Financial security: What good is the idea to us?

Sometimes, I wonder why people making lots of money at work are still complaining about not having enough money. Then, if we ask a few questions, we understand why.

Often, the reason is because they scaled up their consumption as they made more money.

Keep our lifestyle simple even as we make more money over time. That is a sure way to having enough money now and in the future.

Want some ice cream? We don't have to go to Swensen's.

Over the years, quite a few readers have written to me to say that they took action after reading my blog posts. I am happy that they feel less stressed up and more secure about their finances now.

Recently, I wrote this in reply to a reader:

"I am happy to sense a tone of determination and also a clarity of mind in your message. You have a plan now and you sound confident of your financial future."

I would have liked to share his story but he would rather not have his story shared. It would have been quite helpful to some, I thought, to read a real life account of how scaling up our consumption even as we make more money would set us back financially.

I will end with a Chinese saying:
师父领进门，修行在个人.

If we do not act upon a good idea, what good is the idea to us?

Related posts:
1. Are you sometimes forced to be extravagant?
2. The evil instalment schemes and their minions.
3. An essential habit to becoming richer.

Free "e-books" on financial security for Singaporeans: here.

ASSI reaches 6 million before Singapore.

Before Singapore hits 6 million in population, ASSI is going to hit 6 million pageviews first. Might happen in the next hour.

It has been almost 5 years since I started blogging. Lots of ups and downs and never did I think ASSI would come so far.

I think I will have to pop a bottle of oatmeal! Oatmeal?

Yes, champagne is too expensive but a picture? No problem. It is the thought that counts. LOL. ;p

SembCorp Industries: "A safe price of entry."

A reader, Dexter Choo, asked me how did I value SembCorp Industries and determine a "safe price of entry"? Before I go on, I must establish that if we believe that valuation exercises are subjective and this is something I have blogged about many times before, then, it follows that "safety" is also relative.

So, with that in mind, I am going to share in this blog my approach in this instance. Now, please note that I am not saying that this is the right or best approach. It is simply something that makes sense to me and that I am comfortable with. After all, what we do should have a strong connection to our motivations.

For a while now, in view of rising interest rates in the not too distant future, I have been looking to increase my investment in companies which:

1. Are net cash or have very low net gearing.
2. Are able to generate stable earnings.
3. Pay out a good portion of earnings as dividends.

If we look at SembCorp Industries' numbers for the 5 years to 2013, we see that it is generally a net cash company which generates stable earnings. It is also a company with growing NAV/share from $1.86 in 2009 to $2.93 in 2013. Now, as an income investor, the fact that they also pay consistent and meaningful dividends of at least 15c a share (DPS) is important to me.

Now that we have some numbers, we might ask what would be a sensible price to pay for the stock? Depending on the valuation technique we use, we would get different answers.

Personally, in this case, I use a very simple metric, PE ratio (TTM). This looks at the price of the stock today and the earnings in the last 12 months. I might also discount earnings a bit to be more conservative but if by annualising the earnings in the last 6 months I would get a more conservative estimate anyway, I would use that. So, what is a reasonable PE ratio for SembCorp Industries?

Given more normalised circumstances without considering the effect of the Global Financial Crisis in 2008 and the Fiscal Cliff panic in 2011, Mr. Market seems quite happy to pay a price that has a PE ratio of about 11.4x to 13.6x for SembCorp Industries.

Based on an estimated 40c EPS for 2014 and my entry price of $5.04 a share, I got in at an estimated PE ratio of 12.6x. Is it undervalued? Not by a long shot, I don't think so. Then, why did I buy?

Well, apart from the fact that it ticked all my boxes, I reminded myself of an idea by Warren Buffett:

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

A buy price of $5.04 a share is not fantastic but I believe that it is fair enough.

As an investor, I am also informed by Technical Analysis (TA) which tells me that what price Mr. Market is willing to pay often has to do with sentiments and not fundamentals. So, I also look at charts in an effort to time my entries at prices more reasonable. Of course, we have to remember that TA is about probabilities and not certainties. So, there is no guarantee that prices would not go lower.

I will end by saying that there could always be "safer" prices at which to buy a stock. So, buying SembCorp Industries' stock at the depths of the Global Financial Crisis, for example, at a PE ratio of 7x would have been much safer but that is all I dare to say.

Related posts:
1. When to BUY, HOLD or SELL?
2. SembCorp Industries: A nibble.

Tea with Matthew Seah: MSN Money.

SGX have revamped their interface to include some fanciful features for investors. However, I am still not very used to that. MSN Money have also refurbished their website recently to give investors better summaries of companies.

All the key numbers of a company and easy to read charts are provided for investors like me, providing a quick snapshot of a company which is useful before I decide whether to delve deeper into their numbers.

Here are some beautiful screenshots for Mastercard (please click on screenshots to enlarge):

As for companies listed on SGX, MSN Money has also compiled more numbers than SGX although the latter does not have direct access to these (I think). So I guess SGX still has a lot more room for improvement. For now, this will be my preferred choice when screening for potential companies to invest in.

As an example, you can check out Keppel Corp here.

P.S. Matthew Seah does not write about why any company is a good investment choice at any price. Readers should carry out due diligence and verification of information provided themselves. Some other guest blogs by Matthew Seah: 1. Dollar cost averaging and expected returns. 2. POSB Invest Saver Account.
3. Interview with Matthew Seah: Value Investing.

SembCorp Industries: A nibble.

Today, a reader asked if I was interested in SembCorp Industries since I bought into SembCorp Marine recently. Answer? Yes, I am interested and I have been looking at it for a few days.

SembCorp Industries' share price has not suffered as dramatic a decline compared to SembCorp Marine's. I think it would be correct to say that it is less volatile. If we think about it a bit more, this is quite natural since they are a conglomerate and have an interest in other businesses such as utilities which probably helps to cushion their earnings.

Here are some numbers:

Click to enlarge.

So, in line with my effort to increase the proportion of companies in my portfolio which are net cash and which pay consistent dividends, I decided to take a nibble at $5.04 a share as the stock price hit a low of $5.03 today.

With 1H 2014 EPS at 20.1c, expectation for a full year EPS of 40c is reasonable. This gives a PE ratio of 12.6x which seems reasonable. Well, it is definitely more attractive than in July this year when it was trading at a PE ratio of about 13.75x when the stock was about $5.50 a share.

Assuming a dividend per share of 15c, it would give us a dividend yield of 2.98% which doesn't seem as attractive as SembCorp Marine's but I reminded myself that this is based on a lower assumed payout ratio of 37.5% and not 50%.

Could we see the stock price going lower in the near future? We could possibly see $4.99 a share but because momentum oscillators such as the MACD and the CMF did not form lower lows as the stock price formed a lower low, I feel that selling pressure in the near term has somewhat abated.

About SembCorp Industries:
Sembcorp Industries is a leading energy, water and marine group operating across six continents worldwide. With facilities of over 7,200 megawatts of gross power capacity and over eight million cubic metres of water per day in operation and under development, Sembcorp is a trusted provider of essential energy and water solutions to both industrial and municipal customers. It is also a world leader in marine and offshore engineering, as well as an established brand name in urban development. The Group has total assets of over S$14 billion and employs approximately 10,000 employees. 

See Press Release: here.

Related post:
SembCorp Marine: A nibble.

CapitaMall Trust: When is AK nibbling?

Following a recent blog post in which my admiration for CapitaMall Trust's (CMT) management was once again mentioned, with the REIT's unit price having retreated from a recent high of $2.09 a unit, I decided to examine whether it makes sense for me to have some exposure to the REIT soon.

One thing that has held me back for some time is the matter of distribution yield. With an annual DPU of about 10c, give or take a small fraction, at $2.00 a unit, we have a yield of 5% and at $1.80, we have a yield of 5.55%. This is also yield made possible only with financial leverage.

Anyway, I have blogged about how rising interest rates would increase the interest cost for REITs and how it could affect their interest cover ratios and income distributions. It could also affect their valuations as investors demand cap rates which make more sense when a riskier property investment is compared with a more attractive risk free rate.

Well, these concerns could be addressed effectively as long as REITs are able to increase their rental income meaningfully. It would largely be through positive rental reversions and this would hinge upon whether tenants are willing to pay higher rents. I expect that some REITs would be able to do this better than others.

When would tenants agree to pay higher rents?

There are probably many factors involved and only a businessman would have the full answer but factors such as the nature of the business, general economic conditions and availability of suitable alternatives come to mind. Obviously, some factors are beyond the control of even the best REIT manager.

However, for Retail REITs like CMT, if they are able to add value by encouraging shoppers to choose their malls over the competition's, they will create a win-win situation for themselves and their tenants. I believe that CMT is doing a good job of this and the REIT's tenants would appreciate this.

Not much of a shopper myself, it is really after becoming a CapitaStar member and getting the CapitaMalls credit card that I appreciate this as I looked at the REIT through the lens of a business development manager which is the fun part for me.

Then, there is the part that is not as fun for me which are the numbers. I looked at the REIT's debt. CMT has a credit rating of A2 from Moody's. That is a relatively high rating and it helps to ensure that the REIT will have access to cheaper funding.

Correct as of June 2014, here are some numbers:
Gearing: 34.3%

Interest Cover: 4.7x

Ave. cost of debt: 3.6%

NAV/unit: $1.76

The REIT's debt maturity profile shows staggered maturities which is very comforting:

Also, 98.7% are fixed rate borrowings.

It is hard to imagine CMT being caught in any situation where they might have trouble refinancing their debt. Now, this is not saying that it cannot happen, of course, which is why, expecting interest rates to rise from middle of 2015, I think that having a larger exposure to companies which pay stable and meaningful dividends out of their earnings with little or no debt is safer than increasing exposure to leveraged income instruments like REITs.

Next, as REIT investors, we would be familiar with the argument why Industrial REITs must offer a higher yield because their land leases are much shorter (although some could hold some freehold properties which throws a spanner into the wheels of this train of thought). Anyway, I feel that what is more important is a REIT's ability to actually add value even if their land leases are getting shorter over time.

REITs are able to add value through Asset Enhancement Initiatives (AEIs) and developments which max out their existing properties' plot ratios, for examples. AIMS AMP Capital Industrial REIT does a good job of this although it is an Industrial REIT with most of its properties having shorter land leases. So, to have a pro-active REIT management that creates value for unit holders is very important.

Now, coming back to CMT, unless we do not visit shopping malls at all, it would be difficult not to see how CMT have done a good job with their malls. I don't visit all their malls but because I stay in the west side of Singapore, I visit Bukit Panjang Plaza, LOT 1, Westgate, IMM and J-cube quite often. I also visit Bugis Junction, Bugis Plus (former Illuma), Raffles City and, sometimes, Bedok Mall. Oh, recently, I visited Junction 8 a couple of times too. 

If we look at the AEIs that CMT did and are doing now, it is easy to see that they have added value and are going to add more value to the REIT again.

I hope to buy at a discount to NAV but with a strong track record and pedigree, under normal circumstances, it would be difficult for my wish to come true. Then, perhaps, I might be persuaded to take a nibble if I could pay only a smallish premium to NAV.

Click to enlarge.

Could we see a re-test of a many times tested support at around $1.80? Maybe.

See presentation slides: here.

Related posts:
1. SPH or SPH REIT?

2. CMT: Buy the retail bond or the REIT?

3. AIMS AMP Cap Industrial REIT: 103 Defu Lane 10.

Tea with TheMinimalist: If Personal Finance and Investing were a religion, what would be your denomination?

The Minimalist, a mysterious and wise man, has contributed another guest blog to ASSI. I hope you enjoy reading it as much as I have:

Over a podcast interview with AK71, he shared that “Investing is a religion”. I can relate to his statement on so many levels. Firstly, there are so many different denominations like value investing founded by Benjamin Graham and David Dodd or permanent portfolio by Harry Browne. Secondly, you cannot “force” someone to adopt an investing style that they are not comfortable with. For example, my best friend is a conservative investor and is satisfied with investment returns that match the inflation rate (3% to 5%). People like my best friend would be best suited for the Permanent Portfolio.

With so many religions in the world, which one is the best for me?

During my university days, I went through a “quarter-life crisis” and was very lost with what I wanted to do in life. Upon the advice of some friends, I decided to turn to religion. As I started reading different religious texts (such as The Bible; Dhammapada; Dao De Jing), attending services, I realise that these religions share common truth. I will share two points that have benefitted me the most. The first one is to engage in meaningful and purposeful work. The second is to love and serve people.

For readers who are new to personal finance and wish to take charge of their finances, where is the best place to start? In my humble opinion, the Bible of personal finance is “The Richest Man in Babylon”.

In this book, it states the 7 universal principles of personal finance. When you secure a copy of this book, read it once, read it twice and commit the principles to heart. More importantly, PRACTISE it. Success only comes by taking actions, NOT by reading. (I have never come across a book that is titled “Read and Grow Rich”) 

After reading the bible of personal finance, feel free to research the different styles of investing and adopt one that you are comfortable with. One of the best ways to shorten the learning curve is to be a mentee to someone who has successfully applied those principles. (Maybe, AK71 can start a mentorship program and start with coaching his mentees to eat oatmeal for breakfast, lunch and dinner. Cheap, healthy and nutritious!) 

Breakfast of champions'.

A word of caution.

Make sure you are learning from the RIGHT people. I am sure many of you have read of religious leaders in Singapore who have fallen into the money/power trap. Or finance trainers who promise infinite riches by paying $X,XXX to attend their courses.

The end goal of personal finance/investing should be financial freedom where our assets generate sufficient passive income to cover our expenses. The means should justify the ends. If your mentor makes his money through insider trading (illegal), excessive leverage (dangerous) or guess-work (lazy), you might want to reconsider learning from this person.

To end off this blog post, I feel that there is no religion that is “superior” or “right”. Everyone should make a well-informed decision on the faith that he or she is comfortable with. Do not convert yourself to a certain faith just because your wife/husband/best friend/teacher is of that faith (I am a deist for those who are curious about my faith). Similarly, there is no personal finance philosophy or investing style that rules supreme over all others. If you are uncomfortable eating oatmeal for breakfast, lunch and dinner, then don’t do it! (Right, AK71?)

Here are some actionable steps to get you started on taking charge of your personal finance:

(1)    Grab a copy of the book, “The Richest Man in Babylon”

(2)    Read and memorise the seven universal principles of personal finance

(3)    Plan and write down specific steps on how you would apply each of the seven principles. For example, you want to apply the first principle “Start thy purse to fattening”. To do this, you write down “On my next payday, 16^th Oct 2014, I’ll set aside S$500 from my S$5,000 paycheck to a designated savings account with OCBC.”

If you like what I have shared in my blog post, feel free to e-mail or share with your friends on FB.

Richest Man in Babylon
Buy pre-owned with free shipping worldwide at US$6.98 a copy.
Read and learn 7 important lessons in life:
1. Pay ourselves first.
2. Live below our means.
3. Put our money to work.
4. Always have insurance.
5. Our home is a consumption item.
6. Plan early for retirement.
7. Upgrade our knowledge and skills.

Read another guest blog by The Minimalist:
Financial planning? Start with why!

Related posts:
1. Getting paid more while waiting for opportunities.

2. Motivations and methods in investing.
3. If we are not rich, don't act rich.
4. A common piece of advice on saving.
5. Do you want to be richer?

OCBC and CapitaMalls: Providing value for money deals.

At the sharing session with Sean Seah and friends, there was plenty of food. It was like a pot luck session and I saw a few boxes from Polar. They are famous for their puff pastries and Swiss rolls, I believe. Their curry puffs cost $1.80 each and I always thought they were quite expensive. So, until quite recently, I never did buy Polar curry puffs.

Wah! AK recently bought atas curry puffs?

Well, I got them for $1.00 each and that was the first thing I said yesterday to the group. Yes, terrible. I totally forgot that initial impression is very important and they probably thought, "What a cheapskate..." Of course, I went on to say how they could also get $1.00 curry puffs from Polar, oblivious to what they might be thinking.

Actually, it is all thanks to the OCBC Frank VISA card that I have now. To get the special deal, I use the NETS Flashpay function. We will also need the NETS Flashpay Savers app which is free to download. The app lists many special deals and one of them is from Polar.

Each time, we are allowed to buy up to a maximum of 4 curry puffs at $1.00 each and pay with NETS Flashpay. A discount of almost 45%! That is a pretty good deal!

So, ever a sucker for great deals, I tried their curry puffs. Not bad but, honestly, I still prefer Old Chang Kee's curry puffs which are cheaper, heartier and tastier.

What? You think I am saying this just because I am an Old Chang Kee shareholder?

Aiyoh, terrible. How could you think like that?

Anyway, I am very sure there will be comments after this to suggest curry puffs which are better than Old Chang Kee's and I promise not to delete them as long as they are not advertisements. Nice AK.

Then, to augment the impression participants might have that AK is a cheapskate, I told them about how I admire CapitaMall Trust's management very much and how I think they are doing a good job of driving shoppers to their malls. How does this show I am a cheapskate?

I revealed how I am a CapitaMalls credit card holder and also a CapitaStar member. For a whole month, I get free parking in all their malls any day of the week for 3 hours per visit per mall when I have $1,200 worth of spending using the credit card. The spending doesn't have to be money spent in their malls too. It could be payment of bills at the AXS machines etc.

Assuming that we visit their malls 10 times a month, we could easily save $30 in parking fees. That is 2.5% of $1,200. My sister shares my car and I also go out with my mom once every few days just to spend quality time together and do a bit of grocery shopping. We make sure we visit a CapitaMall when we go out and not a competitor's mall. When I meet up with friends on weekends, I always suggest meeting in a CapitaMall. Sneaky!

Anyway, there is another reason why I like CapitaMalls. Getting discounted shopping vouchers!

Once a year, they will have this special deal for members to buy $300 worth of vouchers and get another $30 for free! I bought plenty last year and I am buying again this year. Everyday, for a limited time, each member is allowed one purchase per mall. The purchase of vouchers will count towards that $1,200 spending to get free parking too. Nice.

We use the vouchers mostly when we shop in NTUC Fairprice supermarkets in CapitaMalls but they are accepted in most of the shops, really. So, it is like getting a 9.1% discount on our groceries, on top of getting Link Points (about 1.3% rebate) and NTUC shareholder rebate of 4%. When I go shopping with my mom on Tuesdays, we get additional 2% discount for senior citizens too.

Some money, we have to spend. If we can save some money in the process, why not?

Related post:
1. CapitaMall Trust: Buy the retail bond or the REIT?
2. Save $: Frank Card, Signature Card & Dividend Card.
3. Supporting my businesses and getting paid in the process.