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AK feels like Bilbo Baggins.

Saturday, March 1, 2014

The good thing about being an anonymous blogger is that I feel more comfortable to share more openly many things about myself, including what is my annual passive income from investments, for example. Anonymity gives me some protection and that gives me courage.

Over the years, I have been invited to speak at various public events or to be interviewed. Predictably, I have declined all such invitations with only one exception.

Bilbo Baggins. Source: Wikipedia.

Recently, I met a group of big hearted people who feel that many people will benefit from me sharing in person my little ideas about financial well-being and investing. Of course, my immediate response was to decline the offer. No surprises there.

However, I was so won over by what they are setting themselves up to do that I offered to them my blog which represents more than 4 years of dedication. To me, if my blog is able help fulfil the noble vision which they have, it would give me great satisfaction. Well, of course, I would still be blogging. I still enjoy it enough not to give it up yet.

They are very decent people and they think that it is not right for them to take my blog. They reasoned that it is not right to take it without fair compensation. They do not like the idea they will benefit from the arrangement but not me. This is the kind of people they are. Despite telling them that it doesn't matter to me, they refused.

Instead, they asked me to seriously consider doing greater good by inspiring people in person. I understand the argument that many people do not read blogs. I understand that many prefer people to people contact. However, there are already so many speakers and trainers who are doing a good job of inspiring people. Why me?

I am just a regular guy who works as a manager in a family controlled SME. I make a mid 4 figure salary and have 14 days of annual leave a year. I make use of common sense and try to be prudent with money. I also try to make my money work for me by investing for a second stream of income. There are many people who are like me in Singapore, I reckon.

Fear of the loss of privacy is the biggest thing that is holding me back from making a public appearance. It would also be terrible if, by making a public appearance, I cause my family to be subjected to scrutiny as well.

I told one of these friends that I feel like Bilbo Baggins and that, to me, he is Gandalf who has come knocking on my door. Should I pack up my stuff and go with him?

I am a worrier by nature and, already, I can imagine how things could go wrong in more ways than one. I wonder is this going to be worth it?

Related post:
Common but admirable people.

Hock Lian Seng: DPS of 1.8c.

Hock Lian Seng's strong balance sheet, cash flow as well as high gross profit margin attracted me. Even if it is not a good investment for growth, I believe that it is a good investment for income with its record of paying out meaningful dividends.

Hock Lian Seng reported a gross profit margin of 40% on the back of lower revenue but higher gross profit. NAV per share improved from 24.9c to 27.8c. EPS reduced slightly from 4.9c to 4.7c, year on year.

A DPS of 1.8c has been declared. This means a payout ratio of 38.3% and a dividend yield of 6.67% based on the price of 27c a share.


Realistically, Hock Lian Seng will face headwinds in future and the management has said that:

The Group will continue to participate selectively in the some of the upcoming infrastructure projects tenders called by the Singapore Government. However, the Group is expected to face stiff competition from large foreign contractors, higher construction costs and a shortage of foreign workers.
So, although there is reason to believe that Hock Lian Seng will do reasonably well based on past track record, the landscape has definitely become more challenging.

Its exposure to property development could also be ill timed:

On the property development front, the Singapore Government has implemented property cooling measures to both the residential and industrial property market. The Group believes that the measures would create a stable and sustainable property market in Singapore.
The construction of the two industrial property developments are expected to be completed by early 2015. The joint venture residential project at Dairy Farm Road was launched in September 2013.
Having said this, now, with a PE ratio of 5.75x and trading at a slight discount to NAV, the stock does not seem expensive.

See: Full year results.

Related posts:
1. Hock Lian Seng: Buying on weakness.
2. Hock Lian Seng: Dividend 1.8c per share.

Yongnam: DPS of 0.6c.

Friday, February 28, 2014

With plans to double the MRT lines in Singapore by 2030 and with more public sector construction projects, investing in Yongnam seemed like a natural choice and I have blogged about this many times over the last couple of years.

Unfortunately, last year was a very bad year for Yongnam and they presented a more or less expected set of nightmarish numbers for FY 2013. To be fair, the management already warned way ahead of time that numbers are likely to be bad. So, no one was caught unaware and Mr. Market seemed to have taken the results in his stride. Yongnam did not see any big plunge in share price.


In summary, the problems were:
1. Significant cost overruns in 3 projects.
2. $8.1 million loss in selling off some steel pipe piles.
3. $5.1 million provision for bad debt.
4. Additional costs from alteration works for 2 projects.

All these meant that net profit fell 87% to $5.5 million, year on year, although revenue rose 20% to $362 million. ROE fell from 15.9% to just 1.3%. EPS fell from 3.45c to just 0.44c.

In an earlier blog post on Yongnam, I said that the question to ask was whether the problems were one off events or recurring in nature. If we believe that they are one off events and that Yongnam's business is still fundamentally sound, then, we should make use of market weakness to accumulate its stock.

Yongnam's order book stood at $340 million at the end of 2013. $185 million will be recognised this year. Of course, Yongnam is also taking part in tenders this year and winning some of these potential projects would bump up revenue figures. Expectations are for project wins with total value of almost $300 million.

As long as nothing like what went wrong last year happen this year, I believe that Yongnam's numbers for 2014 couldn't get any worse. Guidance is for gross profit margins to normalise to 20% this year and even if Yongnam did not win a single contract this year, which is highly unlikely, they would still be able to deliver a similar or stronger EPS.

On 31 October, I said that, "With a 3Q loss, they might or might not pay a dividend for the year although a lower DPS should not be demanding. Without major CAPEX in the year, this is a possibility."

Yongnam declared a DPS of 0.6c which is higher than their EPS of 0.44c. This signals Yongnam's ability as well as determination to reward shareholders despite having had a tough year. I appreciate it and, to me, it also shows that Yongnam is likely to reward shareholders more generously when its numbers improve again in future. Will it happen? Very likely, it will.

Someone told me that with EPS of only 0.44c, if we value Yongnam at 8x earnings, its shares should be worth only 3.5c each. I told him that I am a generous person. So, I value Yongnam at 11x earnings and will buy from anyone who is willing to sell to me at 5c per share. Any takers?

See presentation slides: here.

Related posts:
1. Yongnam: Substantial shareholder increased stake.
2. Yongnam: Profit guidance 3Q 2013.

Croesus Retail Trust: Luz Omori and Niz Wave I.

Thursday, February 27, 2014

I really shouldn't be blogging now because I am so sleepy but I just couldn't resist looking at the announcement and, then, I'm trapped. OK, this will be a short one (I hope). Here are some things which got my attention.

DPU Improvement

In an earlier blog post, I said that the Trust would probably use the funds from the MTN they issued soon. Otherwise, we could see a 5% decline in DPU.

Now, with the acquisition of 2 new properties, Luz Omori and Niz Wave I, we will see a 5.7% increase in DPU instead of having to worry about a 5% decline. Good news for income investors!

Borrowings

The two properties are purchased at a slight discount to valuation which is good. However, the total value is still some $176.3 million. This is much more than the $100 million MTN the Trust issued last month.

In an earlier blog post, I was wondering if a placement or a rights issue would happen. Instead, the Trust has taken on more onshore debt, specifically, a 5 year debt facility with Mizuho Bank. They were able to borrow rather cheaply and the effective interest rate for this debt facility and the MTN together is 2.96% per annum.

With these purchases and borrowings, by my estimate, gearing level has gone up from 42% to approximately 55%.


The properties

The information provided by the Trust is mostly clear enough. I really like the fact that the Trust chose to purchase both the properties in Tokyo. These properties are located in areas which have seen growing populations in recent years and are within a few minutes walk to train stations.

What I want to point out is that Luz Omori's land is not freehold but leasehold in nature. This probably explains the relatively small price tag of S$42.7 million which is also at a slight discount to the valuation of S$44 million. The lease on the land expires in July 2059, 45 years from now.

As for Niz Wave I, the situation is bizarre because the building sits on 4 parcels of land of which 3 are freehold and 1 is leasehold and this lease expires in December 2029, 15 years and a few months from now. Would they have to tear down a quarter of the building then and return the land in original condition? Bizarre.

I am inclined to believe that the owner of that particular land parcel would probably allow the lease to be extended when the time comes since that one parcel of land is unlikely to be of much use to anyone if the surrounding 3 parcels of freehold land are owned by the Trust. Then, the question of price will have to be answered but it can only be answered when the time comes.

NPI Yield

These two buildings together have quite a decent NPI yield of some 8.1%. The 4 malls in the Trust's initial portfolio have an average NPI yield of about 7.8%. So, in addition to being DPU accretive, the purchases are NPI yield accretive but it could possibly have something to do with the fact that Luz Omori sits on land with a relatively short lease. Yields for leasehold properties are generally higher since they are usually cheaper to buy.

See Media Release: here.
See Acquisition Announcement: here.

Related post:
Croesus Retail Trust: Cap rates and growth.

Marco Polo Marine: Drilling for higher income.

I am going to take another trip down memory lane and this time to look at why did I invest in Marco Polo Marine. Then, I will look at the most recent development in the business.

I first invested in Marco Polo Marine in the middle of 2012 when I spotted persistent insider buying. I got in at 31.5c and 32c a share. Since then, I have been accumulating. The highest price I paid was 42c a share and the last time I bought more of its stock was on 24 June 2013 at 37.5c a share.

The combination of a few factors gave me the conviction to make Marco Polo Marine the largest investment in my portfolio:

1. Insider buying.
2. Chairman of the company has close to 60% stake.
3. A relatively consistent ROE of about 15%.
4. Timely emphasis on building a fleet of AHTS vessels.
5. Enforcement of cabotage laws in Indonesia.
6. Relatively cheaper valuation compared to peers.

A complaint I had was that it was moving too slowly and I wished that it would leverage up and buy OSVs to immediately take greater advantage of the higher charter rates in Indonesian waters.

In the current climate, it is hard to buy OSVs at what might be considered good prices and it is not difficult to understand why. So, Marco Polo Marine would rather build OSVs in their own shipyard than to buy from others. However, they did manage to get a good price for MP Prevail last year. I think that shows that the management is rather savvy when it comes to acquisitions.

With their gearing level on the rise, however, I was rather concerned about the strength of their balance sheet but if the business chugs along with the progressive deliveries of the OSVs being built in their shipyard, we should see progressively stronger earnings in the next couple of years, everything else remaining equal.

Of course, we now know that everything else did not remain equal because Marco Polo Marine issued some MTN and decided to buy a jack up rig. This was totally beyond my expectations and it took me a while to digest the news.

My initial reaction was to ask how Marco Polo Marine, a company with a market capitalisation of S$135 million, was going to pay for a US$214 million rig? That was a natural reaction. However, when we think of the S$300 million MTN they have in place, it all makes sense.

Marco Polo Marine drew down S$50 million in MTN in the last quarter and this attracts some S$0.7 million in finance cost every quarter. As they only have to pay 10% of the rig's total bill this year, I have an inkling that they might use the remaining money to pay down debt. They only have to pay another 10% of the rig's total bill by 11 February 2015. The balance 80%, they only pay when they take delivery of the rig in 4Q 2015.

What this means is that we could see lower profit this year. However, if some debt is paid down and if the two 8,080 BHP AHTS vessels are completed on time, we could see the impact lessened. Assuming the status quo, then annualising 1Q 2014's numbers, we could see a 22% reduction in EPS to approximately 4c or so, year on year. This assumption is, of course, unrealistic, and would form my worst case scenario for the company.


The cabotage law in Indonesia will include drilling rigs by December 2015 and to time the delivery of the rig in 4Q 2015 really makes sense. There is no need for a huge capital outlay in the meantime while Marco Polo Marine sees more own built OSVs joining its fleet in the next two years which should improve earnings as the vessels enjoy higher charter rates.

When the time comes to take delivery of the rig, Marco Polo Marine should be financially more robust but it would still need to draw from its S$300 million MTN program to pay for the rig. This is the hard truth but it is good to know that financing is in place.

Chances are high that Marco Polo Marine will be able to secure a contract for the rig a few months before they take delivery of it. Chances are also high they will be able to get pretty good rates as there is a lack of such high specs rigs in Indonesia and, of course, the enforcement of cabotage law in the country for rigs by then tilts the scales in Marco Polo Marine's favour.

Now, how significant an income contributor could the rig be?

According to AM Fraser, the Pacific Class 400 jack up rig which Marco Polo Marine ordered commands a day rate of some US$ 160,000 in Thailand. With the cabotage law in Indonesia, the rate could be higher when Marco Polo Marine takes delivery of their rig end of next year. I know that AHTS vessels enjoy a 20 to 30% premium in Indonesian waters. Could we expect the same kind of premium for rigs come December 2015?

If we were to do some quick mental sums, we would be able to conclude that this is probably going to be a very good investment. Simplistically, just putting the rig to work 11 months in a year could bring in some serious money without factoring in any possible premium. In such an instance, the return on the investment would quite easily exceed the 5.75% coupon payable on the MTN.

So, my assessment of this latest development is that it will lead to some short term earnings depression due to higher finance costs but it is not going to cause the company any distress. By 2H 2014, things would start to look up and by 2015, with more AHTS vessels in its fleet, enjoying higher charter rates, earnings would look even better. Then, when the rig is delivered by end of 2015, we should see a big boost to earnings, if everything goes as planned.

Do we share Sean Lee's vision and are we able to take the same leap of faith? Or do we think he has a few loose screws in his head?

Related posts:
1. Marco Polo Marine: Exciting times ahead.
2. Marco Polo Marine, Mermaid Maritime and Jaya Holdings.

Sabana REIT: Buy but remember the Sukuk.

Wednesday, February 26, 2014

In November 2013, I said that I reduced my investment in Sabana REIT and moved the funds into Croesus Retail Trust, believing that a reduction in my exposure to industrial properties in Singapore was sensible. At the time, Sabana REIT was trading at about $1.09 a unit.

Then, in January 2014, I wrote a piece saying that Sabana REIT's quarterly results were within my expectations and that trading at $1.07 a unit, we could see its unit price fall to $1.03 once the REIT went XD if Mr. Market were to demand a 2% premium over the market leader, A-REIT.

I also said that although I was not buying at $1.07, neither was I selling. The reason was because Sabana REIT's relatively low occupancy of 91.2% could improve over time. So, we could see DPU and distribution yield improving, everything else remaining equal.


How much of an improvement would we see? Well, assuming that Sabana REIT improved occupancy of its properties to 96% and that DPU improved proportionally, we could see an annualised DPU of 9.2c. This would give us a yield of some 8.6% at its NAV of $1.07 a unit.

At a price of $1.03 per unit, we are just a whisker away from a 9% yield. It would be 8.93%. This is rather attractive and at $1.02 a unit, we see a prospective distribution yield of 9.02%. $1.02 a unit also coincides with a technical support provided by Fibo retracement lines.

So, it is not surprising to see investors buying again at current prices even though, technically, I see a stronger support at 97.5c or 98c a unit. Do I really think unit price could go that low? This is just what I see in the chart as a possibility. I don't know if it would happen.

However, remember the $80 million Convertible Sukuk due on 24 September 2017? In 2012, when I blogged about this, I said that if all should be converted to new units in the REIT, they would add some 10.5% to all units in issue. This would dilute existing stakeholders' interests but the debt would disappear.

"During the financial year ended 31 December 2013, certain Converting Sukukholders had converted an aggregate principal amount of $7.5 million. As a result, the Group elected to issue 6,285,090 units at the then conversion price of $1.1933 to these Converting Sukukholders."
Source: Full year 2013 report.

The bond holders pay a higher than market price and the REIT's gearing level declines at the same time. Seems like a good deal for the REIT. Actually, it makes sense to the bondholders too as they are paid a coupon of only 4.5%. Even converting to units at $1.1933 would mean enjoying a distribution yield of some 7.3%. Of course, this is leveraged yield. So, not really comparable.

Anyway, we should not worry about what these bond holders should do. Instead, we should think about how would their actions impact us as investors in the REIT.

If all the bond holders should convert to units by 2017, be prepared for a further 8.8% dilution but the REIT's gearing would then decline to a lower 33% thereabouts. Is this a good thing?

Well, it would mean that any increase in DPU from improving occupancy level could be diluted and we might not see much of a difference from current levels. If there should be zero improvement in occupancy level, which I think unlikely, then, we could see DPU reducing to 8.08c which means a yield of 7.84% at a unit price of $1.03 which makes a unit price of 98c a unit seems less far fetched.

Of course, if the convertible bond holders decide not to convert to units anymore and wait for maturity in September 2017, then, expect the status quo, everything else remaining equal.

What the bond holders would do is anyone's guess but what are investors in the REIT to do? Well, add to long positions at $1.02 to $1.03 a unit if we like but bear in mind the convertible bond and the possible effects. Are we comfortable with it?

In my opinion, prices of $1.02 and $1.03 a unit are not bad but don't be surprised if unit price should decline to 98c. So, always have a war chest ready.

Related posts:
1. Sabana REIT: Convertible Sukuk.
2. Added Croesus Retail Trust and reduced Sabana REIT.
3. Sabana REIT: After the 4Q 2013 results, am I buying or selling?

AIMS AMP Capital Industrial REIT: The rights' value.

Tuesday, February 25, 2014

With AIMS AMP Capital Industrial REIT's 7 for 40 rights issue on the horizon, suddenly, I feel nostalgic. This is a REIT which I have been invested for many years.

Looking back, my very first blog post on the REIT was on 31 Dec 2009. I had only been blogging for a few days back then.

At the time, the REIT was trading at 20.5c a unit ($1.025 post consolidation). It offered a distribution yield of about 10% and I said, "I bought a large chunk of MI-REIT at 20.5c after the recapitalisation exercise. At that price, it gives a yield of about 10%. It's trading at about 30% below NAV. It has the lowest gearing amongst Singapore industrial REITs. For anyone looking for high yield at a bargain, this is a BUY even at 21.5c."

I kept on accumulating units in the REIT and when it had a 7 for 20 rights issue in August 2010, I took part enthusiastically. After all, my calculation then showed that, on an annualised basis, the rights units were going to enjoy a yield of 13.42%. The rights were offered to unit holders at 15.5c a unit (77.5c post consolidation).

Of course, we should know the value of our investments. Otherwise, we won't know if it is worth buying more or not. On 11 December 2010, I did a valuation exercise for the REIT and decided that the fair value was 25c a unit ($1.25 post consolidation). Totally subjective, I am sure.

That meant that, by my reckoning, even at 24.5c a unit, it would still have been a fairly good buy. So, when Mr. Market went into a depression later on and offered to sell units of the REIT at lower prices, it was only natural that I bought more.

The value of the REIT had remained the same. So, a lower price meant that it had become cheaper.

Specifically, I bought more units from August to December 2011 when such a depression took place. By then, the REIT had transformed into a stronger entity and there was no reason for it to trade at lower prices but it did.

On 14 December 2011, the last time I added to my long position in the REIT, I paid 93.5c a unit which was just a little shy of very depressed prices last seen in 2009. That worked out to be just 18.7c a unit, pre consolidation!

It didn't take much to know that buying the REIT in December 2011 was a better deal than buying it during the lows of 2009. Why? Pay almost the same price for a financially stronger REIT today than for a weaker one 2 years ago? Felt like a sensible thing to do.

The future of the REIT was also very promising as they embarked on a redevelopment program and I was able to conclude that by early 2014, two years on, the expectation was for a positive DPU impact, everything else remaining equal. To anyone investing for income, the REIT was, quite simply, a buy and I said to accumulate on weakness.

Regular readers might remember that I said I am not averse to trading around my long positions. I sold some of my investment in AIMS AMP Capital Industrial REIT in the following year when its unit price rose but I retained most of my investment in the REIT as part of my core investments for passive income. With past distribution yields on cost ranging from 10.18% to 13.42%, I think that my investment in the REIT has not done too badly.

The current rights units to be issued at $1.08 a unit will probably be the most expensive units of AIMS AMP Capital Industrial REIT's I have ever bought. At $1.08, I am expecting a prospective distribution yield of 8.66%. A very rough back of the envelope calculation shows that this could increase to 9.26% (taking into consideration income from Optus Centre, the redevelopment of a property in Defu as well as savings in financial expenses).

The prospective distribution yields of 8.66% to 9.26% for the rights units are rather much lower than the distribution yield of 13.42% for rights units offered in its 2010 rights issue. So, this rights issue seems relatively less attractive.

However, if we believe in the management and if we believe that a prospective distribution yield of 8.66% to 9.26% is sufficiently attractive, we should take up our entitlement and apply for more excess rights. Otherwise, we could think of selling our rights entitlement.

For anyone who is thinking of buying the nil-paid rights, although the theoretical ex-rights price (TERP) was calculated to be $1.365 which meant that the fair value for nil-paid rights should be 28.5c a unit, to get the same pre rights distribution yield of some 7.77%, the highest price we should pay for nil-paid rights should be around 12c per unit. Of course, the lower the better but not higher than 12c per unit.

Nil-paid rights start trading 2 days from now.

Know the value and we will know how much we should be paying. Good luck to us all.

Related posts:
1. AIMS AMP Capital Industrial REIT (MI-REIT).
2. AIMS AMP Capital Industrial REIT: Rights issue.
3. AIMS AMP Capital Industrial REIT: Revised DPU and fair value.
4. AIMS AMP Capital Industrial REIT: 7 for 40 rights issue.
5. AIMS AMP Capital Industrial REIT: Optus Centre.

Congratulations to DBS Westgate!

Sunday, February 23, 2014

After breakfast, I went for an early morning stroll in the mall. I like early visits to the malls when they are pretty quiet and I usually leave by 11am before it gets a bit more crowded and noisy.

Saw many bouquets outside DBS Bank. So, I went and kaypoh a bit.




Wah! All the big names in finance!

Er, how come no bouquet from Muddy Waters har? Why har?

Hmmm...

Hmmmmmm...

Anyway, this was my breakfast:


Atas nasi lemak and atas barley water. $6.50.

Related posts:
1. Gourmet sandwich by AK71 Deli!
2. Atas and healthy lunch!
3. A meal with numerous benefits.
4. $2.00 breakfast and $1.00 dinner.
5. AK71 bought healthy lunch.


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