What did I buy in Aug 18, Sep 18 and Oct 18?

Gosh, 3 months zoomed past!

Aug 18
Isoteam Bought Isoteam at $0.31 without a detailed review. Prices have fallen further since (0.215 on 15 Oct), so I probably should stop procrastinating and do a proper review.

Sep 18
QAF Bought more at $0.75. Prices have fallen further since (0.725 on 11 Oct). Somehow I don't seem to be hitting the right notes although I did a detailed review in July.

Oct 18
None so far... but I am watching Capitaland Commercial Trust, SIA Engineering, Wilmar... I will probably end up putting my money in Singapore Savings Bonds temporarily as I haven't found anything really worth buying.
[Edit: bought AIMS AMP REIT in end Oct]

Stock Review: Singapore Airlines

I last reviewed SIA in Feb 2017. Prices have since went on a roller coaster ride and it's now $9.56, last done last friday. The lowest was $9.50 on 13 and 16 Aug 2018.

Profit Margin
Profit Margin is still lean, but an improvement from previous review,
FY17 = 892.9/15806.1=5.65%
FY16 = 360.4/14868.5=2.42%
Q12018 = 149/3844.5=3.88%
Q12017 = 346.5/3864.2=8.97%

Fuel costs have been rising and adding to costs. In 2016 and 2017, fuel costs form 25% of revenue.
FY17 = 3899.3/15806=24.7%
FY16 =3747.5/14868.5=25.2%
Q12018 = 1079.4/3844.5=28.1%
Q12017 = 925.7/3864.2=24.0%

Clearly, fuel costs ate into their margins in Q12018.

Return on Assets (= Net Income/Assets)
SIA is constantly buying aircraft. They boast a young fleet with average age under 5 years old. I chose to divide by the Property, Plant and Equipment figure as it is likely referring to the aircraft, instead of total assets, which includes other investments. For this calculation, I prefer to use the more conservative net income instead of operating profit because debt is used to finance the aircraft purchase.

FY17 = 892.9/19824.6=4.5%
FY16 = 360.4/16433.3=2.2%

Overall, it's still not an effective use of the aircraft, but I guess we can say that the new aircraft may be a draw for customers.

Dividend Sustainability
Free Cash Flow per share is even more negative now at -$1.03 in Q12018. Dividend payouts are funded by debt. Although they paid a dividend of 40 cents for 2017, a yield of 4.2%, I am not attracted to it. As a whole, SIA may have been watching their costs, but I just don't think their increasing debt is a good thing.

The writer does not own any SIA shares.

References:

• Financial Report Q12018, ended 30 Jun 2018
• Financial Report Q42017, ended 31 Mar 2018

What did I buy and sell in Jul 18?

QAF Limited Bought more at $0.86. I systematically bought after prices fell another 10%. This time, I did a more detailed review on the business and the factors affecting their pork business. I still believe that it is a good business although I have heard many alternate interpretations. It is one of those moments where you wonder if your analysis is wrong because everybody is selling, or the opposite...

Singapore Press Holdings (SPH) Sold at $2.90. I recommended to buy SPH when the prices fell after the next CEO took over. I recently decided to sell because it has risen 20% from it's low of $2.41 (23 Mar 2018). One of my sell criteria is when the price rises fast without any fundamental or economic changes that caused the prices to fall. Most importantly, it's to take profit first, then decide whether to by again later. Given the share price's volatility, this stock should be a good candidate to trade in and out. There should be another wave to ride when SPH launches their Woodleigh Residences condo in late Sep 2018. I will see how the prices go...

Stock Review: QAF Limited

QAF Limited is a company owned by the late indonesian tycoon Mr Liem Soie Leong aka Soedono Salim who founded the conglomerate Salim Group. His youngest son Anthony runs Indofood Agri Resources, a palm oil producer. His second son Andree runs QAF as Vice Chairman, which has 3 business areas: bakery (e.g. Gardenia), primary production (pork produce, e.g. Rivalea) and distribution and warehousing (e.g. Cowhead, Farmland). Andree's son Lin Kejian runs QAF as Joint Group Managing Director. To see a more detailed listing of the brands they distribute, check out Ben Foods.

QAF ownership extracted from SGX Stockfacts

QAF has a long history (you can read a bit more about Wong Fong Fui who turned QAF's business around before selling it to Salim Group in 1996). The company focused on Gardenia bread and expanded their business from there. Bakery is still very much a core business for them.

Their share price has fallen from a high of $1.585 in Feb 2017 to the current low of $0.86 in Jul 2018, a drop of 46%. This is mainly due to a pork oversupply issue worldwide that started in the beginning of 2017 after China reduced pork imports.

QAF's share price over the past 10 years

So is the stock worth buying? The most important factor to assess is whether the business, excluding the affect pork business, is able to provide stable income for the company. There are many figures inside the financial report but I will drill into the earnings by segment.

Extracted from financial reports FY2017 and Q12018

References: 1Q2018, 4Q2017

The earnings from primary production is about 30% in 2017. Although the 1Q2018 report didn't state the Earnings before income tax (EBIT), based on the proportion between EBITDA and EBIT for FY2017, we can expect the primary production contribution in 2018 to be lower than 30%. Earning per share (EPS) in 1Q2018 has reduced from 2.6 cents in 1Q2017 to 0.5 cents in 1Q2018. There was also a scrip dividend issue which diluted the shareholder base slightly (1.5%).

Assuming straight-line projection of earnings for the rest of 2018, i.e. 0.5 cents x 4 quarters = 2 cents, QAF is definitely not going to be able to pay its dividend of 5 cents/year, a track record which they have been maintaining for since 2012. There is no net profit per segment figure in the financial report, which I thought would be good if the management had included it. Anyway, we need a guess-timate, so we just use whatever is available. Based on this, and assuming bakery's profit is constant, because the EBITDA figures say so, I estimate the loss from primary production to be $11M. The only problem is there is no way to tell whether this loss is a one-off or a recurring loss.

Extracted from financial reports FY2017 and Q12018

Ok, now to the valuation, if the business could be valued by the market at $1.585 at its peak, halving the price means that the market is expecting the primary production business to not contribute any income. As we have seen that the losses are actually eating into the profitable bakery business, this suggests that QAF's share price can fall further. My current average price is $1 and I will be holding on to these stocks as it has a good economic moat -- bakery and food distribution business, even if its pork business is out of business.

The pork oversupply issue is hitting US the hardest because China has imposed a 25% tax on US pork imports. Many australian pig farms have closed. Some may have to kill the pigs because there are no buyers and it costs money to feed them. The only reprieve will be if China is agreeable to take in Australian pork imports, however, this will take a while even if they start negotiations now. I am expecting QAF's price to remain volatile in the next 6 months until the market consolidates. My strategy is to just buy on dips to average down, barring any other unforeseen events like a full-blown trade war that sends everything crashing.

Book Review: Robert Kuok a Memoir with Andrew Tanzer

Robert Kuok Hock Nien is well-know businessman who ran mainly the palm oil and sugar business Wilmar and the hotel property business Shangri-La.

This book tells the tale of his early years in Johor Bahru, studying in Singapore Raffles College, and then returning to JB when the Japanese war broke out, so he didn't complete school. He was quite lucky to not get captured and earned a job in Mitsubishi during the Japanese occupation. Many chinese hated the Japanese but he didn't (for survival).

Luck was the recurring theme throughout his life, government appointed him sole distributor licenses, profiting in sugar trades, tariff protection from government, his mother's help with picking divination lots when he couldn't decide, an acquantaince that suggested the name Shangri-La for his hotel, buying prime land at discounts, living a long life despite working long hours, always rushing onto a plane, grew up smelling second smoke, smoked a bit, ... which are all lifestyle choices that are correlated with bad health.

Overall, I didn't feel that I learnt as much as from Philip Yeo's memoir, about making investments. Robert Kuok's memoir was more like how to clinch deal strategy -- put everything down and always arrive earlier than others.

He also gave his views on capitalist and communist societies. He is anti-greed, but acknowledges that greed is necessary to motivate people to work. Knowing when to stop will then be a matter of moral values. His thoughts on money is also quite similar to Warren Buffett where he said that he does not believe in leaving his wealth to his children. He sets up foundations and help the needy with the recurring income these investments are generating. He believes that if his children are like him, they won't need his money. If his children are not like him, then he will probably spoil them with his money.

I may not believe whole-heartedly that he is this very noble businessman who creates jobs and look after staff, but I do believe that his postscript message written on the last page when he was 94 years old in 2017 is genuine:

"I would like young people to take stock of what life on earth is really about. Do not confuse material satisfaction with happiness. Money cannot do everything for you. Distinguish between the real and the fanciful. Learn to live simply and, whenever you can, share your wealth with others. You are not alone in this world. There is immense wisdom handed down from ancient sages such as Laozi, who taught that to live a contented life, one should eschew greed and live as simply as possible and in harmony with nature."

What did I buy in Apr 18, May 18 and Jun 18?

I didn't know 3 months had passed so quickly.

Apr 18
Design Studio Bought more at $0.32. I didn't have the time to do a detailed review, but the company locked in losses, CFO resigned, but I think that the business model was still sound, so I just bought a bit first. Prices have fallen further since, so I will just adopt wait and see approach.

May 18
QAF Bought more at $0.95. Same thing, I didn't have the time to do a detailed review, but the company announced reduced earnings, some oversupply issues still persist which look cyclical, but economic moat still looks good, so I just bought a bit first. Prices have not fallen beyond $0.95, but hovering around $1.

Jun 18
Singtel Bought more at $3.18. Same thing, I didn't have the time to do a detailed review, but the company fundamentals hadn't changed much. I think it's just the market sentiment about the threat of the 4th telco adding price pressure. I still like the business, so I just bought a bit first and will just wait and see if the price falls further. Prices have fallen further.

Hopefully more opportunities appear in the coming months.

Book Review: Building wealth through REITS by Bobby Jayaraman

I decided to read this book because I was interested to find out how the perspectives of the REIT managers were like when it was written in 2011. It is very easy to read, not many financial technical terms, and is very suitable for a REIT investor wannabe.

The first half of the book is the theory, which you will find boring if you already know how to read the items in the financial statements and fairly standard ratios. Nonetheless I learnt about perspectives. For example, when someone tells you to focus on the Net Property Income (NPI) of the REIT, it actually refers to the NPI as an amount, but what the analyst uses is the growth % of the NPI. For me, I prefer to use my version of NPI where I exclude the valuation gains but include other losses, so that I get an even lower value.

Two REITs stood out for me -- Saizen REIT and Capitaland Mall Trust. Saizen has been delisted, and I didn't know its history until I read this book. If I had known, I may have bought it. It was actually a set of distressed residential properties being bought over by investors when a Hokkaido bank went bankrupt between 1999 to 2000. These investors cashed out of their investments in 2007 via an Saizen REIT IPO. Such opportunities happen once in a blue moon for the folks who have the cash.

The history of Capitaland Mall Trust was also interesting because it explained the high valuation gains. The properties were bought from the parent Capitaland in 2002 at relatively lower prices. Over the years, they sold off the under-performing properties too. I never really thought about it that way, and by the same yard stick, Keppel REIT should have a high valuation gain too because they were created around the same time. I will probably pay more attention to this when I review Keppel REIT again.

One recurring theme discussed in the REIT managers' interviews is to only buy the property when the price is good. This can be either in the form of buying an old building at a good location and then renovating it, or to buy multiple properties located at good population catchment areas to leverage on a single management team to save on cost. This concept can be applied to anything, even hiring people for a job, but it's probably easy to say but difficult to execute because you need to be have the skill and foresight to know how to transform less desirable properties into desirable properties.

Although the market sentiment in 2011 was one where people were quite fearful of another crash given the fresh memories of the financial crisis and continued war in Iraq, anyone who had bought at 2011 prices would have profited today too.

Overall, the book reinforces my belief that any investment is good at a yield-accretive price. Patience will pay you eventually.