Monday, January 21, 2019

Current Market Report- Staying on the sidelines

There has been a slight rebound in global markets with STI at 3,220.56, which is a decent distance from its 52-week low of 2,955.68, a 264.88 point difference (8.22%). The same holds for true, where we can see from our STI list here. As you can see here, I revamped the table to include more details of the STI stocks. Last prices are closing prices as of Monday 21 January 2019.


The stock which is closest to its 52-week low is SIA at 5.09%. SATS is the second closest, where it is 5.6% away. You may recall my previous idea of buying at a price of 4.5 but SATS recently ran up and I will be waiting to see if it will fall. Possible reasons for the rebound might include borrowed confidence from the US market, which has seen an impressive rebound itself to 24,706.35 currently.

Major risks entailing this rebound will include:

1) China's slowdown in its economy
Slower growth does mean that China will be able to buy less stuff from the rest of the world. We note that China is the number 1 country where Singapore exports to, so a slowdown here will inevitably spread to our economy.

2) Federal Interest Rate Hikes
I think I said this in previous posts, but this is always worth a mention as interest rates are one of the central elements in an economy. Hikes in interest rates should affect an economy in theory.


Other intermittent risks will be the political instability in US and UK due to the uncertainty respectively arising from Trump and Brexit.

Singapore reits are also pretty overvalued as it seems, and there will definitely be room to fall if major risk 1 and 2 comes into fruition.

As of now, I do not have any ideas of anything to buy, so I will be happy to hear your lovely ideas. Please share and/or comment!

Tuesday, January 15, 2019

My Reading List- Mapletree Industrial Circular

So this came in my mail. My dad is an unitholder of Mapletree Industrial so I thought this would be something interesting to read and look up. (finally a nicely printed color book instead of reading online presentations!)


In a nutshell, Mapletree Industrial is proposing to buy 18 Tai Seng Singapore and adding it into its portfolio. A quick overview here from their website.

Source: MIT Investor Presentation Slides

So firstly, MIT is exploring a variety of options to come out with the cash, either by equity or debt or both.

Source: MIT Investor Presentation Slides

LTV, meaning loan-to-value represents the amount of money being loaned with respect to the total acquisition cost. Conventional wisdom does tell us that issuing equity to fund the acquisition will cost a dilution in current unitholders' holdings as the number of outstanding shares increases and each share is worth less prior to the issuance with a lower net asset value (NAV). Similarly, issuing debt will mean that gearing will increase, while NAV might also drop due to an increase in liabilities. From a macro point of view, if interest rates do rise as projected, perhaps it would be better for the reit to go for the equity option, or a 40% LTV option as illustrated above. This can allow them to service their debt more easily. As you can see, a 100% LTV (pure debt no equity option) drives gearing up to 38.7% from 35.1% as opposed to a 40% LTV. There is no 0% LTV here (no debt pure equity option) but it seems that the idea of dilution might not be popular with the unitholders.

The second observation was that 18 Tai Seng is dependent on Sivantos Pte Ltd which makes up 36.6% of its gross rental income. Sivantos is a manufacturer of hearing aids and the income from Sivantos will have the most impact on this new property's income.

Source: MIT Investor Presentation Slides

Although that being said, Sivantos only makes up 1.9% of the entire MIT portfolio. Additional benefit includes reducing the reliance on the other properties in the portfolio, where the top tenant HP drops from 10% to 9.4%.

Source: MIT Investor Presentation Slides

Of course this is a double-edged sword, if Sivantos fails to perform, reducing the reliance on other properties won't really matter too. This is my assumption here, but I will be inclined to think that income from Sivantos will be stable and not volatile, as demand for hearing aids is price inelastic as it is a pretty specialized good.

The final part of interest is of course the effects on distribution per unit (DPU) and NAV.
Source: MIT Investor Presentation Slides

In theory, DPU will be the maximum at 12.11 cents if you use purely debt to fund it (same number of outstanding shares) and the least at 11.83 cents if there is some equity issuance. We note that the predicted number is higher than the current DPU of 11.75 cents. Given the closing price of 1.97 on Tuesday 15 January 2019, the previous DPU translates into 5.96%, the LTV 40% option translates into 6.01% while the LTV 100% option translates into 6.15%.  NAV will remain the same at 1.47 if it is 100% debt and increase slightly to 1.49 if there is some equity issuance.

Of course, this probability of the predicted scenario is not guaranteed. Whenever I look at a decision-making process, what I like to look first is the entailing risks which the decision carries.

From my own experience, Tai Seng is not really popular for me and I recall the last time being there was taking driving lessons at Comfort Driving Centre (CDC). So the 'proximity to mature housing estates like Hougang, Bedok and Toa Payoh' point might not draw maximum benefit for the reit and retail elements in the reit may have a risk of not outperforming.

Secondly, the current market price is 1.97 and NAV is 1.47, where you are paying a whopping 50 cents extra for a unit. Although the yield is still pretty acceptable at 5.9-6.0% levels, this is a point of consideration for me. Because assuming they go for the LTV 40% option which is a mixture of equity and debt for a 6% yield, waiting for the price to drop is also a good way to increase dividend yield.

Thirdly, the risk of ecommerce is still there. This might not be very pertinent in the current market but I am going to include it here for my reference (I have written a little about ecommerce in my previous post).

52-week low for MIT is 1.84 which is still a distance away from 1.97.

Technical-wise, price is currently above the 200 exponential moving average which signals a uptrend for now.


Personally, no matter the acquisition, I will not be looking to buy the stock at its current price due to the 50 cent premium over its NAV. I think even the 52-week low of 1.84 is too high for my taste and I am looking at 1.60 levels which was a support in early 2017. The probability of this price happening is pretty low but I will prefer a higher margin of safety at a 13 cent premium.

What are your ideas on this? Looking forward to a constructive discussion.

Thursday, January 10, 2019

Current Market Idea- Mapletree NAC Trust

There has been a recent market rebound and this is rather evident from the 52-week low table we have here (prices are as of Thursday 10 January 2019 closing prices)


All the highlighted stocks from my previous post have rebounded and none are near their 52-week low as of now (the nearest being Singtel which is 6.91% away from its low). My buy call on SATS at 4.5 has to wait unfortunately, but nevertheless it never does harm to do more market analysis on stocks of interest. My previous stock of interest Parkwaylife Reit also rebounded to 2.71, well I suppose in a bullish market, it is tough to buy stuff so I'll have to wait and see!

One stock which I am currently interested in Mapletree NAC which is currently trading at 1.18 at this point of writing. My analysis might not be really accurate as I am using the 26 October 2018 financial presentation which is fairly outdated information.

So a quick look will tell us that the reit has been increasing the money rolling in, with gross revenue and NPI increasing by 12%, which is pretty good. Distribution income and DPU has also been increasing, which should be our utmost concern as unit holders.


Source: MNACT 2Q 2018 Results Presentation

We also note that debt which has fixed interest rates stands at 78%, annual effective interest rate for its debt stands at 2.48% and 80% of distribution income hedged against the Singapore Dollar. Let's look at these three points: for the first, the Federal Reserve is projected to have 2 rate hikes this year (this might change if Trump does pressure it politically) so our risk here is the 22% of debt which might incur higher interest costs. Secondly, the annual interest rate is 2.48% which is pretty ok and I am using the 10 year treasury yield of 2.725% as my basis for comparison. Lastly, we note that the currencies that we are concerned about is the Hong Kong Dollar, Renminbi and the Japanese Yen. Since HKD is pegged against the US Dollar, we can just directly use the USD for our analysis. My take is this: if the rate hikes do happen, more investors will be inclined to buy USD for its higher yield, which will cause an appreciation, which means the USD aka HKD will appreciate against the SGD. This might be already on the way to being true, where the USD rebounded from its 1.30-1.31 lows to its current price of 1.35-1.36 following the rate hikes. Renminbi might continue to depreciate where China faces the pressure of its mounting US debt and dwindling financial reserves. I particularly like this article which clearly depicts the risk it is facing, and if that holds true, the Renminbi should continue to depreciate in value. The Japanese Yen might continue to appreciate as it is a safe haven currency which investors will want to hold in volatile markets. But overall, I believe that currency risks will not have an adverse effect on the reit's earnings.

NAV of the reit stands at 1.325 as opposed to the market price of 1.18, where we are paying 89% of its NAV for a unit. This does signify some sort of undervaluation as opposed to the other S-reits which are trading above their NAV. Gearing is at 39% which is below Singapore's regulation of 45% which looks decent. 2018 dividend yield is at 6.45% which is pretty good as it is 4+% over the current SSB which yields 2.2%. Mapletree NAC's low was at 1.07 which I was contemplating to buy but it rebounded rather quickly.

The risks here would be e-commerce which will erode profits especially in China where e-commerce is so prominent. A recession might also cause a drop in household income and people are less inclined to spend and leading to lower profits for the reit. During my Hong Kong trip, I had the chance to visit Festival Walk on a weekday and I noticed that although the traffic for the mall was good (Festival Walk is on Kowloon Tong interchange and there are many universities in the vicinity), the actual number of people buying stuff wasn't that many. Food court and restaurants were very packed though during lunch hour so the shopping mall might just be a place for people to pass through to their destination (although I may be wrong as weekends might save the day!).

Since I am in view of a bearish market, I will not be buying at its current price and I will be looking at a higher margin of safety at a price of 1, where yield is 7.5%. This will be a long term price that I am comfortable with holding, as a recession does not last forever (so do bullish markets).

Any interesting ideas here? Please share!

Wednesday, January 9, 2019

Welcoming 2019!

Happy belated new year to everybody! I haven't been posting much recently because I am in Hong Kong now.

Recently Apple made the news by dropping a 10% due to a lower revenue forecast, which led to a -660.02 (2.83%) point drop to 22,686.22 for the Dow Jones on 3 January Thursday. I was also surprised that our local STI did not catch the bearish sentiment and instead ended at 3,059.23 with a +46.35 point (1.54%) increase the following day. However, I still maintain my bearish stance on our STI.

So what's my rationale? Firstly, this year will see a projection of two rate hikes by the Federal Reserve. My belief is that rate hikes do cause a drop in the stock market (by theory) and I am quite bearish in the overall financial markets (check my previous blogpost for a detailed explanation). Other accompanying reasons include the risks arising from detriments of inflation, military conflicts and trade wars.

The chief difficulty I am pretty sure we all share is when exactly to go in. No one knows when the market is perceived to be at a 'bottom'. I mean, no one exactly knows, because we don't know whether something will go up or down (unless insider trading but still not 100% confidence). Personally, I think the best way to handle this is to identify certain stocks you want to hold in the long term and try to go in as low as possible, or even buy more when it drops from our purchase price. This is my current plan and I am glad to hear any improvements or feedback on this.

One observation I would like to state is that our reits have not been dropping and at lower prices, which is to my surprise, because I think reits would be most affected by interest rate hikes since it affects their cost of debt. But well, we will see again for the year.

Recently, MAS announced the increase of the personal limit for the Singapore Savings Bonds to be raised from $100,000 to $200,000 starting from February 1. I will be more inclined to increase my stake in SSB while waiting for a market correction. As it seems now though, everything seems to be going for slight rebounds with STI at 3,158.07 after a 1.12% gain today.

It also seems that I have to wait longer for my SATS call as it rebounded to 4.9 today (short of 4.5 buy call) which in my opinion is a little tad overvalued. I will be talking about other stocks of interest when I am back from Hong Kong this week. Hoping the new year will be well for everybody.

Cheers!

Wednesday, December 26, 2018

Post-Christmas Analysis- Parkwaylife Reit

Hoping everybody had a great Christmas so far!

As I am writing this, Dow Jones is at its 52-week low of 21,792.20 after suffering a -653.17 (2.91%) drop during Christmas Eve. Since we are on the topic of 52-week lows, here's the updated table for the STI stocks which I have mentioned in my previous blog posts. All prices here are the closing prices on Wednesday 26 December 2018.


Stocks which managed to rebound nicely out of their lows are Keppel, Singtel and SATS. You may recall I mentioned that I am interested in buying SATS at 4.5 and now it is at 4.61, 1.3% above its low. New stocks to the 52-week low list now include UOL, Thai Beverage and UOB which fell a little recently. These stocks also made new 52-week lows during this period which does signify some level of bearishness.

On a very superficial level of analysis, I still think there is room for STI to drop. Currently, it is at 3,011.15, after dropping 39.91 points or 1.31% today. However, it hasn't been really falling in tandem with the US markets in terms of direction and magnitude. It is still short of its 52-week low of 2,955.68 which I think will breach soon. Japan's Nikkei dropped 5.01% during Christmas in the light of US uncertainty and rebounded slightly here.

Although the current US futures are showing a slight rebound here, I am still rather worried about the stock market prospects due to a number of pertinent risks. Firstly, the rate hikes from the Federal Reserve should be top on the list, as an increased cost of borrowing money will contract the economy and pressure the stock markets. Secondly, the current political uncertainty in the Trump administration is worrying too; will the man be impeached? Will he build his wall? Or will he continue his war with China on trade? His unpredictability certainly translates into uncertainty and possibly a bearish stock market. Thirdly, trade war tensions are also key here, where increased tarrifs do adversely affect company profits and the stock market. In the light of these risks, I am waiting to buy at a lower level than current market prices to give myself some margin of safety, should these risks hold true. I will be seeing if STI will hover near the 2,950 mark and see if it will return to 2016 lows. I will likely be a buyer during those lows.

On my radar too are some reits (real estate investment trusts) which are of interest to me. The one that I am most interested in is Parkwaylife Reit, currently trading at 2.62.

I will like to keep this short, so I am going to jump straight into the points that appeal to me. The first highlight is how it is handling the interest rate hikes.


Source: Parkwaylife Reit 3Q 2018 Results Presentation

Its interest cost is only 0.94% which means for every $1,000 it is borrowing, it only has to pay $9.40 in interest costs. This is quite low considering that Federal Reserve recently hiked rates to 2.5%. Notably, its interest cost is one of the lowest among Singapore reits, which gives me much comfort. A good interest cover ratio of 13.5 also means that the reit can pay interest payments for 13.5 years based on its current profit. In terms of interest payment, this is one of the better reits to choose from.

Second point which I like is the increase in Net Property Income (NPI) for this year. This is rather obvious, because it is a nice bonus if the reit can increase its profit so that it can pay out more distributions to its unitholders (aka you and me). According to the presentation, this was attributed to higher rent amounts from the reit's properties. Another plus point is the constant increase of distribution per unit (DPU) for the past 10 years which is a testament to its track record.


Source: Parkwaylife Reit 3Q 2018 Results Presentation

Source: Parkwaylife Reit 3Q 2018 Results Presentation


Other essential details would include the Net Asset Value (NAV) which currently sits at 1.76 and gearing which is 37.7%. From a NAV perspective, the reit might be too overvalued at 2.62 as you are paying 86 cents more for every unit purchase. However, I can understand the premium so far due to its advantages in its more favorable interest rate management. Gearing is also at a comfortable 37.7%, well below Singapore's regulatory 45% for all reits. From a dividend yield perspective, in 2018, the reit is currently trading at about 5% yield. Current 52-week low is at 2.56. 

I will be waiting to see if Parkwaylife Reit will continue to trade lower given the bearish sentiment in the markets. Interestingly, Singapore reits have not been falling as hard as the STI stocks (non-reits). Capitamall Trust is instead near its 52-week high, which I am rather surprised by. 

What are the stocks that you all are interested to buy? Please share!


Thursday, December 20, 2018

Federal Reserve hikes rates- Gameplan for now

The most prominent news that has been rattling the markets is the hiking of federal fund rates by the Federal Reserve from 2.25% to 2.5%, for more details, you can read here.

Essentially, when there is a rate hike, the cost of borrowing money is higher which translates into a lower household disposable income. People will have less incentive to spend money when that happens, and businesses will feel the brunt of that in the form of lower profits. That is not the only way businesses will be affected; they will also have to face higher borrowing costs which may lead to slower growth and of course lower profits in the long term. In a nutshell, a rate hike should lead to a hit in the stock market by theory. And so far, the theory is holding true, with markets worldwide taking a hit this week. At the point of this writing, the Dow Jones is 464.06 points down at 22,859.60, a 2% drop.

So that's the brief macro background for today.

Now turning to the Singapore market, I updated the 52-week low table here. As you can see, those which are highlighted are roughly the same (1% above 52-week low) with a new addition of Sembcorp Industries. Interestingly, all the highlighted stocks made fresh new 52-week lows after I wrote my last post, Keppel Corp at 5.89, Sembcorp Industries at 2.52, SATS at 4.55, Singtel at 2.93, Venture at 14.11 and SPH at 2.35. The closing prices I am using here is the prices of Thursday 20 December 2018.


When rates go higher, investors tend to venture out of riskier assets like stocks and buy safe haven instruments such as government bonds (especially US treasuries). The risk premium (the difference between the return of the risky asset in question and the return of risk-free assets) is narrowing. For example, why would I buy a risky asset like a stock when I am only getting extra 1% of yield as opposed to buying a government bond? For reference, the US 10-Year Treasury Note is trading at 2.766% yield at this point of writing. If I would compare with a stock like SATS which is trading at 3.93% at its current price, I need to question if the prospects of SATS are good enough to justify the (3.93-2.766)= 1.164% spread (which honestly isn't that high).

So what's my gameplan for now? Conventional wisdom tells us that the rate hikes will definitely be bearish in the short term for stocks and the 90 day truce for the US-China trade war does not seem to be working well. I will be looking to see if there is further weakness in the Singapore market and see if there are any buying opportunities in terms of undervalued stocks. One of which I highlighted would be SATS at 4.5 at 4% yield. I would also be talking about some REITs which I am currently interested about in my next post.

Stay tuned and happy holidays for the rest of the year!

Sunday, December 16, 2018

Market Talk- My Take on SATS

I thought I would use this weekend to think through about my investing plan for the week and for the month.

So to start off, buying a stock can be generally broken down into two segments: firstly which stock to buy and secondly when to buy that particular stock. I think the order does not really matter and can be based on your preference.

I am going to simplify my problem set for a start and look at STI stocks which are trading near their 52-week low as a starting point. (I am assuming undervalued stocks are near their 52-week lows, which may not be too bad an assumption) The below stocks would be the one which I have highlighted in my criteria. (<1% to its 52-week low) The last prices here are the closing prices of the stocks on Friday 14 December 2018.


Here I have 5 stocks of interest namely, Keppel Corp, SATS, Singtel, Venture and SPH. For today's post, let's delve into SATS since it's the nearest to its 52-week low.

Firstly, let's look at the different breakdowns of revenue.

Source: SATS 2nd Quarter Report 2018/2019

There are two business segments, namely food solutions and gateway services. 

Based on the SATS website, the food solutions business consists of 'airline catering, food distribution and logistics, industrial catering as well as chilled and frozen food manufacturing, besides linen and laundry services'. The gateway services tackles 'airfreight, baggage and ramp handling, passenger services, aviation security, cargo, warehousing, perishables handling to cruise handling and terminal management'. We can further analyze this in terms of the industry where SATS's revenue is heavily concentrated in the aviation industry. Lastly, in terms of geography, most of SATS's revenue is derived from its Singapore operations.

A superficial observation would be that SATS derives most of its income from airlines and the Singapore market. The airline industry has not been very rosy too, where higher oil prices have taken its toll in the industry. Airlines will then be forced to save up on costs, where SATS will continue to feel the pressure.

My first line of thought should be whether the demand for such services will continue to persist. The second line would be to determine the current level of competition in the market. I did a quick Google check and found out that the top competitor was dnata.

dnata is SATS' main competitor in both food solutions and gateway services in Singapore. There is already a history of competition between the duopoly which operates in Changi Airport. You can read more about it in this 2016 Today article here. Based on SATS website, SATS has a significantly higher market share of 80% of all scheduled flights at Changi Airport and serve 50 out of the 68 scheduled airlines in Singapore. This may allow SATS to withstand competition from existing competitors like dnata and any new entrants.

However, despite of all the risks I have highlighted above, it's quite consoling to observe that revenue has been mostly increasing across all segments (business/industry/geography) with some exceptions. Operating profit has also increased by 8% although Profit After Tax and Minority Interests (PATMI) had a substantial decline of 9% for the 2nd quarter, where Earnings Per Share (EPS) dropped from 6.5 to 5.9 Singapore cents. This decline was generally attributed in the report to 'lower contributions from both Gateway and Food associates/Joint Ventures'. These ventures are generally based in Malaysia and Indonesia and might continue to pull down on SATS due to lower volumes and/or currency depreciation against SGD.

One more thing that is of interest to me will be the history of dividends paid so far.

Source: dividends.sg


I like the fact that SATS have been generally increasing their dividend payouts over the years and averaging the higher end of 3-4% with a payout of 18 Singapore cents this year. 

So moving forward here, will I buy the stock? Currently, oil prices are plunging where airlines may be able to take advantage of these savings (if they are not too heavily hedged). These factors may allow SATS to enjoy higher revenue from these airlines. Another potential factor for upside would be an increase in international visitor arrivals in Singapore for 2019, which can also lead to an increase in volume of people taking flights. I must say these are double-edged swords, as the inverse will also be detrimental. 

The largest risk here would be the trade war between US and China, which might blow up and affect SATS especially in its gateway services (air cargo services) where they will suffer from a decrease in trade volumes due to tariffs. Passengers travelling on business class might also be affected as less trade might mean less flow of passengers for business.

In conclusion, in this uncertain economic climate, I am not sure if SATS will continue to outperform, but I am fairly confident that it can survive at least in the Singapore market in the long term as it does not face any strong competition in the market now. Personally, I would be looking to buy SATS around a price of 4.50 which yields a 4% that I am very comfortable with in the long term. I hope this has been enlightening to you as it has to me!


Wednesday, December 12, 2018

My maiden post in my investing diary

I have been investing for a little while since my army days, which amounts to a decent period of 4 years. But yet, I have not been able to properly sit down and document each bit of my investing journey. Since it's the December holidays for me now, I thought it will be a good start for me to begin penning my thought processes along the way.

I hope this blog can serve as a poignant reminder of what I did well, could have done better and most importantly, what I should never do again. A retrospective diary of all my decisions which I can look back and reflect on (if necessary)

As it stands at the current time of writing, this is my current portfolio holdings here.

I am currently rather bearish on the market as I believe the ill-effects of the looming trade war has been grossly underestimated and we will feel the full blasts of it in 2019. As you can see, I am heavily vested in Singapore Savings Bonds (SSB), while waiting for any undervalued stocks to surface. My current active position is in Starhub (which I am suffering a paper loss but I am still holding onto it because I think the current price is rather sustainable).

Currently STI is at 3,099.99 with a +40.71 gain on 12 December, where it's 52 week trading range stands at 2,955.68 to 3,641.65. 

The most significant piece of macro news at this point of time would be the recent arrest of Huawei's Chief Financal Officer (CFO) Meng Wanzhou, which caused some tension in the US markets the previous week. I would be looking to see how this saga plays out, which in my opinion should be resolved soon.

Back at home, Singapore is currently facing a maritime dispute with Malaysia, where Malaysian ships have been stopping at Singapore waters. I doubt the dispute will be escalated badly and the Singapore market does not seem to be rattled by the events.

But these events are just one-off events, the main highlight for me is the set of interest rate hikes the Federal Reserve is set to embark on as that is what will directly affect the financial markets. Hikes invariably mean that the cost of money is higher, which will lead investors to venture into safe havens such as US Treasuries and liquidate their equities which are deemed to be higher risk. I am glad that I am in the position where I am holding a sizable amount of cash in SSB which I am ready to deploy anytime once the market goes down.

That concludes my first post, and please leave me any comments if there is anything. I would love to have a discussion about anything under the sun :) I am also on InvestingNote so do reach out to me. It would be great to share ideas and strategies on thriving in the investing world.

Current Market Report- Staying on the sidelines

There has been a slight rebound in global markets with STI at 3,220.56 , which is a decent distance from its 52-week low of 2,955.68 , a 264...