Stock Review: Yoma Strategic Holdings

Yoma's founder is an enterprising man, Mr Serge Pun (63). He is a Myanmar national who started a company in Hong Kong in real estate development, progressed into real estate investment. His business spanned Bangkok, Shenzhen, Kuala Lumpur, Chengdu, and then finally Myanmar.

Yoma's business is primarily about real estate development business in Myanmar, managed by Serge Pun's two sons, CEO Melvyn Pun (38) and Cyrus Pun (36). The business also diverged into automotive (tractors), F&B (KFC) and tourism (balloons), with real estate still forming majority of the business.

There are a few figures in the financial report that I will dig into.

Profit Margin
What I could not find in the financial report was the expense per sector to find which sector was the most profitable. Instead, revenue was the only number that was categorised. As a result, I am forced to calculate the profit margin for the business as a whole -- 39% in 2016 and 35% in 2015 which are extremely high margins for a property developer.

Revenue categories extracted from financial report

Balance Sheet
Net cash is positive, however assets are largely contributed by development properties and land development rights. Asset value increased $100M to ~$950M as at 31 Mar 2016, contributed by increase in trade receivables, higher values of development property and land development rights. I didn't like it that the report didn't explain whether the higher values were due to higher valuations or increase in stock. There was a brief description about valuation gains for their investment properties.

Revenue Driver
Revenue driver appears to be driven by debt, which does not look sustainable to me -- debt steadily and proportionally increasing with revenue.

Star City
ALL the properties are in this little carved out "world" called Star City or Thanlyin. On the map, it appears to be a plot of land separated from the Yangon city centre by a river. It is marketed as a new township for the upper class.

extracted from Google Maps

What puzzles me is Star City is surrounded by farm land (at least to me it seems like it on the map). Yet the residential buildings are 8 to 12 storeys high, which will require lifts. I consider it too expensive a commodity to maintain. I would have believed a little bit more in the township and planning story had it been a combination of landed houses and 4 storey walk-up apartments spanning a wider area to help people move into homes they can afford.

Myanmar is also a relatively poor country with GDP per capita of US$1,183 in 2013. For comparison sake, Singapore's GDP per capita was US$54,648 in 2013. Indonesia, US$3,475. Vietnam, US$1,867.

Conclusion
While Myanmar is just beginning their path to democracy, it will take a lot of hard work and cleaning up (of corruption, crime, etc.) to be able to improve its citizens' standard of living. Building high-rise buildings with international schools in a ring-fenced, secured, Star City will not help the average citizen afford a better education or house. Unfortunately, it reminds me a lot about Malaysia's Iskandar township story. I wouldn't place my money on Yoma Strategic at its current price of 56 cents. Dividend was 0.25 cents or 0.4% yield. However, it could become an overnight darling like Genting Singapore if there are many speculators in Thanlyin, but the bubble will definitely burst for this one because high prices are not supported by fundamental wage growth and affordability in Myanmar.

References:

1. Full Year 2016 Financial Report
2. FY2016 Presentation Slides

What will I buy with $3000 (Jun 2016)?

The media reports about consecutive slowdown in the economy and government downgrading outlook forecasts. Do you read into the positive growth figure of 1-2%? or do you read into the consecutive quarters of economic slowdown? Although I am not an economics expert, there are some logical ways to understand what growth figures mean.

Singapore settles for slower growth for rest of decade - May 27, 2016, Business Times

For example, there is a report that the median salary has increased from $3,705 (2013) to $3,770 (2014). At a national level, it means that salaries for each worker had gone up, which may seem like a good thing. However, that does not mean that you will get a salary increment. It also does not mean that your job will always be there for you. In fact, if you are drawing a salary lower than the median and you get retrenched, you are helping to move the average higher.

Similarly, if manufacturing exports are decreasing, it can mean that the value of exported goods had decreased, or the goods are no longer in demand, or there had been a reduction in manufacturing companies because cost-conscious companies had shifted their manufacturing operations offshore. Does it mean that the economy is headed for a really bad time? Tuition centres are definitely sprouting up everywhere. The positive growth and negative growth still add up to a positive growth, which means that businesses are still adjusting to new business models, or the government is simply faking numbers.

The key to knowing what to invest in is to understand what is relevant to you and the world today. Learn relevant skills. Invest in relevant companies. There are certain industries that you know will disappear in 10 years time, some that you don't know or will not. Sometimes I also ask myself whether the mobile phone will be replaced. Does it matter? Will your land disappear? Will the need for food and energy disappear? Does Singapore still need the skills you have?

One thing I am not so sure about is the opening of flagship stores along Orchard. What impact does an Apple flagship store at Knightsbridge Mall beside Paragon have on Paragon? What impact does Uniqlo flagship store have on Orchard Central (a mall whose layout I seriously dislike) and its neighbour Centrepoint? Will crowds be drawn away from hot favourites Ngee Ann City and Paragon?

I am still placing my money in SPH REIT.


1. SPH REIT* $0.93, 5.9% yield. 5.5 cents/share. If you buy 3,000 units, you can expect to get $160/year. Pros: Easy to visit Paragon and Clementi Mall to see how the shopper crowd is like. Occupancy is consistency maintained at 99.9% to 100% for both malls.

Read the financial statements before putting your money on any stocks.

The above is by no means a fail-proof recommendation to buy. Stock prices fluctuate and buyers need to be aware of the risks.

The writer owns stocks marked *.

Is there a pattern in the stock market?

I had been following the stock market for quite some time and I believe in a few patterns:

1. Holiday season low trade volume because investors are having holidays with their families given their passive income from investments.

2. Sell in May (also partly attributable to the holiday season reason)

3. Holiday seasons generate very high sales numbers and make people very optimistic about the new year. Major market movers (i.e. popular gadgets, games, shopping, etc.) launch their new products/once-a-year-huge-discounts just-in-time for Christmas. The reports normally get reported in Jan-Feb the following year.

The sudden jolts can't be predicted:

1. SARS, influenza, Eloba, Zika, etc.

2. Flash crash due to technical glitches in trading algorithm, or China's circuit breaker that halts markets based on % swings.

3. Lehman brothers defaulting on their bonds (although people saw it coming, they believed that the bank was too big to fail)

Despite my constant answer to my friends that we can never predict the market, I decided to make an attempt to "predict" what the market will be like in the next 6 months (just for the fun of it).

Please don't take this too seriously as I will not be responsible for your missed opportunities. If the predictions turn out to be true, it could be mere coincidence or empirical evidence to support the hypothesis that there indeed are annual patterns in the market.

I extracted the historical monthly index from Yahoo and then did a month to month % comparison and average it over the 5, 10, 15 year spans. For e.g. 1 Jan vs. 1 Feb = 5% means STI was 5% higher on 1 Feb compared with 1 Jan. When plotted on a graph, it shows that 1 May sees the sharpest increase and 1 Sep sees the sharpest drop as compared with all other monthly comparisons. However, the index at 1 Sep could still be higher than the index on 1 Jan.

STI monthly difference

So sell in May probably became a self-fulfilling prophecy.

What will I buy with $3000 (May 2016)?

Hug money and hold tight for a mini roller coaster ride. I will still be recommending the same stock this month.

1. SPH REIT* $0.93, 5.9% yield. 5.5 cents/share. If you buy 3,000 units, you can expect to get $160/year. Pros: Easy to visit Paragon and Clementi Mall to see how the shopper crowd is like.

Read the financial statements before putting your money on any stocks.

The above is by no means a fail-proof recommendation to buy. Stock prices fluctuate and buyers need to be aware of the risks.

The writer owns stocks marked *.

Stock Review: Keppel DC REIT

Keppel Data Center (DC) REIT's financials look decent. Debt ratio of 30%, average lease expiry is 8.7 years, loan rates are fixed at 2.4%, occupancy 92%, etc.

What is holding me back from buying Keppel DC REIT? (I applied for it during the IPO but did not buy any post-IPO as I thought that the price does not offer me sufficient margin of safety. 7% is so-so, 6% is not high enough...)

1. Lease expiry

When you look deeper into the distribution of rental income vs lease expiry, 66.8% of the leases are 2.3 years, which is very short. In terms of distribution of rental income vs tenants, 62.1% belong to internet enterprises and IT services. My rough guess is that the 62.1% of tenants form the majority of the 66.8% short leases.

2. Demand and Supply

Keppel DC REIT appears to suggest that the growth in global data centre traffic (which is something like internet traffic) will provide the demand for data centres. To me, there are certain assumptions for this correlation to hold true:

• Size of servers remain the same
• Servers will still be in existence and will not be overtaken by a newer breed of hardware (much like how servers overtook mainframes 20 years ago)
• No consolidation of server infrastructure across the globe (hence demand keeps growing)
• Wired network infrastructure will still be in existence and will not be overtaken by a newer wired/wireless/satellite technology (much like how copper wires were replaced with eternet cables 20 years ago and then fibre cables 10 years ago)

If you believe in those assumptions, then perhaps the growth in data centre traffic will indeed continue to contribute to the demand for data centres. Personally, I feel that the size of servers is already shrinking at a very fast pace. For example, if we need to use 5 server racks 5 years ago, we can easily get the same computing power with a fraction of a server rack today. (This is purely based on my own observations which will need to be further validated to be believed.) As servers become more energy and space efficient, data centre space (physical space which is what Keppel DC REIT is about) requirements will definitely be reduced. Global data centre traffic can grow, storage requirements can grow, and data centre requirements can still be reduced at the same time if any of the assumptions I stated above suddenly become irrelevant.

3. Valuation model

The valuation of the data centres assumes that the space is worth a 1000 times more than the raw cost of renting the physical space (at industrial REIT rental rates) because of the specialised manpower and equipment required to manage the data centre, and high barrier for entry because of the high capital investment required.

While this is probably the best valuation method now, we need to remind ourselves that this method of valuation is not an assurance of its asset value. In the container shipping industry, we had seen how software and machines automated the entire sorting and movement of containers. Ships that were valued based on the pre-automation days of specialised manpower rates become overvalued. In telecommunications, we had seen how cable TV had become obselete in a matter of 20 years. If the coaxial cables were valued based on the cable TV subscription fees then they would be not worth anything now because fibre cables had fully replaced the network infrastructure.

Telecommunications as an industry will not disappear because people still need to communicate. Data centres businesses will not disappear too because people still need the infrastructure for internet applications. We just need to ask ourselves how much we are willing to pay as an income/value/growth investor. As an income investor, I will expect a minimum of 8% yield to consider an entry. I personally do not see any growth or value in this, so ask someone else about that.

References:

1. Q1 2016 financial results

What will I buy with $3000 (Apr 2016)?

STI has been hovering around 2800 points and it's quite safe to buy income generating stocks at 5% yield or higher when you are not caught in an upturn wave. When income is generated, you don't really need to worry about whether the market is good or bad. It's similar to a hawker centre set up -- just because 99 stalls keep changing owners because business is bad doesn't necessarily mean that the 100th stall that constantly enjoys long queues of customers will be unable to make money.

1. SPH REIT* $0.95, 5.7% yield. If you buy 3,000 units, you can expect to get $160/year. Pros: Rental from Paragon and Clementi Mall are expected to be stable despite reports about retail shops closing down and high vacancy rates in a handful of Orchard district retail malls. The reasons why the units are vacant are probably why Paragon enjoys 100% occupancy -- location, location, and location.

2. Boardroom* $0.59, 5% yield. If you buy 5,000 units, you can expect to get $150/year. This company has 3 business areas: Secretarial services, depository services, business solutions. There are many similar companies (at least 50 companies) offering similar services except for the depository services where they help CDP with the shareholders registry. Whenever you buy shares, it has to be recorded somewhere, and the service is provided by Boardroom. If you look at its financial report, it has been consistently operating at positive cash flow. Profit margin is around 10%. The downside is that there is very little float in the public market (just 15%) and you will be just waiting for one of the 400+ shareholders to sell their shares to you. Limited upside.

Read the financial statements before putting your money on any stocks.

The above is by no means a fail-proof recommendation to buy. Stock prices fluctuate and buyers need to be aware of the risks.

The writer owns stocks marked *.

Stock Review: Keppel Corp and Semb Corp Industries

I still have my holdings in Keppel Corp (KC, bought since 2 years ago, hence I am still sitting on thousands of paper losses, but will seek to reduce exposure depending on circumstances) but I had sold off my holdings in Semb Corp Industries (SCI, bought 3 months ago) last week for a small profit. I foresee eratic and depressed prices to persist and definitely would not recommend first-time investors to take this roller-coaster ride. This is my 3rd ride on the roller coaster (1st - 2009, 2nd - 2011) and every ride has been different. This ride seems to be longer than the earlier two as the fall in oil prices had fallen to a once-in-30-years low.

The key factor that I am watching at this point in time is "Inventories and Work-in-Progress" and "Trade and other Receivables" on the balance sheet. Receivables usually means work has been fully delivered. This is because KC and SCI both did their first write-off in years, which is probably the first sign of many more to come. To write-off "receivables" in their accounting mean they remove the payment amount from the "receivable" column and tell you that they do not think that they will be able to collect that payment. The trick to deciding how much to write-off also depends on how overdue the payment is (could be as old as one year or sometimes more).  There is some benefit to write-off gradually over a few quarters because you pay less taxes and you can better manage your cash flow.

Trend of  Receivables amount on the balance sheet

Trend of Inventories and Receivables amount on the balance sheet

From the trend, receivables appear to be on an uptrend. The downtrend for KC is not to be taken as a good sign either because KC's management explained during the Q&A sessions that their projects with Sete Brasil (the brazilian company in a scandal and it at risk of bankruptcy) are still recorded under order books and not "receivables".

In terms of debt, both companies have been very stretched in the past 1 year. However, the large increase in KC's debt is largely due to the funding of the privatisation of Keppel Land in the start of FY15.

Debt (leverage) ratio

Overall, KC's balance sheet is riskier than SCI's as KC's inventories and receivables are much much more than its net assets (i.e. assets minus liabilities). However, this is also largely due to the large debt for Keppel Land. At this point in time, I had not seen any signs of how the privatisation of Keppel Land had helped the company.

SCI faces a higher concentration risk than KC. Sete Brasil contributes to 30% of SCI's rig-related order books and 20% to KC's rig-related order books. The amount SCI wrote-off was 3 times that of KC's. Taken in proportion to the inventories and receivables (charts shown earlier), the write-off effect is definitely bigger for SCI. Had it not been for the one-time divestment gains SCI made, the write-off could have made SCI's full year result in a net loss, like what happened to Semb Corp Marine.

KC, on the other hand, has investment income support that forms 25% of its recurring income, which is something built up over KC's lifetime. This to me, is a reflection of KC's management long-term investment focus and risk appetite, which is one of the main reasons why I have the faith to endure the long winter with KC.

Oh, and the dividend yields for KC are higher, so I am happy to get paid to ride this roller coaster.

The writer owns units of Keppel Corp shares at the time of writing.

References:

1. KC Financial Reports
2. SCI Financial Reports