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!

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!

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!

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.