&N at $6.57

18 Jan 2011

More selling from the portfolio: Time to weed out "junk"?

We sold our small position in Courage Marine on 18 Jan (18 lots at $0.215), following the sudden spike in the stock. The previous day, the company announced that it had plans to list in Hong Kong, which would improve liquidity and branding. While we still think that the company holds decent value, we remain cautious on holding "junk" in our portfolio for the longer term, and we see the rapid move in the stock price as a good opportunity to monetise our position and lock in profits.

We do not have a terribly optimistic outlook on the BDI; the measure has remained depressed by the weak global trade outlook, while the floods in Queensland will weigh on dry-bulk rates for some time. Coupled with the high price of crude oil, we think that dry-bulk shippers like Courage Marine will have to depend largely on prudent cost management for profit. While the company remains one of the most prudently-financed shipping companies available for investment, we have decided to take profits and raise our cash level to above 20% of the portfolio.

Sold Memtech International; What makes a well-financed company

We sold out of Memtech International yesterday at $0.14 (25,000 shares), reaping a tidy profit on our cost price of $0.12 (in April 2010). We have also collected a $187.50 dividend on our holdings, adding substantially to total profits (over 20%). While the company still remains cheap, we are happy to take profits on a lower-quality company like Memtech (just as we did for Gallant Venture, albeit a little early).

We continue to endorse long-term investing, but will prefer to hold companies which have the wherewithal to survive economic downturns via strong business moats (as Warren Buffett would allude to), well-financed positions, or a combination of both. Such companies within the portfolio would include SPH, Keppel Corp, Noble Group and Capitaland. We would even consider a company like Fraser and Neave with its high leverage (given its property exposure) as well-financed, as we believe that the company's strategic assets and portfolio of brands would allow it to access financing even under distressed market conditions.

We identify that access to financing is far more critical than temporary balance sheet strength, as in the case of the US government's continued ability to refinance at ridiculously-low yields, despite already being heavily indebted. All things equal, we would prefer companies which have both strong balance sheets and easy access to financing, but we remain cognizant that strong balance sheets can sometimes be a temporary blip. We recall several apparently well-financed S-Chips on the local Singapore bourse whose balance sheets were suddenly burdened by trade receivables that could not be identified, or the inability to service debt obligations due to cash remmittance issues.

We are not saying that Memtech International falls into such a category; the company has a healthy track-record of keeping its balance sheet in order. Unfortunately, the company's business moat is nearly non-existent, and we buy such companies to sell once the stock price moves from "deep-undervaluation" to "slight-undervaluation".

Dec 10 Sharebuilder additions

16 shares of F&N at $6.17 and 31 shares of STI ETF at $3.22

Sold Gallant Venture

We sold our 10,000 shares of Gallant Venture on 10 December 2010 at $0.37 apiece, representing a 37% gain from our investment price of $0.27 in October this year. Gallant Venture has been a "hot" stock recently, with Kim Eng citing a $0.75 target price. While the stock looks still looks cheap relative to book value, we are not terribly confident about management's ability to translate its undervalued landbank into cashflow over the next few years, that is to say, our investment in Gallant Venture was slightly speculative.

While we tend to avoid speculative purchases, our investment in Gallant Venture appeared to have sufficient downside protection, with substantial upside potential should positive newsflow trigger a re-rating. The company does not have the quality which will render it a longer-term investment prospect in our opinion, and we are also mindful that the company does not have a solid business model. The strong gains have come over just under 2 months, and we find this 37% return sufficient to justify a sell.

 

Nov 10 Sharebuilder additions

30 shares of STI ETF at $3.265 and 15 shares of F&N at $6.43 on 18 November 2010

Oct 10 Sharebuilder Additions

15 shares of F&N at $6.385 each, and 29 shares of STI ETF at $3.27 each on 18 Oct 2010

New position: Gallant Venture

We bought 10,000 shares (at $0.27) of Gallant Venture today. Amidst the general rise in the stock market, Gallant Venture stands out as a clear underperformer, with rather depressed valuations. The stock trades at a seep 47% discount to its book value of $0.5125 per share, while that book value is similarly understated as the company's landbank is carried at cost.

The company's massive 18,200 ha landbank in Bintan is carried on the books at about $541 million, which works out to about $0.28 psf. While land sales in Bintan have been rather slow, the selling prices have been in the region of between $6 to $29 psf, representing 22-100 fold increases in realisable value. Obviously, there are costs involved in the development of the land into habitable living space, and Bintan is hardly the most popular or sought-after resort destination. We admit that there are huge risks in our investment - much of the land may never be sold. However, we think that with the stock trading at half of an understated book value, we are getting the landbank cheap and are prepared to wait for potential catalysts for a stock re-rating.

Sep 10 Sharebuilder additions

Sharebuilder additions on 20 September 2010:

Added 31 shares of STI ETF at an average cost of $3.13 per share, and 16 shares of F&N at an average cost of $6.12 per share.

Aug 2010 sharebuilder additions

18 Aug 2010

Fraser and Neave 17 shares at $5.56
STI ETF 54 shares at $2.98

July 2010 Sharebuilder additions

F&N - 18 shares at $5.44
STI ETF - 34 shares at $3.01

New position: Courage Marine

We purchased 18,000 shares of Courage Marine today at $0.185, adding a new position to the portfolio. The BDI has fallen from its lofty peaks of 10,000+ points in late 2007 and early 2008, and now resides at about 3,200 points (after hitting a low of 663 in Dec 08). Dry bulk shipping rates have been volatile, and it is not surprising that a shipping firm like Courage Marine which depends on spot rates for charters has seen extreme volatility in its revenues over the past two years. Revenue plunged from US$90.5 million in 2007 to US$27.94 million in 2009 as shipping rates collapsed, and baring some exceptional items, the company was loss-making in 2009.

Given the extremely cyclical and uncertain nature of dry-bulk shipping, why then are we making an investment in this particular company? First, while we are no experts on timing the shipping cycle, it is probably more accurate to say that we are nearer the trough of the cycle than the peak. Most shippers are trading near or below book value, and we have yet to see a convincing return of profitability in the dry bulk segment. The time to buy cyclical stocks is when they trade at extremely high PEs, or when they are loss-making; the time to sell is when they trade at low PEs, indicating that peak earnings have been achieved.

Second, we like the company's conservative and unique approach to dry bulk shipping. Typically, companies choose to lock in long-term COAs when freight rates are high (eg. Mercator Lines), and often purchase newly-builds for such long-term charters. While this appears like a safe way to generate income, the approach fails to account for the potential of reneging by the charterer, especially when rates have plunged substantially. More often that not, the shiponwer is left with little choice but to lower the contracted rate, or face the prospect of fighting a long and expensive lawsuit. Courage Marine deals largely in the spot market, and to a lesser extent with COAs.

However, the company's fleet is exclusively made up of old ships - the average age of its fleet is bearing on 30, which is usually when a ship gets scrapped. Because of its focus on older vessels, the company has avoided overpaying of expensive new vessels, and avoids the long delays for newly-builds to arrive. In a prudent manner, the company has expended its fleet from 4 vessels in 2001 to 10 currently, and yet has maintained its net cash position (think Wheelock Properties Singapore), a rarity in the shipping industry where leverage is often used with reckless abandon.

While having a fleet of older ships comes with higher maintenence costs, the company has managed to keep operating costs low (operating costs rose just 65% in 1Q 10, compared to the 158% increase in revenue). Also, since its ships are depreciated on a 30-year basis, the residual book value of its fleet is minimal, compared to the book value of a much newer fleet (eg. Mercator Lines). It is highly likely that some of the older vessels are being carried at minimal value (since their age exceeds 30, there is only drydocking left to depreciate), despite their ability to generate income. At about 1.2X book, we think that the stock is rather cheap.

While most other shippers were attempting to slash their fleet and cancel newly-build contracts, Courage Marine managed to capitalise on the shipping downturn by purchasing several vessels at fire-sale prices (old ones, of course). The low prices paid mean that the company requires little debt (most vessels are funded by internal resources), and even allows the company the flexibility to scrap vessels when steel prices rise (the company scrapped a capesize vessel for a quick profit of US$400,000 in just a little over a month).  

The company has paid out a healthy stream of dividends since its IPO, and even paid out a US$0.00472 dividend for 2009, a year where the company barely broke even. We anticipate that if shipping rates see a rebound, it will not be surprising if the company is able to fund a dividend in excess of 10% (based on our purchase price).

  

Sold SGX, a quarter of the portfolio in cash

Singapore Exchange Limited (“SGX”) wishes to announce an investment of $250 million in technology, comprising $70 million for a new securities trading engine and $180 million for infrastructure outsourcing services and data centres, collectively known as the Reach initiative. The investment of $70 million was previously announced by SGX on 4 March 2010.

The investment in the Reach initiative is to create the fastest access to Asia by implementing a new high-performance trading engine, a state-of-the-art data centre, as well as introducing co-location services to its customers. The Reach initiative also includes establishing presence at key data centres in Chicago, London, New York and Tokyo. The infrastructure outsourcing services will enable SGX to benefit from improved access to technical capabilities, implementation of enhanced processes and comprehensive infrastructure management tools. (3 June 2010)

We sold SGX (finally!) at $7.28 today, bringing the portfolio's cash level to almost 25%. We actually bought SGX at around the $4+ level in mid-March 2009, in the belief that the company (and its stock price) were sure beneficiaries of a market recovery. The stock's returns have been decent since, but we see little upside from current levels, despite the hype over the new $250 million trading system which promises to boost revenues. The exchange expects additional annual recurring expenses of $12 million due to this new system, which is paltry compared to the $200+ million operating expenses SGX racks up every year, but we are sceptical that the new trading system will actually provide a substantial boost to revenue.

The problem we have with SGX is that growth for the exchange is difficult to create. The new CEO, Magnus Bocker, is pulling out all the stops to try to increase revenue, and the latest $250 million investment represents a foray into algorithmic trading, which Mr Bocker hopes will drive trading velocity in cash equities trading. In our opinion, it will be difficult to induce algorithmic traders into providing liquidity for a large number of stocks listed on the exchange - either due to a low free float or a distinct lack of buying interest. The small market capitalisation of many counters also compounds the problem. More likely, algorithmic trading will be focused on the usual suspects (the market darlings which adorn the daily top volume list) and some of the larger capitalisation companies. Traders need other buyers and sellers in order to make money, so why focus on low investor interest companies where they have to make a market to induce buyers? As has been the case in the past, higher velocity and investor interest in a select group of stocks will likely drive investors away from others, more like a zero-sum game.

Moreover, Singapore's positioning as a financial hub (and "Asia's exchange") remains in question, given that Hong Kong already enjoys tremendous levels of trading volume. Much of this stems from Hong Kong's proximity to China, whose citizens possess tremendous household wealth. Hong Kong is already facing stiff competition from the Shanghai exchange, and going forward we expect to see Shanghai obtain a more-than-fair share of new large-cap listings. What does this leave SGX? Zilch (except for numerous poor quality third-tier S-Chips).

SGX's monopoly status looks safe at present, with its infrastructure setup preventing other players from quickly stealing market share in the local market. However, with the limited growth from local retail investors, SGX is looking overseas for growth. While this could be a way to boost revenue, SGX already charges one of the highest clearing fees in the world, and there could be downward pressures on pricing, reducing margins. The ASX has recently announced lowered fees as a result of the entrant of new competitors, which could be something that SGX may face further down the road.

Sold Jardine Strategic, market technicals unfavourable

We sold our shares in Jardine Strategic today (500 shares at US$21.22), despite the much anticipated sell-off in the stock market following huge losses on Wall St last Friday. Nonfarm payrolls were poorer that expected, renewing fears that the recovery in the US isn't going to plan. Also, a curious statement from Hungary's ruling party indicating that Hungary would go the way of Greece in terms of its debt problems further fuelled investor worries.

As we have described in a previous post, European debt problems are unlikely to simply disappear, and the likely result would be a sovereign default by one or more European economies. We have yet to see a selling climax, despite the sharp YTD falls in some markets.

While we reiterate that valuations are attractive for the stock market in general, we have to acknowledge the unfavourable market technicals - the Dow Jones and S&P 500 have both fallen below their 200 day moving averages, and the moving average now appears to be a resistance for both indices. With such bearish market technicals coupled with the fact that we have yet to see the market capitulate (or a failure/near-failure of one or two European banks), we have little choice but to err on the side of caution. With our sale of Jardine Strategic Holdings, we have raised the cash level of the portfolio to about 19%. We will also be looking to dispose of SGX to increase cash to about a quarter of the portfolio.

There is a good chance that we may be wrong in our reading of the market, which is why we will remain largely invested, but our larger cash holding will help us to buffer risks to the downside, and will be a useful source of ammunition should distressed opportunities appear.