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Singapura Finance: 1 for 1 rights issue.

Tuesday, September 30, 2014

I have been a Singapura Finance shareholder for a few years. If you have not heard of Singapura Finance, well, it is not surprising as it is one of those sleepy stocks that don't really shout out for attention.



Why did I become a shareholder a few years ago?

1. They have a good track record of rewarding shareholders with meaningful dividends.

2. The stock was trading at a big discount to NAV. (It still is.)


Nothing exciting, really. Just the usual stuff I look out for.

In the last few years, however, earnings came under pressure. EPS declined and dividend per share (DPS) also declined.



The reason really is due to the low interest rates environment and the Chairman said:

"The Singapore Dollar interest rate, which closely tracked the US Dollar interest rate, remained at an exceptional low level throughout the year. As a result of the continual low interest environment coupled with the relentless market competition, interest margin was subjected to immense pressure and deteriorated further during the year. Against such challenging external backdrop, and the need to provide additional collective impairment for the loan allowance, the Group profit after tax for the current year declined 21.2% to $5.3 million." (Taken from Annual Report 2013.)

How are things looking now? Results improved in 2014 and profit after tax rose 10.2%.



Now, with interest rates likely to rise next year, it seems that Singapura Finance might do much better again in future. To ready themselves, they are strengthening their capital base by having a 1 for 1 rights issue at an issue price of $1.00 per share. This rights issue is renounceable which means that shareholders could sell nil-paid rights in the open market if they do not mind having their shareholdings diluted.

I know that some readers might be thinking about possibly buying Singapura Finance's stock now to participate in the rights issue. If you are one of them, you might want to consider the following first:

With a theoretical ex-rights price (TERP) of $1.275 per share, nil-paid rights selling at any price lower than 27.5c (when they start trading) would be "cheap". At a NAV/share of $2.10, a share price of $1.55 is cheap (26% discount to NAV) but, post rights, NAV/share becomes $1.55 or so. So, the TERP of $1.275 is less cheap (17.75% discount to NAV, post rights issue). Of course, rights shares at $1.00 each represents the best value for money (35.5% discount to NAV, post rights issue).


Expect EPS and DPS to half as well, ex-rights. 3.5c and 2.5c, respectively, perhaps? Of course, this is assuming that everything else remains equal and that there is no improvement in business performance in future which seems unlikely to me.

For existing shareholders to subscribe for the rights allotted to them is, ultimately, to show confidence in the management that they will be able to improve earnings by more than 100% in due course. It has to be more because even if earnings should improve by 100%, it would mean that business performance has not improved one bit on a per share basis. Then, it would be better not to have had the rights issue.



I will subscribe for my rights as I am confident that interest margin will improve in future although the business environment is likely to stay competitive. I will apply for excess rights too but I will give the nil-paid rights a miss.

Taking part in the rights issue is to believe that the additional funds will generate a much higher EPS in the medium term. In the short term, business performance could continue to be lacklustre and whether this would put downward pressure on the share price or not is hard to say.

See announcement on rights issue: here.
Visit Singapura Finance's website: here.

27 comments:

Singapore Man of Leisure said...

AK,

Your readers should watch and learn.

Own a stock that may "suffer" if interest rates rise?

Then counter-balance it by owning another stock that will "benefit" with the rise in interests rates!

Heads we win; tail we win :)

AK71 said...

Hi SMOL,

You make it sound like it is such a revelation. ;p

I like to think that a rising tide will lift all boats and it is reasonable to assume that when interest rates rise eventually, all lenders will do better.

It is possibly a good idea to accumulate such stocks on any weakness. :)

Derek said...

Hi AK,

Thanks. I'm waiting for a certain butterfly to blog about his strategy on rights. ;)

AK71 said...

Hi Derek,

I hope you have your butterfly net ready. Butterfly has been quite busy lately. It is that time of year. ;p

Felix Leong said...

yeah I think the interest rate environment is putting pressure on its profits however I think the bigger problem is competition against so many banks in singapore
Looking at singapura finance and hong leong finance, they are both trading at a big discount to book value, its not because that they are undervalued, but because they are unable to generate a decent amount of ROE. While local banks can still make 10-12 ROE, these saving and loan companies are dinosaurs that might extinct within the next decade

AK71 said...

Hi Felix,

Yes, I am concerned with the competition that Singapura Finance is up against. It is a small player, after all.

However, to say that the company might go the way of the Dodo in the next 10 years could be a bit extreme. Of course, I don't know if it would happen but I do know that more than 80% of the company's total income is from interest income. So, its performance is very much levered to interest margins.

Just to put things in perspective, UOB's interest income forms a much lower 60% of its total income, if I remember correctly.

If interest margin expands and from such a low base, I can imagine that Singapura Finance's performance should improve tremendously.

So, since I am confident that interest margin will improve in the not too distant future, it follows that I must feel that Singapura Finance's future performance will improve, everything else remaining equal. :)

It might not be a good choice for growth but as an investment for income, it could prove more than adequate. ;)

Lee Tek said...

Hello AK!

If i were to invest on REIT, do i look at the DPU or DPS to determine the passive income generating every year?

AK71 said...

Hi Lee Tek,

REITs are like unit trusts. So, as investors, we own units in REITs.

We receive income from REITs in the form of distributions. DPU stands for distribution per unit.

I hope this helps. :)

Andrew Chew said...

Hello AK,

I have something to ask. The announcement did not mention any Book Closure Date so does that means if I buy SF now, I will be able to subscribe for the Right Issues?

Thanks.

AK71 said...

Hi Andrew,

I believe they have to get approval from shareholders first. So, there needs to be an EGM.

If you become a shareholder now, you should be eligible to participate in the rights issue unless you have a foreign address.

WK said...

Is it correct to evaluate SF using PE? The PE is quite high.. DPS only 2.5c nia..

AK71 said...

Hi WK,

It is a useful ratio and it does show how earnings of the company is under pressure.

Although trading at a discount to NAV, the PE ratio indicates that the company's stock is more expensive compared to DBS, UOB or OCBCs' stocks.

Buying in now would be to believe that as interest margins improve, Singapura Finance will benefit much more than the local banks simply because more than 80% of its total income is from interest income.

Rick said...

Hi AK

What do you think of another counter call Hong Leong Finance? This counter seems similar to Singapura Finance.

AK71 said...

Hi Rick,

I have not looked at Hong Leong Finance before.

Of course, please feel free to share your views with us. :)

Rick said...

Hi Ak

I would not dare to 班门弄斧 in front of you.

AK71 said...

Hi Rick,

Oh my, let me assure you that I am definitely not a master with an axe. In fact, I would avoid axes as far as possible. Dangerous looking things. -.-"

I look forward to hearing diverse views from readers all the time. If I should disagree, I will make it known, of course, but I enjoy a lively and civil exchange anytime. :)

Rick said...

Hi AK

Hong leong is similiar as they also have a dividend policy of rewarding shareholders with dividends 2 times a year and is trading at a discount to NAV. The 5 year parameters trend in the annual report look quite similiar to Singapura finance.

AK71 said...

Hi Rick,

Thanks for sharing your insights. Much appreciated. ;)

Passive Income Builder said...

Dunno if i shld buy or not leh. Its returns have been rather dismal lately :(

Peng Yu Tan said...

Hi AK,

I was researching a little on Singapura Finance. I noticed that their compensation plan is on the high side. The combined remuneration of the Chairman and CEO amounts to almost 10% of the profit after tax (I took the middle ground of $600,000). Seems a bit high to me. Did that worry you?

AK71 said...

Hi Peng Yu,

Profits have been declining in the last 5 years, if I remember correctly. So, even if the compensation packages were to stay stagnant, the percentage you mentioned would see an increase.

As Singapura Finance has been good to me as an investment for income, I am willing to give them a chance to prove their worth in anticipation of higher NIMs in the coming years as interest rates rise.

ryan said...

Seems to be a fire sale going on.. I like discounts :D

AK71 said...

Mr Clark added that the regulations that have come into effect are making certain areas of banking more expensive than they were previously. "This has forced banks to really assess their level of involvement in those areas and the level of resource they want to dedicate to them."

Singapore banks look to be relatively resilient for now as they rely more on core units, such as retail and corporate banking. Going forward, analysts said it is these areas which will continue to flourish, even as specialist services are affected by global sentiments.

Ms Josie Ling, a private banking consultant at Eban International, said: “I am moderately optimistic about hiring in finance in Singapore going forward. It is a bit of a mixed view.”

She said that while jobs that are closely tied to the capital markets and the global financial sector might not have a “strong flow”, those that are tied to the real economy - such as retail, private and corporate banking - would have a brighter prospect.


Source:
http://www.channelnewsasia.com/news/business/singapore/banking-jobs-shake-up/1712148.html

AK71 said...

SINGAPORE banks are expected to post stronger margins in it first quarter results due this month, thanks to the gains in benchmark rates, a Maybank Kim Eng report said this week.

"We look forward to sequentially better net interest margins (NIMs) from rising Sibor and SOR," said the client note on Wednesday, referring to the Singapore interbank offered rate and the swap offer rate.


Source:
http://www.businesstimes.com.sg//companies-markets/brokers-take-singapore-banks-to-post-fatter-margins-for-q1

Kevin said...

Hi AK
thanks for your post on Singapura Finance. I was wondering what are your current views on the company as it has not given out any dividends this year and its share price has been languishing in no man's land.

thanks

rgds
Kevin

AK71 said...

Hi Kevin,

Unfortunately, interest rates are staying low for a longer time than expected and having 80% of its income as interest income means weakness for a longer time. The same goes for Hong Leong Finance which is, of course, a bigger outfit.

As long as interest rates remain low, banks will do better than finance companies as they are less dependent on interest income. Banks' earnings will be more resilient.

AK71 said...

The Monetary Authority of Singapore is relaxing some of its rules on finance companies from this year onwards, to make it easier for small and medium-sized enterprises (SMEs) and start-ups to obtain funds from them.

These finance companies, which complement banks in providing loans to businesses, will now be allowed to offer a higher amount of uncollateralised loans to companies.

Currently, a finance company's total uncollateralised lending is capped at 10 per cent of its capital funds, while uncollateralised lending to a single borrower is capped at S$5,000.

These limits will be gradually relaxed. Finance companies will eventually be able to offer uncollateralised loans amounting to up to 25 per cent of their capital funds.

And a single borrower will be able to take up uncollateralised loans amounting to up to 0.5 per cent of the finance company's capital funds.

These finance companies will also be able to offer current accounts and chequing services to businesses.

And they will be able to join electronic payment networks such as Inter-bank Giro, Fast and Secure Transfers (Fast) and Nets.

Singapura Finance chief executive Jamie Teo welcomed the move, saying this will allow finance companies to offer more services to their customers.

"We would be able to issue ATM or debit cards, which we previously could not, which meant that our customers were unable to easily withdraw money or make electronic payments. With this change we would be able to attract more customers."

The MAS will also lift its prohibiton on the takeover of a finance company by a foreign entity.

Source:
http://www.straitstimes.com/business/banking/mas-relaxing-rules-on-finance-companies-to-help-smes-start-ups-obtain-funds

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