Stock Review: Singtel

My friend asked me what price is a good buy for Singtel. I told him I don't know, but that I am keen to buy Singtel over its competitors M1 and Starhub because Singtel still has a monopoly in the traditional telecommunication network (fixed lines used by businesses). They also have indirect ownership of the fibre broadband network through NetLink Trust (previously known as OpenNet). Starhub and M1 will not have that long-term advantage Singtel has. That is why, financials aside, from a business standpoint, Singtel has a monopoly advantage.

Growth potential
Digging into Singtel's financial report, what stands out is that Singapore contributes to just a quarter of its EBITDA (earnings before taxes, depreciations, etc.).

Singtel's EBITA by geography

Regional mobile associates include India's Airtel, Philippine's Globe Telecom and Indonesia's Telkomsel. Australia's share comes from Optus. AIMS AMP Capital Industrial REIT (another company listed on the SGX) has a 49% stake in Optus Centre. You can consider looking at that REIT if you think that Optus Centre is a good investment.

If you think that Singapore is crowded enough, I bet the developing neighbours are just as crowded. Just based on the assumption that population will definitely grow in these developing countries, we can safely assume that the growth potential (over a very long term of 10 to 20 years) of Singtel is high. Organic population growth effects take many years to materialise.

Quality of Earnings
Singtel has an impressive investment income. What I mean is income it gets from doing nothing. Ok, they probably still have to do some work, but it is basically income derived from just shareholdings. 63% earnings come from its operations (Singapore, Australia) and 37% from its associates and joint ventures. This is akin to you having a full-time job with a gross salary of $63, say per day, and at the end of the day when you go home, you have another $37 waiting for you at home. Some people call it passive income. This diversification provides a substantial cushion for localised or seasonal dropped in earnings (e.g. Australia dollar depreciation, or drop in iPhone sales in Singapore, etc.)

Singtel's EBITA by source

Stock volatility/stability
Stock volatility or stability is important to me. I personally feel that Singtel's price spread (reaching a high of $4.40 and $3.60 low in a span of 6 months) is just an effect of the wider market swings, so I am not concerned. The Straits Times Index had a 20% price spread as well.

Singtel's stock price changes

What I am more interested in is who the price swingers are. Flipping through the financial report, we will see that the top 20 shareholders own 97% of its shares. There is also stock options granted to staff and there are activities every month. What this means is that the people who are buying and selling everyday on the SGX are likely day traders, small fries looking for long-term investments (like me), or staff who want to cash out their stock options (of course they have to pay tax on their gains too).

The daily volume has been in the range of tens of millions in the past few months, which is small, compared to the approximately 16B shares in total. 3% of that is 480M. If you see 20M shares changing hands on a day, it's only a very small portion of investors.

Singtel's Top 20 shareholders

So if you can accept that price will fluctuate because of the profile of sellers, then you should not worry about the price you pay.

Assuming a dividend of 16.8 cents (an payout has been consistent), and it's last closing price of $3.64, a yield of 4.6% is decent. The market price will likely follow the STI trends, i.e. if STI drops by another 5% from 2830 to 2690, then we can expect the price to drop from $3.64 to $3.46. Similarly, if the STI rises, then the price will rise. So the more important question is whether you are happy with the 4.6% yield based on the current price.

Singtel's dividends over the past 6 years

A buy plan that I may consider that costs ~$7,000 with eventual average price of $3.46 for 2000 units:
Buy 500 units at $3.65
if the price drops by 5%, buy 500 units at $3.46
if the price drops by 10%, buy 1000 units at $3.29
if the price goes up, just be contented that I had bought some and wait for the next opportunity.

The writer does not own any shares mentioned.

Stock Review: If I were to pick a Commercial Trust

So many candies... which to pick?

Some people buy a stock based on its price vs past 1 year, vs what they previously paid for, vs what the IPO price was, vs dividend yield, vs price-to-book ratio, etc. I have a preference for stocks that have sustainable income, and this can mean monopoly in industry, selling of goods or services that are daily necessities, companies the country cannot do without.

I had (long, long ago) divested stocks in Capital Mall Asia (2009) and Mapletree Commercial Trust (2013) shares that I got in the Initial Public Offering (IPO) after locking in capital gains of 25%, mainly because I feel that online shopping puts a strain on retail shops and it's impossible to continuously increase rents by 10%.

Commercial trust broadly includes office space, retail space and convention/exhibition space. Today my focus is on office space.

If I have only $5,000 to spend on commercial trust shares, and all the yields are attractive -- 6 to 7% -- which will you choose?

1. CapitaLand Commercial Trust (CCT)
2. Keppel REIT (K-REIT)
3. Fraser Commercial Trust (FCT)
4. OUE Commercial REIT (OUE C-REIT)
5. Mapletree Commercial Trust (MCT)
6. Suntec REIT

Comparison of key attributes among commercial trusts

Debt
CapitaLand Commercial Trust (CCT) has the least debt, which means they have more room to grow or higher profit margins, depending on how you look at it. K-REIT's debt is too high for comfort and that is possibly a reason for its suppressed stock prices, given the uncertainty of an interest rate hike.

Profit Margin
Interestingly, Suntec REIT has the lowest profit margin based on my interpretation. I re-read the financial statements a few times just to make sure that I didn't read it wrongly, and I think I lifted the correct figures. As these massive landlords also invest in different properties, I must also commend K-REIT earns a profit that is 127% its revenue. i.e. it is able to generate sizable passive income, i.e. income from its investments from subsidiaries or joint ventures whose buildings are not directly managed by the company. CCT's overall profit margin is 91%, which I like a lot.

Price-to-book ratio and yield
All look attractive. MCT is the only exception trading above book value, which reflects investor confidence, but its portfolio is 70% retail and Vivocity is doing very well.

Occupancy
CCT is particularly attractive because of high occupancy and longer average leases, which means its income stream will likely be more stable than its competitors. While at a portfolio level, FCT's lease look healthy (3+ years), when you drill into the specifics, the Singapore leases are about 1.5 years, and the Australian leases are 10 years. Income from their Australia properties form a smaller percentage, hence FCT will probably have higher operating costs trying to renew and add tenancy contracts.

Overall
CCT looks the most attractive, but there is a risk of dilution of units. The dividend of 8.5 cents assumes that none of the convertible bonds (they call it CB 2017 in their financial report) will be converted to units. The total value is $175 M at a conversion price of $1.54, representing 3.9% of total units, which will mature on 12 Sep 2017. For as long as the market price remains below $1.54, it is unlikely the investor will convert to units. The dilution effect is about -10 cents in annual dividend per share.

The writer owns some units of Keppel REIT.

To Buy or Not?

For the past one month, I had been on a mini buying spree. My friends asked me every week whether I bought anything and I was buying something every week. At the end of one month, I felt poor. I was referring to shares on the SG stock market. Money not enough. I deployed partial warchest meant for -10% correction and -20% correction all within the month of Aug 2015. The last time I deployed partial warchest for -10% correction was Dec 2014 and I had 8 months to save and top-up my warchest. No chance this time.

Theoretically, the idea was to have 100% capital control, i.e. for every $1 invested, $1 is contributed to the warchest.

When the market makes a -5% correction (benchmarked against the  highest STI reached), spend 5% of warchest, and only buy when the price drops. When the price is on the uptrend, then save money.

In the worst case scenario (based on history), when the market makes a -50% correction, spend 100% of warchest.

The rationale behind the 100% capital control is that in the event of a flash crash of -50%, I will be able to pick up stocks at half the price which will offer double protection of my invested capital in an upturn. That was the theory.

What happened between Jul and Aug was that prices dropped by 5% consecutively every one-two weeks. Following the theory, I should have spent 20% when the market was -20%, but I overspent. I spent 25%. That sucks.

So to buy or not to buy...

1. Sit out from the market for a while to top up my warchest.
2. Take a little risk and continue to buy little by little since -20% corrections are once every 4 years and we are still not near the once every 10 year crash cycle.

I think I will continue to buy, and my friends will continue to watch me buy. Nobody dares to buy and I like it that way (until I am done shopping).

Saving my ILP - Part 4

It has been four months since I drew up my strategy to save my ILP and I am glad that the insurance industry isn't as bad as I had expected.

I consulted an independent insurance broker, ok, maybe not really really independent, but I tried my best to source for an independent broker and I found one (yes, after four months). Some criteria I had was the person must be rich and contented to not want to take advantage for me. The person does not try to sell me products that I don't need. This made my search very hard because it meant that I need to look for the person, instead of the usual salesman/salesgirl trying to grab you while you are shopping. I willingly heard sales talks from Manulife and Great Eastern, but none met my requirements. Google for independent financial advisory services, that was where I got some leads.

The broker shared that in the market, only Prudential and Great Eastern protect their agents and do not allow brokers to sell. All others, including the (rather expensive) AIA, are available through brokers. According to the broker I spoke to, the brokers' commission is lower than the agents who represent the company, because brokers have no vested interest. This met my criteria that the person is likely to offer me the most value for money deal in the market to convince me that it's good and cheap so that they can close the deal.

Just to recap, my Investment Linked Policy (ILP) had $100,000 death benefit, critical illness, early critical illness cover each. I also had riders: $50,000 accident, $1,000 medical reimbursement, $10,000 female illness, and premium waivers. The yearly premium is $3,317.

What I will do in four months' time after my new policies are in-force, is to minimise the ILP  insurance coverage to just $80,000 death benefit and make it an investment policy. My revised yearly premium will be $2,699 (-$618). That translates to a saving of $18,540 over 30 years. That lean and mean investment policy can then give me potential returns that I had earlier calculated in Part 1:

Assuming I live a long life until 95 years old, exceeding the average life expectancy of 85, at a 3% yield, I could also surrender the policy after 13 years to break-even.

Now I share a little about my cost comparison. Based on mortality charges listed in the ILP, the total premium cost is $197,000 over 30 years, versus term insurance premium of $57,000 (30% of the ILP premium) over 30 years for the following coverage:

• $1M death benefit (30 years)
• $300,000 critical illness benefit (30 years)
• $100,000 early critical illness benefit (term 20 years)

I was contemplating whether I should also terminate my more expensive 20 year Term Life policy ($500,000 benefit) for a cheaper equivalent to save $440/year. The savings would be depending on how much coverage I want to have too. I decided to retain it. I was also deciding between 20 and 30 year terms. I decided on 30 years for coverage up to 65 years old, which will be the retirement age in a decade or so. Critical illness cover also does not really make sense beyond 65 years old in an ILP. I think I will feel a bit "naked" if my term plans all end at 55 years old and I am still working. Another morbid thought was that the chances of falling sick between 55 and 65 years old is also higher than 35 to 55 years old, so I should extend my coverage to the maximum possible. Getting struck with critical illness at 60 years old will be a terrible experience if all my term plans had terminated and I would have felt that I wasted tens of thousands of premiums. If I get struck with critical illness at 70 years old, I will probably tell myself that I am too old and expensive to be insured.

A ball park figure of a $1M death benefit is cheaper than a $500,000 death benefit on a per dollar basis. Although I contemplated a long time whether I will need $1M death benefit, As $1M will be $500,000 after 30 years of inflation, I thought that it was a reasonable sum. I also decided to retain the 20 year term life policy for $500,000 death and accelerated total permanent disability (TPD) benefit, mainly because I had money to spare and my life is probably worth more than $1.5M at the moment, in terms of opportunity cost. The financial adviser introduced me to a concept of projected net worth at retirement age of 65 years old if I continue my earning, saving, spending and investing habits. At 65 years old, I will supposedly be valued at $2.4M and have more than enough money to retire.

Next was how much coverage I will need for critical illness and early critical illness. I decided on $300,000 for critical illness and $100,000 for early critical illness. The total cost is at least an additional $2,088/year and $1,472/year after 20 years. I decided to ditch the accident insurance. [Edit: premium amount updated on 1/8/2015]

New policies that I will buy at a cost $2,088.

• $1M death benefit (30 years, up till 64)
• $500,000 TPD benefit (accelerated, meaning consumes from the death benefit) (30 years)
• $300,000 critical illness benefit (30 years)
• $100,000 early critical illness benefit (term 20 years)

Existing policies that I will keep at a cost $3,139.

• $80,000 death benefit + investment component (whole life)
• $500,000 death benefit (20 years, up till 54)
• $500,000 TPD benefit (accelerated) (20 years)

I will be dropping the riders that costs $618/year. Total cost will be $5,227/year now, which is within my current annual dividend income from equities, so I feel that I do not need any income replacement insurance now.

Private shield plan is now $700/year (but increases with age) for 100% private hospital single-bed ward coverage. This will gradually increase to ~$4,000/year at 65 years old and increase by $400/year every year to ~$13,000 at 85 years old. I did a comparison between term plans terminating at 65 and 75 years old. The total cost is double for the last 10 years. I would rather force myself to exercise and eat healthy instead. Therefore, I had decided to stop all the term plans by 65 years old, which is the expected retirement age.

[Edited on 1/8/2015 with revised term plan cost.]

Stock Review: If I were to pick an Industrial Trust

I divested my shares in Mapletree Industrial Trust in 2013 at $1.40 after buying it at an IPO price of $1.15 in 2010. Reasons why I bought it were high yield (6%) and strong sponsor, Mapletree. One of the reasons why I sold the share was because I could pocket a "guaranteed advance dividend payout" for the next 3 years by means of realising a capital gain of 20%. On the back of vacancy uptrend and increased supply entering the market in the next 5 years (up till 2018), I thought that I could hold cash and wait for opportunities.

My friend asked which Industrial Trust I will pick if I were to pick an Industrial Trust in the current market. My initial response was that I am still bearish on the industrial market and I will probably still not buy into Industrial Trusts. However, I will force myself to read and choose one, even if I am not buying any.

The first thing I look out for is the demand and supply trends. For that, in Singapore, we have Jurong Town Corporation (JTC) that publishes these statistics quarterly.

Vacancy rates - extracted from JTC

Based on vacancy trends, I will pick warehouses and single-user factory. Logistics companies sometimes have their distribution centres classified as warehouse or single-user factory.

The second thing I look out for is rental prices. JTC also has statistics for rental index.

Rental index - extracted from JTC

Based on the rental index, I will pick single-user factory as it is reporting an uptrend.

The third thing I did was to comb through the financial reports -- Fundamental Analysis. Without knowledge of the industry, I will need to read these reports to make a relative comparison to identify which share to choose in the current market.

Side-by-side comparison of key numbers I look for - 
extracted from individual companies' financial statements and presentations

If there were any transcription errors, it was unintentional. I went through the reports over a few days and I re-read some numbers which looks strange. I couldn't find some of the numbers I was looking for in Ascendas, hence I left it blank -- and it didn't matter too. For each number, I marked out in green the most preferred number (e.g. highest yield), and in red the least preferred (lowest yield).

Just based on the first preference of choosing warehouse and single-user factory, my preferences will be bias towards Cache Logistics. However, we need to keep in mind that Cache Log pays out 100% of its earnings in dividends, hence growth is limited. There are some numbers to like, such as high profit margin, high occupancy, and low trade receivables, which are healthy signs of a single-user factory -- fewer tenants to manage and tenants also pay promptly.

If I have to choose a second preference, I will choose AIMS AMP Capital for the same reasons as Cache Log. The higher weighted land lease expiry is 10 years higher than Cache Log because they have freehold land in Australia (by virtue of a 49% stake in Optus Centre), which they used 99 years as part of the calculation.

Ascendas is my least-liked share. One thing I didn't like in the report was how they perceived lower than market average occupancy as potential revenue. Their profit margin is the lowest among the five companies compared here, and significantly lower than the other four companies. Hence, I am made to believe that there are probably operational inefficiencies within the company. However, some people may like that fact that Temasek Holdings (government-linked) and JTC (government) are reputable sponsors to Ascendas. Having an Ascendas' CEO who was an ex-JTC CEO and ex-EDB deputy managing director, could probably hint that some government-style management is present.

Ascendas CEO - extracted from Ascendas website

Ascendas ownership - extracted from Ascendas website

The writer does not own any shares in the companies mentioned.

Singapore Fixed Deposit - Jul 2015

Seems like banks are competing for fixed deposits this Jul with the Singapore Savings Bond. I compile this out of personal interest as I am also doing some shopping for my soon-maturing FD.

Excludes priority/privilege promotions because I am a commoner. All fresh funds.

One Year

Hong Leong 1.6% p.a. 12 months 50k

Standard Chartered 1.5% p.a. 10 months, min 25k

UOB 1.5% p.a. 13 months, min 20k

CIMB 1.45% p.a. 12 months, 25k

Maybank 1.45% p.a. 12 months, 25k

OCBC 1.4% 12 months, min 20k

Two Years

CIMB 1.95% p.a. 24 months, min 25k

Hong Leong 1.8% p.a. 12 months 50k

Standard Chartered 1.75% p.a. 10 months, min 25k

Stock Review: Accordia Golf Trust

What made Accordia Golf Trust (AGT) stood out was its supposedly 12% annual yield. That was what prompted me to take a deeper look at the company. When they launched their IPO in Aug-Sep 2014, I just spent a few minutes to browse the prospectus and then decided to give it a miss. This article I am writing is a result of 3 hours of reading.

First, we look at how the 12% calculation was derived because it is a critical assumption to make us feel that it is a good buy. Dividends were promised in the IPO prospectus -- 100% of profits would be paid out -- which turned out to be 5.7 cents for the period Aug 2014 to Mar 2015 (8 months). Using straight-line extrapolation, it is 8.55 cents. At the market price of 70-71 cents/unit, the yield is 12%.

Assumptions to take note of: 1) 100% payout of profits as dividends (which will probably leave no money for the company to grow it's business for the next year unless they borrow); 2) straight-line extrapolation of earnings which may not have happened.

Next, I look into the business model. Income mainly is derived from usage of golf course (65%), restaurants (24%) membership fees (10%). The revenue stream is seasonal where 4 months of the years (winter) will see fewer golfers. How much fewer? I did a ballpark estimate based on dip in income for the winter quarter and derived 30% lower in winter months. However as the expenses are constant, annualised profit margin becomes an important factor. Profit margin is 8% for the 8-month period. Straight-line extrapolation will assume 8% for the whole year.

Presentation slides and Financial Report for period Aug 2014 to Mar 2015

We also look into the history of AGT. AGT's parent is Accordia Golf Co Ltd (AGC), which is listed in the Tokyo Stock Exchange. 

Goldman acquired Accordia a decade ago and used it to buy up dozens of golf courses across Japan at a time when land prices were depressed after the bursting of the 1990s property bubble but demand for the game was still strong. - 6 Jan 2011, Goldman Eyes Clubhouse in Japan Golf Deal, nytimes.com

Golf membership prices soared in Japan during the 1980s bubble economy, then slumped as the country fell into four recessions in the past two decades. At least 800 golf clubs have gone bankrupt since 1991, according to Meiji Golf, which trades club memberships in Tokyo.

Membership values at Accordia-owned courses have fallen faster than the nationwide average, Kazunari Tsutsumi, executive director of Meiji Golf, said in July last year.

- 6 Jan 2011, Goldman Sachs Sells Stake in Japan Golf Course Owner, bloomberg

Accordia is considering several options to give shareholders better value than the 81,000 yen ($990) a share offer by PGM, ... include bringing in a strategic investor and raising dividends, the people said.

- 27 Nov 2012, Accordia Golf Said to Hire Daiwa to Counter PGM’s Buyout Bid, bloomberg

Why will AGC want to create AGT? Selling some shares away to get cash seemed to be the reason to list AGT because they have high valuations for their land and boosted the maximum yield they could (100% payout). Not only did the IPO open below the IPO price, but the price had never risen back to the 97 cents per share paid by 72% of its IPO shareholders. AGC only retained 28% ownership of AGT.

In AGC's financial statement for year ended 31 Mar 2015, it wrote that AGT was a business trust-based asset-light strategy to address issues of its business management, including an improvement in asset efficiency. Due to this strategy, AGC received repayments for the consideration for transferring the operation of 90 golf courses and existing loans receivable.

As a result, capital efficiency and return on equity had improved. AGC will continue to make intensive preparations for additional asset-light strategies for golf courses with confirmed stable profitability by improving their revenues. 

So AGC intends to continue to sell golf courses to AGT. How is AGT going to fund this? Rights issue? Bank loan? 

The yen has fallen about 5-10% a year in the past 2 years. If that yen trend continues, the share price for AGT may continue to drop because earnings are converted to SGD. What this means is that 10% earnings will be negated with 10% yen decrease. A 10% earning decrease + 10% yen decrease will result in 20% earning decrease.

If earnings are expected to rise, why should AGC sell the golf courses to AGT? They would have been better off collecting all the earnings themselves.

Finally, the location of these golf courses are near the mountainous areas, many hours drive away from the cities. The capital appreciation opportunity is limited without population growth. The land are also likely to be too expensive to be converted into agricultural land. Immigration is not easy too because Japan speaks predominantly Japanese. Their society also excludes foreigners in many aspects -- visas, property ownership, employment, marriages.

I am also not too optimistic about "golf tourism" in Japan when there are cheaper golf courses in Asia.

Oh yes, and I normally will mention that their cash holdings is only a fraction of their debt.

[Editted on 26/11/2015: Follow up review here.]

The writer does not own shares in the companies mentioned.