SGX Stockfacts Screener

There are 728 companies listed on the SGX. For the first-timer, or relatively new investor who have had fewer than five transactions, you are probably still conforming with social proofs -- a bias that believes that if everybody is doing something, it can't be too wrong.

As a non-conformist, and I say that because I will probably be the out-lyer in most social experiments, I am conscious of all these cognitive biases and human natures, hence I consciously act on raw, hard, facts that will stare at my face while I concurrently tear away any emotions.

Here's my simple criteria to selecting stocks, backed by sound financial fundamentals.

1. Low Debt/Equity (D/E) ratio You can never be any safer than following this ratio. A company with little or no debt means that the company has superb money management. They watch their top and bottom very tightly. This is very suitable for new investors because of the loss/risk aversion bias.
2. Minimally 3.5% yield Bank of China pays 3.55% p.a. on balances up to $60k if you credit your salary, spend $500/month on credit card, and pay 3 bills. It's safe to have dividends higher than the savings interest rate. A metric to look at for over-valued companies are extremely low yields, such as tech companies that cost a bomb before they even start to make enough money to pay you dividends higher than the savings account interest of 0.05%.
3. Price/Earning ratio < 13 which is an STI average This is also an arbitrary anchor to make you see feel safer that you are buying a stock that is below the average, which has a lower chance to be over-valued compared with another company that is above the average.
4. At least $800M market capitalization This is an arbitrary number I took from someone else's study (I can't remember) that companies in the 70-th percentile in terms of market capitalisation have the best performance. The companies are big enough to secure funds/loans for expansion, likely have established corporate governance structures, but are also small enough to grow and transform to seize opportunities, usually have one boss to call the shots. The very very large caps (e.g. >$10B) with very established businesses will not be able to adjust as quickly because of multiple layers of management to manuverve and many stakeholders with vested interests. They tend to be over-valued as well because the market pays a premium for their track record and reputation.

With these simple criteria, I present you a screen shot of only 20 companies that can satisfy my selection criteria from SGX Stockfacts Screener...

Here's how you select the criteria, if you don't know how.

Here's the shortlisted 20 companies.

This is the easy part. Now, start reading up on each company to find a business that resonates with your beliefs. You are one step nearer than 728 companies staring at you.

The writer owns shares in SIA Engineering, Keppel Corporation and Keppel REIT.

[Updated on 27/8/2016: You can also check the market statistics that SGX compiles every month to show which are the performing sectors. In this year, until Jul, Consumer Goods, Telco and REITS were the top 3 performers. How I use this data is to look for those sectors that are negative and study the companies in those sectors to look for under-valued stocks. Those that are positive, I will just verify with my stock selections to see if I had performed better than the average. For example, telco 12.84%: my singtel share bought at $3.60 last year is $4.20 now, so it's +16.67%, so I had performed better than the average.

Annual Sectorial Performance of Singapore Securities

]

Stock Review: Hyflux

I haven't recommended any first-stock this month because I didn't come across any to recommend.

Today I will review Hyflux -- the darling who created Singapore's NEWater. CEO Olivia Lum was a household name when she quitted school to start her company to make this first-of-a-kind Singapore-made water filtration technology because I own 30 units of 6% Cumulative Preference Shares (CPS) which I bought via an IPO in 2011. The structure was such that you get paid $6/year for every $100 unit held for 7 years. Upon maturity, Hyflux either redeems your capital or extends the tenure by a duration to be determined but at a 8% rate. The main reason why I bought it was because it was like a bond, and we have limited bond choices as retail investors.

Last week, this said CPS was trading below par value, or $100. The lowest was $93. Over the past 6 years holding this CPS, the price had been always at least $100. That pompted me to dig little deeper into its financial report.

The company is debt-laden. Debt/Equity (D/E) ratio is 80 as at Jun 2016. The lower the better. There are many other companies who fare much worse, so don't be too alarmed. There are other companies with similar preference shares holding much much much more debt (about 4 times more than Hyflux), for e.g. Oxley holdings (D/E = 348). Aspial's DE = 208. Basically I had divested all my shares in any company whose D/E ratio is above 50 because the economy is undergoing a lot of change and companies with high debt will likely have difficulties changing because they may not have the money to make the moves they want.

Top 10 D/E companies extracted from SGX Stockfacts

Anyway, back to Hyflux. After going through the financial report, the line item that is burning their cash is something I don't really understand, this term called "service concession arrangement". After doing a Google search, I seem to understand it as a maintenance agreement to manage and operate the water/energy plant after Hyflux constructs it. Hyflux owns the rights to manage and operate and these rights can be sold to other operators. However, as the filtration technology is proprietary to Hyflux, I am not sure whether there are patent or rights income because I don't see it anywhere in the financial report.

The other thing I was trying to identify was the profit margin to operate the plants. In 1H2015, profit margin (before tax) was 22%. in 1H2016, profit margin (before tax) was 2%. I seriously hope that I am misinterpreting the report. What happened over 1 year? 2 projects started, so higher revenue had been recorded, however, expenses are also very high as these are construction costs (~S$300M). The 2 projects are: TuasOne waste-to-energy (“WTE”) project (to be completed in 2019, client NEA) and Qurayyat Independent Water Project (“IWP”) in the Sultanate of Oman (to be completed in 2017, client Oman gov). This S$300M is likely the "service concession arrangement" line item on the cash flow sheet. In terms of reporting, I would have preferred the project expenses and loans to be tracked separately to show that their cash flow issues are purely because of the projects.

My conclusion is that Hyflux' negative cash flow issues are due to project construction costs. However, this is not conclusive as the company chooses not to separate the development and maintenance business. I still have faith to hold on to my CPS. If I were the Hyflux CEO, I will probably want to report my revenue, expense, debt, profit by the business nature. In terms of construction projects, I will also require my clients to pay me more upfront to manage my cash flow better. I probably prefer to buy the CPS that guarantees the 6% payout than to buy Hyflux equity ($0.51, 1.2 cents dividend or 2.3% yield) whose dividend is currently heavily penalised because of negative cash flow.

The writer owns Hyflux CPS 6% at the time of writing.

Stock Review: Sheng Siong Group

Sheng Siong is a household supermarket name. I had been avoiding it because I felt that their ethics could be improved and by that, I just felt that they were exploiting cheap labour, exploiting foreigners, selling low quality food, taking advantage of hawkers because they bidded for a hawker centre and turned it into a more expensive food court, etc.

Then I realised that all this while, Sheng Siong's share price had been rising non-stop. Do I hop on in support to earn some pocket money or do I hang on to my belief that because of their way they operate their business, they will get some "retribution" in time to come.

They have hit all the right notes. No debt. Dividend payout is almost 90%. Positive and growing cash flow. Marketing efforts are superb, analyst coverage is perfect (100% issue buy calls), every financial report, they report a bit about what they want to do and how they are achieving it. They expand their stores every year. They are even starting one in China, Kunming.

At $1.02 and 3.6 cents dividend, it translates to a yield of 3.5% which is decent.

It's tempting, but then I ask myself again whether they are exploilting cheap labour ($2.88M worth of Government Grant under Wage and Special Employment Credit Schemes, as reported in the Q2 2016 financial report). I asked myself whether it's their fault that they turned the hawker centre into a food court or is it the government's? While it could be the government's fault for publishing the tender, Sheng Siong had the choice to run it as a hawker centre or a food court and it chose to charge it as a food court.

Profit margins are growing. 10% is high. They could have paid these employees higher salaries. They could have sold better quality food to improve the well being and health of the lower income families who patronise their supermarkets. As a shareholder, I will like it, but I then ask myself whether it's morally right to take advantage of the lower income group that Sheng Siong targets and I can't bear to want to have a part in it.

It is also this very same moral principle that I also don't buy SMRT's shares. I don't own any Sheng Siong shares. I don't foresee myself buying it although it looks attractive. However, if you don't have this same moral dilemma that I have, just go forth and buy.