STI and HSI Red Amidst the Trade War

A short read today showed that the STI plunged 2% due to escalating tensions in the US-China trade war. This could be contributed to the tariffs which Trump promised on Friday, which includes a 10% tariffs on US$300 billion worth of goods. On the contrary, the Federal rate cut did not give the expected stimulus to the stock market, which might not be unexpected as based on current market conditions, a rate hike should have been more logical.

As I am very interested in the STI constituents, I decided to see which stocks were bearing the brunt today.

The first stock is SIA which is hovering near its 52-week low of 9.01. At this point of writing, its current price is 9.02.

The second stock (which I have mentioned before) is SATS which is hovering near its 52-week low of 4.55. At this point of writing, its current price is 4.74.

Other notable stocks include DBS which had a 3.2% drop today.

Another point of interest will be the HK market, where today, 5th of August, is notably the biggest strike in Hong Kong's history. I think it is a double whammy for HK as they have to deal with the twin reasons of the trade war and the ongoing protests.

I am currently looking at Bank of China, which has broken its previous 52-week low of 3.19 to 3.05, which makes it even more appealing to go in. (Let us bear in mind that BOC is actually based in China and is just a H-share) I will be looking at other HK banks but I will be probably avoiding those banks based in HK such as the BOC (HK) holdings and Hang Seng Bank etc.

Just a superficial thought.

SATS- Trap or Opportunity?

What caught my eye in the market was SATS, whose price took a great hit of 6% due to earnings dropping with a drop of 14.4% in net profit. However, the closing price of 5 on Friday was notably still higher than the 52-week low of 4.55. I previously wrote about SATS here a few months ago and many of the points I mentioned remain salient.

From my previous post:

'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.'

'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.'

Based on the UOB report here, main reasons for the drop in earnings include the grounding of Jet Airways, low volume of air cargo and the grounding of the Boeing 737 Max airplanes. I think the low volume of air cargo is an effect arising from the trade war but the first and third factors were pretty unexpected reasons in play.

EPS dropped from 5.7 cents to 4.9 cents but I think dividend payout should remain safe in the short term unless the three factors mentioned greatly exacerbate. At closing price of 5, dividend yield is 3.6%.

For me, the game plan is to enter below 52-week low of 4.55, perhaps at 4.5 levels for a 4% yield. If these factors snowball badly, a higher margin of safety is going in when the price hits 4. We will see if the trade war will still continue to persist or cease to exist.

Learning the Shiller Ratio and some random thoughts

Happy Chinese New Year everybody! I can't believe that it has been 2 months since I started blogging.

I guess if you have been following my previous posts, I am mainly concerned about the current valuation of the stock market as it gives me an indication of when to buy. So one thing that caught my eye on Investopedia was this which was quite interesting to me.

The Shiller Ratio is a measure which is equivalent to the current price divided by the average of 10-year period of real earnings per share. It is inherently an extension of the Price-Earnings ratio, albeit adjusted for inflation and different phases of a normal economic cycle. It is a ratio to determine an overvaluation or undervaluation of any financial asset, but also accounting for cyclical factors that artificially inflate or deflate a company's earnings.

Of course, Singapore is my main point of interest, so I managed to find the historic Shiller Ratio from the Barclays website.

Source: Barclays Shiller Ratio (Singapore)

As of 31 December 2018, Singapore's Shiller Ratio stands at 15.21, which is pretty decent considering that it is rather low given the peaks you see in the above diagram. Notably, the peak was around 35 in October 2007 before plummeting during the Great Financial Crisis. Looking at current levels, it does seem compelling for a buy.

Let's look at the pros and cons here. The pros should be quite evident, where the Shiller Ratio has accounted for expanding and contracting business cycles using a 10-year period to smooth earnings, which is not represented in a normal PE ratio. This can ensure that outliers like the Great Financial Crisis will not greatly affect the conclusion we will get. After all, this is all about the law of large numbers, where the end result should be stable and generally similar.

Obviously, there are some disadvantages which might/might not be of significance. I think the first point is that the Shiller Ratio is based on past data which is retrospective and does not provide any prospective meaning, aka knowing what happens in the past does not make you 100% sure about what the future entails. 

But still, I think the Shiller Ratio is a good enough gauge for us to assess the valuation of the market.

As we celebrate Chinese New Year in Singapore, US markets are still up and running so I thought I should have a look there too 

I am currently thinking of diversifying outside of Singapore and buying some undervalued US shares but if we do apply the Shiller Ratio which we previously discussed, it seems that the US market is even more overvalued than the Singapore market.

Source: Barclays Shiller Ratio (Singapore and USA)

The US market has a Shiller score of 26.64 which represents a pretty huge margin over Singapore's score of 15.21, which generally means it is harder to find undervalued gems in the market. But it is always good to shortlist first, and then pull the trigger later.

The current Shiller Ratio for the S&P 500 is 29.75, with mean of 16.6, median of 15.7 and a range from 4.78 to 44.19, where the current market is slightly overvalued and above its mean.

My recent call on SATS at 4.5 has not been feasible, where SATS is trading at 4.8 currently. Parkwaylife Reit is also at 2.79 and Capitamall Trust at 2.39 which is a tad too high for my taste. Mapletree Industrial is at 1.99 and Mapletree NAC is at 1.25. All the stocks had run up pretty high after my writing so I didn't get the chance to buy. But I do hope I am rewarded for my patience as I am of the view that high prices don't always last, just like how bullish markets don't continue forever. We will see again!

I will write more again after the new year about some US stocks I had some interest in. But for now, it's visiting time. Cheers to the new year ahead!

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!