Portfolio review: Unexpectedly eventful.

At the end of last year, I shared the results of my efforts in the stock market and also my strategy to grow wealth and augment income in the new year. Quite a few things have happened since then. So, I decided to do a review of how things have moved.

In the S-REITs department, the biggest change this year to my portfolio has to be the major divestment in Sabana REIT. My current long position in the REIT is just a bit more than 10% of my investment at its largest. Whatever I have left is free of cost and will continue to generate passive income although on a much smaller scale.

Also in the S-REITs department, I took part in AIMS AMP Capital Industrial REIT's rights issue and tried to get more excess rights but without much success. Recently, I sold a small percentage of my investment, believing that it was the right thing to do as its unit price ran up, post rights. This REIT is still my largest investment in S-REITs. Having said this, passive income received from this REIT will shrink some 15% this year, given the dilution from the recent rights issue.

In the Business Trusts department, I decided to divest completely my investment in Perennial China Retail Trust after receiving another round of income distribution which I concluded was unsustainable. This was before the takeover offer by St. James.

Also in the Business Trusts department, in late January, I more than doubled my investment in Croesus Retail Trust, believing that, trading at a discount to valuation and offering an attractive income distribution, it is a more dependable passive income generator than Perennial China Retail Trust. Although its relatively high level of gearing is a concern for some, there is unlikely to be any nasty surprises in the area of financing over the next few years.

In other stocks, I added to my long positions in Yongnam and Hock Lian Seng. Yongnam hit a rough patch, as expected. However, things are likely to improve later this year and probably the next. It is a leader in what it does and it has a very good track record. Last year's performance was exceptionally bad and probably would not be repeated. I like how Yongnam started to pay meaningful dividends in recent years and this is likely to continue, conditions permitting.

Hock Lian Seng, like Yongnam, is in the construction sector and also like Yongnam, I expect it to be a beneficiary of increased spending on infrastructure projects in the country. Already, Hock Lian Seng won two major projects which have bumped up its order book and will provide earnings visibility for some time to come. There will probably be more order wins in future. Of course, Hock Lian Seng also pays meaningful dividends which I like.

One stock which I have been waiting for an opportunity to accumulate was CapitaMalls Asia. Well, it is a pity that it will be taken private by its parent, CapitaLand, which offered $2.22 a share. I feel that it is a fair enough price which, perhaps, suggests that the price at IPO was unfair but I will let readers draw their own conclusions in this contentious issue. My acceptance form has been sent out.

A stock which I have turned more cautious on is Marco Polo Marine. Recent developments mean that the business is now somewhat different from what I envisioned it to be in my initial investment thesis. Not giving enough consideration to how the tugs and barges could be a drag on overall performance before, I decided to trim my exposure to the stock. Things could improve in future but, for now, the level of clarity has lowered.

The first few months of the year have turned out to be a bit more eventful than expected on the investment front. My war chest is now fuller through some divestments as well as dividends received. I do not have any immediate plans for the funds and I will probably just hold on to them for now. After all, I had felt that I was too much invested in the stock market and had desired a bigger cash position.

Of course, if I were to keep the status quo, I will, for sure, receive a much lower level of income from my investments in S-REITs this year. How much lower? I guess we will know by end of the year.

Having said this, my decision to increase my level of investment in SPH and NeraTel last year so that my overall portfolio is less reliant on S-REITs for passive income was pre-emptive. Enlarging investments in Hock Lian Seng and Croesus Retail Trust earlier this year has also helped to reduce reliance on S-REITs for passive income.

What next? I certainly do not know if the economy will do well or if it would suffer a decline in the next few years. However, I do know that I am staying invested as long as my investments have reasonably sturdy fundamentals and, preferably, are able to generate reasonably good income for me. They don't have to be stellar performers and I don't have a problem with getting rich slowly.

I will simply wait for Mr. Market to feel depressed enough to sell more to me at prices I cannot refuse while I collect regular dividends in the meantime.

Related posts:
1. A strategy to grow wealth and augment income.
2. Sabana REIT: 1Q 2014 DPU 1.88c.
3. AIMS AMP Capital Industrial REIT: $1.425.
4. Perennial China Retail Trust: Fully divested.
5. Croesus Retail Trust: DPU above forecast.
6. Yongnam: DPS of 0.6c.
7. Hock Lian Seng: $221.8 million contract.
8. CapitaMalls Asia: Farewell.
9. Marco Polo Marine: Price weakness.
10. SPH: Within expectations.
11. NeraTel: A very good investment.

AIMS AMP Capital Industrial REIT: 4Q FY2014.

Without the recent rights issue, DPU would have been 2.95c. A dilution of 15%, post rights, and we have DPU at 2.51c.

I estimated that we could see an annualised distribution yield of some 9.26% based on the price of $1.08 per rights unit. At 2.51c, we have a distribution yield of almost 9.3% per rights unit. This beats my estimate.

However, we have to bear in mind that the REIT usually distributes more income in the final quarter of the year. So, everything remaining equal, DPU could dip in the next quarter.

Of course, things are not going to remain the same because:

1. The REIT's investment in Optus Centre will see its first full quarter contribution in 1Q FY2015. This will help to bump up income.

2. The redevelopment of 103 Defu Lane 10 will get its TOP in May 2014. So, expect income contribution to start sometime in 2Q FY2015.

3. We have to watch out for the increase in vacant space as two Master Leases expired in April 2014. Only 73.3% of the space in these two properties have seen leases renewed.

NAV/unit: $1.47

Gearing: 31.7%

Interest Cover: 5.2x

Based on a unit price of $1.42 and assuming an annualised DPU of 10c, we are looking at a distribution yield of 7.04% per annum. Although I expect a slight upward bias in income distribution in the next 6 months, I do not find the prospective distribution yield attractive enough to add to my long position at the current unit price. Why?

Two reasons:

1. An increasingly challenging situation with the supply of more industrial space which is outpacing growth in demand.

2. The prospect of higher interest rates (risk free rates) possibly from the middle of 2015. The REIT has $111.2 million worth of loans due in October 2015 and $175.8 million due in 2H 2016.

For anyone who is investing for income and thinking of putting down some money in this REIT now, he has to wonder if he is comfortable with the prospects and how things might turn out in the next 12 to 24 months.

See presentation slides: here.

Related posts:
1. AIMS AMP Capital Industrial REIT: Rights' value.
2. AIMS AMP Capital Industrial REIT: $1.425.

Tea with Kenji FX: Wealth destruction!

If we want to be wealthier, we must learn to create wealth. Unfortunately, many indulge in wealth destruction and Kenji FX tells us some of the things to avoid:

Bad:

1. Smoking.
2. Beer drinking.
3. Sponsor clubbers.
4. Cafe hopping.
5. Going after girls who will never be yours and from a different world from you.
6. Car modifications.
7. Credit card signing.

Worse:

1. Gambling, under or above table.
2. Liquor drinking.
3. Drugs.
4. Prostitution, infected with STD with medication fee.
5. Impregnate people's daughters.
6. Keep a mistress (whether you can afford it or not, as stated above).
7. Loan shark (Jaws).

Worst:

1. Putting yourself in a position where you have everything to lose, and when you cannot afford to lose and yet believe Lady Luck would be smiling on you because you are more than a mere mortal.

Wealth destruction could become a habit. Be careful.

“Whether you sniff it, smoke it, eat it or shove it up your ass, the result is the same: addiction.”
William S Burroughs.

It is far better to avoid trouble than to try and get out of trouble.

Money is hard to make and we should make it hard to lose.

Related post:
Be A Millionaire Next Door.

"If we are not careful, it is easy to get into debt."AND
"It might be really hard to get out of debt."
From: The secret to avoiding financial ruin.

Concentrate or diversify?

Sharing an email exchange here:

Hi AK,

 

I am a retail investor who has been investing for some time, and I've also been a long time reader of your blog. Before I go on any further, I would like to thank you for your blog as it has provided many people with valuable insights on investing and personal finance. Your contribution to the investment community is immense, I sincerely hope that you continue blogging!
 

I have a question regarding diversification vs concentration. While I am aware of the benefits of both strategy, I'd like to hear your view on this topic. Very often, I find myself identifying several undervalued companies. However, instead of buying all of them, I try to narrow it down to 1 or 2 high conviction stocks. As such, my portfolio tends to be extremely concentrated. I take into account factors such as the potential upside, catalyst, expected holding period, circle of competence etc.

While my investment record is satisfactory, I have missed many opportunities (mainly because it is impossible to predict when prices will rise) when I did not buy the other undervalued stocks.

Diversification will solve that problem. However, I might risk missing out on huge gains from my high conviction ideas just because I don't want to lose out on the others when prices rise. I hope to find an investment philosophy that would help me reconcile these two strategies and would love to hear your views on this. Thank you.

Regards,

WJ

 

 

My reply:

Hi WJ,

From your email, I get the impression that you prefer a concentration strategy. You have, however, rightly pointed out one of the weaknesses of such a strategy, especially if our funds are limited.

There is a simple solution to the problem you have. Do a lesser form of concentration. What is this?

Let us say you had identified 10 stocks which met your criteria, instead of selecting 2 stocks to put all your money into, put 50% of your money into these 2 stocks. The other 8 stocks get the rest of your money.

You could argue that this is diversification but diversification to me is 10% of your money in each of the 10 stocks. OK, if you like, my suggestion is an adulterated form of diversification. A rose by any other name smells just as sweet. ;p

Best wishes,
AK

Related posts:
1. Excuse me? Are you an investor?
2.  Luck plays a part in investing.
3. The Little Book That Beats The Market.
4. Approach to stock selection.
5. Value investing.

Marco Polo Marine: Reason for price weakness.

Yesterday, a couple of readers asked me what could be wrong with Marco Polo Marine since the share price declined. A reader also asked me where the next support could be, using technical analysis. Last night, I checked if there were any announcements from the company and found a plausible reason for the recent weakness in share price.

We know that Marco Polo Marine has an Indonesian subsidiary, PT Pelayaran National Bina Buana Raya (BBR). Well, the subsidiary has released 1Q 2014 results and the numbers are very bad. Of course, BBR is not all of Marco Polo Marine's business but it is a significant part. So, I would expect Marco Polo Marine's own quarterly results to be affected. How badly affected would depend on how other business segments perform, of course.

Now, the BBR story:

Over at BBR, revenue reduced by 11% while direct expenses increased almost 20%.

The OSV segment of the business did well as revenue improved some 57.3%. However, Tug and Barge vessels segment of the business saw a reduction in revenue by some 47.5%. (The two segments put together, OSV segment now has a 61.5% share of total revenue.)

OSVs are clearly profitable while Tug and Barge vessels are not. Why? OSVs recorded $4.8 million in revenue and incurred expenses of $2.1 million. However, Tug and Barge vessels recorded $3.18 million in revenue but incurred expenses of $4.37 million! This segment bled massively!

In the same quarter in the preceding year, the Tug and Barge vessels segment of the business turned in a revenue of $5.84 million and incurred expenses of $3.95 million. This suggests to me that the expenses incurred by this segment has been quite consistent but the revenue drop, year on year, is astounding!

If this were to continue, BBR would be better off without the Tug and Barge vessels segment of the business. Gross profit declined a massive 62.5%. Operating income declined by 73.5%. After financial charges and income tax, total comprehensive income reduced by 92.1% for the quarter, year on year!

How does this affect my investment thesis?

With the decision to gear up significantly to purchase a jack up rig which could potentially double earnings in FY2016, I was prepared to accept lower earnings in the next two years because of the much higher finance costs resulting from the MTNs although I have to admit that the jack up rig was never a part of my initial investment thesis for Marco Polo Marine.

With the jack up rig and higher finance cost thrown in for the next couple of years, I rationalised that as long as operating income improves steadily over time with more OSVs being added in the same period of time, logically, any decline in earnings due to the higher finance costs could be cushioned. This was an important assumption.

I said that to stay invested in Marco Polo Marine is to believe that:

1. Earnings will improve as more OSVs join the fleet in the next 2 years.

2. The rig delivery by end of 2015 will improve earnings massively.

If well executed, the strategy will catapult earnings upwards, possibly doubling EPS by 2016.

Now, for earnings to improve gradually over time until the jack up rig is delivered by end of 2015, I had focused on the OSV segment of the business as the growth driver. I had simply assumed that the Tug and Barge vessels segment of the business would continue plodding on and that the segment's revenue and expenses would more or less stay constant.

So, for BBR's Tug and Barge vessels segment to turn in a massive loss is a shocker and this has thrown a spanner into my thesis for having a significant investment in Marco Polo Marine.

Does it mean I no longer believe that Marco Polo Marine is on the right track? No. In fact, if not for the decision to focus on growing its fleet of OSVs, BBR would have turned in a loss making quarter instead of one with much lower earnings.
 
Unfortunately, to be realistic, FY 2014's numbers could turn out to be disappointing, everything else remaining equal. This is even if the Tug and Barge vessels segment of BBR's business should see revenue improving and expenses reducing in the next two quarters to what should be the mean.

Lower utilisation of the Tug and Barge vessels in the preceding quarter was put down to seasonal factors (i.e. monsoon period). Expectations of a reversion to the mean did not happen. Is this weakness in the segment temporary or is it going to be more enduring? I am inclined to believe that it is temporary but if a reversion to the mean does not happen in the following quarter, then, the risk of being invested in Marco Polo Marine could be much higher than initially thought.

I am staying invested as I still believe in the growth story but I should move Marco Polo Marine higher up in the pyramid (see related post no. 1 below) from an investment that is for growth and some income to just being an investment for growth. Without the income component, my approach will demand that I trim the size of my investment in the business.

See BBR's 1Q 2014 results: here.

Related posts:
1. Motivations and methods in investing.
2. Marco Polo Marine: Drilling for higher income.

LMIR: 1Q 2014 DPU 0.68c.

There isn't much to say about LMIR's results but this is a quick blog post in response to a guest blogger's request. (Hey, you know who you are and I am still waiting for your next guest blog, ok? LOL.)

In my last blog post on LMIR, I said that:

"... we are likely to see DPU in S$ terms recovering in the next quarter as financial expenses normalise and I have estimated that a DPU of 0.66c is realistic."

Well, LMIR has done a bit better and declared a DPU of 0.68c for the quarter. Making the assumption that all things remain equal, at 41c a unit, we are looking at a distribution yield of 6.63%.

Now, I would ask the question that with the issues which investors in LMIR have to accept, is 6.63% attractive enough?

Issues? What issues?

I am going to be lazy. If you cannot remember, you might want to read this blog post again:
LMIR: Gearing ratio and margin of safety.

As an investment for income, I feel that LMIR can only become attractive again if the Rupiah appreciates meaningfully. When is that going to happen? Your guess is as good as mine.

In the meantime, if I were to put more of my money in LMIR, I will have to demand a much higher distribution yield than 6.63%.

See 1Q 2014 presentation slides: here.

If my car is a luxury... (Buying a $500,000 watch after 3 years of work.)

AK is catching up with the times. 

These days, I get plenty of news and perspectives from what I read on Facebook. 

Of course, there will be things we agree with and things which we don't. 





However, as Rumpole of the Bailey would say, 

"I might not agree with what you say but I will defend to the end your right to say it." 

Well, something to that effect. 

My memory is a bit patchy.






Recently, I read on Facebook about a young person who aims to be the owner of a $500,000 watch 3 years from now. 

The person who posted this on Facebook believes that this young man will be able to achieve it and will prove a crowd of disbelievers wrong. 

I certainly agree that it is important to believe in ourselves, believe that we can make our dreams a reality.

Price tag: $500K.

I admire the fighting spirit that this young man has and he reminds me of someone very dear to me. 

He worked hard to make lots of money and bought luxury watches, cars, shoes etc. 

A picture of success but, till today, he still has to work hard for a living. 

The day he stops working, his income stream will dry up.





I quite understand that every person is different but I hope that this young person will meet someone who will impress upon him why he should not buy that $500,000 watch once he is able to afford it. 

Of course, that said, it is his life and the choice is clearly his.





Not many people, fresh out of school, are able to save $500,000 in 3 years. 

I would assume that for someone to be able to save $500,000 in 3 years, he would have an earned income which is much more than that. 

That is some pretty amazing earning power.





However, it would be a mistake to spend all that money on a watch if that was all the money he had put aside after three years of work. 

It would be a bigger mistake to think that nothing could ever put a stop to this amazing earning power.





"Live within your income and save so that you can invest. Learn what you need to learn... Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris – I wanted the independence." 
Charlie Munger.


Related posts:
1. To be a happy peasant.
2. If we are not rich, don't act rich.
3. From rich to broke?

Asia Invest Symposium by ShareInvestor.

Are you free on the 31st of May (Saturday) from 9am to 1.30pm? If you are, you might want to go listen to Mr. Roger Montgomery, a famous value investor, who will speak for 2 hours at an event organised by ShareInvestor.

He will share his knowledge and experience and cover topics like the following:

- Strategies to Spot High Quality Businesses to Improve your Returns on Stocks.

- How to Buy the Best Stocks for Less Than they're worth?

I know for a fact that it is not cheap to bring in big names like him. So, when I was approached to help spread the word about the event, I was surprised that tickets are priced at only $9.90 for one and $14.80 for a pair.

For those who also do some trading, you will also be interested to know that there is another speaker at the event, Mr. Stuart McPhee.

He will cover topics like the following:

- Trading Strategies in the Stock Indices & Commodities Market.

- How To Identify High Probability Patterns when Trading Forex?

With tickets priced at $9.90 each, I was somewhat worried but I have been assured by the organiser that "there will be no selling or backend products throughout the event."

However, Oanda will be promoting their platform during the event and if you should open an account with them, you will get a book by either Stuart or Roger for free!

I love getting value for money and, in my opinion, this is a value for money event! If you would like to find out more or buy tickets, follow this link: Asia Invest Symposium.

Wishing everyone a happy Sunday!