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

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

Read more about First Stock Series.

Over the past one month, stocks have risen ~5%. If anyone made money out of it, it would have been pure luck. Nobody would have expected Saudi Arabia and the 70% of the oil suppliers to agree to freeze oil output. They could have done this 1.5 years ago, but they didn't.

In Singapore, manufacturing output decreased, which was not surprising as Singapore's labour costs had been growing the past 10 years and factories shift out. Office supply is adding pressure on rentals, which is also expected (we all knew this when these projects started construction 4 years ago), so the market has priced that in. If you look at how each industry contributes to Singapore's GDP, you will know why a manufacturing output drop is deemed to be a sign of a technical recession coming our way. Finance and business services (e.g. consulting) are growing.

Extracted from Statistics Singapore 

For me, as long as the population grows, businesses will always be in business, (of course) subjected to prudent financial management. The growth investor may want to invest in businesses that benefit from higher population densities. Trains breaking down more often doesn't count. Examples of such businesses are food, medical services, waste disposal, high-tech construction, logistics, etc.

I probably will recommend the first-time investor to buy on weakness, i.e. wait for the current wave to subside to a support level before making any purchases. Steer clear of bank and oil stocks if you can't survive a market shock.

1. SPH REIT* $0.95, 5.7% yield. If you buy 3,000 units, you can expect to get $150/year. Pros: Rental from Paragon and Clementi Mall are expected to be stable.

2. AIMS AMP Capital REIT $1.33, 8.5% yield. Pros: Diversed industrial properties (business parks, light industrial buildings, warehouses) on rental with continual asset enhancement activities (i.e. rebuilding/renovating old buildings). Buy 2,200 units, and expect to get $249/year.

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: DBS, OCBC, UOB

I wrote a review one year ago about DBS, OCBC and UOB. The three banks have since published their full year results and I am reviewing them again.

Over the past 10 months, banks, not just in Singapore, had been battered really badly. I had been buying all three bank stocks, but what should a new buyer be looking out for?

Bank	Peak	Low	% change
DBS	$21.50	$13.01	-39.5%
OCBC	$10.92	$7.41	-32.1%
UOB	$25.05	$17.01	-32.1%

1. Debt to Deposit ratio

The loan to deposit ratio is used to calculate a bank's ability to cover withdrawals made by its customers. In Singapore, the Singapore Deposit Insurance Act insures deposits by individuals up to $50,000. This is a safeguard against bank customers, such as you and I, to withdraw our money en masse when the bank shows signs of weakness. For e.g. when you see a headline such as HSBC made a net loss for their full year, as a customer, you may feel worried that your deposits may disappear if the bank goes bankrupt, and hence want to withdraw your money. If many people do that, the deposits outflow will create cash flows problems for the bank, which worsens the bank's financial woes.

A ratio of 1 (100%) means that for every $1 loan given, it is supported with $1 deposit from another customer.

Compared with the US banks, the SG banks' debt to deposit ratio is high (84-89%). Read this recent article about the US banks. As the US banks prepare for the interest rate hike, JP Morgan, the most risk-adversed, maintained a debt to deposit ratio of 60%. There is no magic number, just a risk appetite measurement.

2. Cost to Income ratio

This ratio calculates a bank's expenses as a multiple of its income earning ability -- the lower, the better. Compared with a year ago, all three banks' cost to income ratios had increased.

Extracted from individual financial reports. Distribution of income sources and loan currencies.

Extracted from individual financial reports. Key financial ratios.

Verdict

OCBC appears to be the best positioned out of the three. This confidence is also reflected in its market price where Price/NAV is 1 (i.e. fully valued). Although DBS' Price/NAV is 0.85, it may not be undervalued, as the market had priced in its risks towards non-performing loans in the commodities sector which DBS has the highest exposure to.

Among the three financial reports, the DBS CEO was particularly upbeat about the economy, delivering lots of confidence in the business outlook for even badly battered commodities sector. In fact, they presented the "worst case scenario" where all the commodities debt go bad and they would still be in good shape. In my opinion, based on the sectors with higher absolute amount of non-performing loans, the companies that we need to be wary about are in industries such as manufacturing, transport, logistics, communications. If we have holdings in industrial REITs, where these companies typically operate in, we would need to keep our eyes on the "account receivable" component of the balance sheet to ensure that their tenants are on-time in their rental payments.

Housing loans form a substantial fraction of non-performing loans for UOB. This could be a sign that prices of high-end condominiums will continue to fall because UOB targets this sector of home loans. Consequently, we should also take note of the property developers that are still holding on to vacant units of similar high-end condominium developments. Leasehold units should expect a worse fall based on historical trends.

Buy based on yield, if you can afford to hold for more than five years, the 4.5% yields are very good value for money because in good times, yields hover around 2-3%. If you just have your last $5,000 or less, don't bet on these stocks to make a quick rebound anytime soon.

The writer owns units of DBS, OCBC and UOB shares at the time of writing.

References:

1. DBS FY15
2. UOB FY15
3. OCBC FY15

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

Read more about First Stock Series.

Across the world, stocks continued to fall and we had reached a point where all the "psychological support levels" were broken. After throwing a few months' worth of budgeted investment money into the market, and suffering immediate paper losses, I also sat out for a large part of it to wait for the next level of new lows. Wherever the market would go in Feb would be anyone's guess. However, traditionally, before the Singapore Budget announcements in Feb, there would be a stock rally of some-sort.

1. SPH REIT* $0.91, 6% yield. If you buy 3,000 units, you can expect to get $165/year. Pros: Rental from Paragon and Clementi Mall are expected to be stable.

2. Singapore Technologies (ST) Engineering Ltd* $2.70, 6% yield. If you buy 1,000 units, you can expect to get $160/year. Pros: Cost-conscious management, ever-increasing defense budget that contributes to increasing revenue.

I am conscious that the overall sentiment is rather weary, and for a first-timer to decide to take the first plunge in a time like this is going to be hard, so I am recommending just two companies which I think will weather any shocks in Feb, if any more were to come our way.

There you go! Google search, 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 *.

Thinking about the mini crisis caused by falling oil prices

The price of crude oil had fallen from US$110 to US$30 (-70%). Assuming oil prices remain low for a few years, many industries will be impacted:

1. Oil exploration and support services companies are at risk of not receiving payment from their customers who are unable to pay because they are earning a lot less now. In Singapore. oil rig builders, Keppel Corp and Semb Corp Industries (Semb Marine) had already announced staff reduction and projects deferrment.
2. Manufacturing companies supplying steel and other peripheral materials to build oil rigs will also earn less because fewer oil rigs are to be built.
3. Communications companies supplying satellite communications for oil rigs to be connected to land officers will also earn less.
4. Housing rental market in these oil producing countries will have increased vacancy as expatriates return home. However, the workforce shift may not be signficant because oil exploration work is mostly done by machines and construction done by locals anyway.
5. Salesmen will lose jobs. Oil traders, bank loan arrangers, and the 101 middlemen who get commission cuts along the value chain.
6. Banks and insurance companies with exposure to clients mentioned above will be at risk, somehow or another. However, banks and insurance companies are in a risk balancing business in the first place, so it's expected to have bad debt. Client selection becomes the key differentiating factor. In Singapore, DBS, OCBC and UOB all have some level of exposure, but I feel that <10% is still within a manageable range. Which bank is most exposed to the struggling oil and gas sector?

Assuming people lose jobs, will there be transferable skill sets?

1. Salesmen will enter the tech or other new booming industries.
2. Engineers will look for other jobs, maybe in offshore construction, such as solar farms on sea, or maybe underwater tunnels or living environments.
3. Manufacturers will be forced to reduce costs by improving their product manufacturing processes.
4. Explorators will be forced to reduce costs and look for alternative ways to get oil cheaper. 
5. Advocates for alternative energies will be forced to reduce costs because cost savings is no longer the reason to switch.

Overall, I see depressed oil prices as a catalyst for businesses to transform to lower expense and look for new business areas.

In this mini crisis, I will fish for companies that continually manage their expenses well, have positive cash flow and invest in research and productivity improvements.

Staying calm in rough waters

There are many similarities between facing paper losses on our investments and diving in strong currents. Weather conditions can vary widely but fundamentals remain the same -- be prepared before you dive (into the sea or investments), make sure you can swim well, stay calm and regulate your breathing, be aware of your surroundings and follow your navigation tools. I don't dive but I did pass my dive test to get an open water diving "license".

Personally, diving isn't my cup of tea. I was a good swimmer so it was very easy for me, but I didn't feel attracted to the sport. Investment, on the other hand, had a strange appeal. The satisfaction from being able to "forecast" made me feel like a prophet. In reality, there was no prophet, just lots of analysis and number crunching which anybody determined enough could derive.

To share a benchmark measure of my threshold for boring activities, when I was in secondary school, I completed my maths ten-year-series (TYS) twice. I can spend a weekend just reading a 500-page novel. I can drag myself to swim everyday so that I can reduce my sprint time by 1 second.

In investing, patience is a virtue. All things equal, the most patient usually ends up as the biggest winner. When one is patient, one is usually able to be calmer than others. When one sees a shark approaching for the first time, the one who is calm and can recall prep drills probably has a greater chance of survival. In investing, when one sees steep market corrections for the first time, the one who is calm and can recall textbook analysis of market corrections and crashes has a greater chance of not losing money. It's ok to earn less, just as long as you don't lose more. Never lose money unnecessarily. So if you are impatient, it is still possible to be calm and survive as an investor.

Everyone needs to weather a few crisises. The experience enriches one if one chooses to be enriched by it. Although I had only weathered through the SARS, lehman and 2009 crashes, I would say that staying invested and continuously studying companies when everybody said the markets were crashing like never before made me aware of the need to hold cash and be on a constant look out for value investments. If you were caught with your pants down, just make sure you have your pants more securely fastened in the next crisis. Constantly sitting out of the market will breed more fear and lost opportunities to learn how to weather storms.

Being prepared before one even starts investing means having cash, having your shopping list ready, being aware of the economic situations around the world. Being prepared also means being able to resist temptations to spend money that is sitting in the bank and ignoring the salespersons at banks trying to convince you to part with your money. Every $1 adds up, even if it is just a cup of coffee. Money spent on investments should be money one can afford to lose completely because that is the worst case scenario.

Knowing how to invest isn't important. Knowing what you are investing in is the most important. Buying a plot of land in Texas that gives you 20% annual yield? Buying wines that can be resold at a profit after a few years of holding the stock? Buying a shares of a casino company? There is no right answer to how to invest. Our characters reflect how we invest.

Everybody knows how to invest. Every decision we make in our lives is an investment. We decide whether to spend $5 at a hawker centre or $20 at a restaurant. We decide whether to eat fried oyster or chicken soup. We decide whether to sign up for music classes. We decide whether we want to buy insurance plans and how much to be insured for. We decide the school we attend, the jobs we work at, the friends we hang out with, the families we marry, etc. Every decision is an investment of our time and energy and money with a corresponding return. The yield is then how much we get in return for the decision we make, tangible or intangible, our value systems kick in to calibrate a measure of yield to aid us in our decision-making process.

So before you rush off to buy a book on how to invest or how to be rich or retire early, stop and ask yourself how buying a book on how to invest will help you in your objectives. The money is probably funding the writer's early retirement.

Know what you are buying and spending on. Observe and look for businesses that are profitable. Before long, you will realise that every second in your life is an investment decision and that conscious effort to evaluate your actions will translate to a need to want to buy certain (profitable) companies. That's when you take action and part with your money. That's the conviction every investor needs.

That's when you realised that you are still calm when your portfolio is suffering paper losses. You know that dividends will still appear in your bank account every month because the companies you invest in have profitable businesses. Remember that stress is created when you don't know what to do or what will happen. To reduce stress, you need to have the answers to those two questions or just simply not be involved in the investing process.

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

Read more about First Stock Series.

On 7 Jan 2016, the China market suspended its stock market after a 7% drop in prices for the second time in a week. It was the government's way of stablising the market. The Singapore stock market also fell to a new low and closed at 2,729.91 points. Lots of guts is needed to buy when everyone is panic selling. What will happen tomorrow is anyone's guess.

1. Singapore Press Holdings* $3.76, 5.3% yield. Pros: Diversified investment strategy (property, retail, childcare) to mitigate risks of falling media revenue. Buy 800 units, and expect to get $160/year.

2. SPH REIT* $0.95, 5.7% yield. If you buy 3,000 units, you can expect to get $150/year. Pros: Rental from Paragon and Clementi Mall are expected to be stable.

3. DBS* $15.70, 3.8% yield. Pros: Banks are usually the first to rebound in market upturns. If you buy 200 units, opt for scrip dividend payouts to get about $120/year. Depending on the share price, scrip dividends round up anything more than 0.01, so you can easily get 1 unit free. Example, when the payout is $0.30 per share half yearly, 200 units x $0.30 = $60. If the share price is $16, $60/$16 = 3.75 units. DBS will pay you 4 units. Two payouts will give you 4 x 2 = 8 units. 8 x $16 = $128, which is more than $0.60 x 200 = $120 if you have opted for cash payout. What's more? You reinvest your dividends without paying commission fees to SGX and your broker!

4. Singtel* $3.46, 5% yield. Pros: Diversed recurring income from mobile subscription in Singapore, Australia, Indonesia, Philippines, Thailand, India and Africa. Stable income from government sector. Buy 800 units, and expect to get $134/year. Read a recent Stock Review.

5. AIMS AMP Capital REIT $1.33, 8.5% yield. Pros: Diversed industrial properties (business parks, light industrial buildings, warehouses) on rental with continual asset enhancement activities (i.e. rebuilding/renovating old buildings). Buy 2,200 units, and expect to get $249/year.


There you go! Google search, 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 *.