The mystery of the extra money in my account.

I did an audit on my investment portfolio because of a discrepancy. There seemed to be an extra $2,200 which was deposited into my savings account. OK, I guess when there is more money, it is a "good" discrepancy to have but I don't like not knowing where the money is from.

As I am very much a pen and paper person and all my trading and income records are hand-written, it took me a while to flip through them as I checked line by line. Strangely, everything seemed correct.


Then, I dug out the Tax Invoices sent to me by my broker and checked them against my records. After going back some 12 months, I found the problem.

I am happy to say that the money, all $2,200 of it, is legitimately mine. Whew!

So, what was the matter?

I actually added to my long position in SPH last year in August when its share price plunged after the counter went XD (with regards to the Special Dividend of 18c per share). 

I got 10 lots at $4.03 per share. Some of you might have increased exposure too as SPH's share price went on to touch a low of $3.91 back then. Now, I remember a joke on my FB wall about how buying a few bids lower than AK's price can't be wrong. Good lesson for me. LOL.

Of course, these shares were not entitled to the special dividend and, somehow, I forgot about making an entry in my own records.

Since then, SPH has paid dividend twice, 15c a share towards the end of last year and 7c a share earlier this year. That makes 22c a share and explains the mysterious "extra" money of $2,200.

The feeling is similar to discovering a stray $5 note in my piggy bank when I was a boy months after emptying piggy of all the coins to buy a toy I was saving up for.

Related posts:
1. When to buy SPH's stock?
2. Tea with Mike: An analysis of SPH.

When to buy SPH's stock?

A reader who attended InvestX Congress wrote to say he enjoyed my presentation at the event and that he was especially enlightened as to why I thought SPH made a better investment for income compared to SPH REIT which led to me plonking down more money in SPH's stock. He then went on to ask if this is a good time to buy more of SPH's stock.

Yikes! I am very afraid of questions like this, regular readers of my blog would know.

So, I asked him what did he think the fair value of SPH's stock was? If he were a value investor, he would want to buy it undervalued. Of course, I reminded him that valuation is a subjective exercise and depending on what he focused on, he could come up with different fair values.

Personally, I feel that the fair value is about $4.20 a share, give or take a few bids. So, I do what I sometimes do and which I did not talk about during InvestX Congress. It wasn't something I was supposed to talk about at the event.

What did I do?

I looked at the charts.

Click to enlarge.

I see lower highs on the MACD, a momentum oscillator, as higher highs in the share price were reached at $4.17, $4.26 and $4.27. This is a negative divergence. This is an indicator that weakness is on the horizon.

Immediate support is currently provided by the flattening 200 days moving average (200dMA) at $4.14. Is this support going to be tested next week? Possibly.

Bearing in mind that the 200dMA is a long term moving average, if support at $4.14 should be breached, we could see SPH's share price moving much lower. How much lower? That is hard to say but we can use Fibo retracement lines to get a glimpse of where the supports are likely to be.

Click to enlarge.

Share price could retrace to $4.10 (the 50% golden ratio) or $4.055 (the 38.2% golden ratio). The support provided by the 23.6% Fibo line is a weak one at $4.00. So, if share price should go that low, we are likely to see $4.00 support breached.

So, given the technical analysis I did, if I didn't yet have a long position in SPH, I might wait to get some at immediate support which might be moved higher to $4.15 since the 61.8% golden ratio is at $4.145.

If I already had a long position in SPH (which I do), I will wait to accumulate on weakness which, given the negative divergence observed in recent weeks, looks likely to happen.

Related post:
SPH: Within expectation.

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.

Helping our parents invest their money.

This blog post is inspired by what I read at Bully the Bear. The blog master is now helping his parents manage some of their savings to secure higher returns. The money would have gone into fixed deposits, otherwise. Read: Why my parents are so eager to invest.

My parents also leave money in fixed deposits which they say give them a peace of mind. Whether it is a good idea or not is, of course, open to debate. However, peace of mind is priceless. If they do not wish to put their savings in "risky" investments, I won't go against them. This also gives me a peace of mind because if the "risky" investments turned out badly and I was the one who asked them to invest, then, it would be a nightmare of epic proportions.

Photo taken when I went on a cruise with my parents.

In recent years, however, my mom saw how my investments delivered regular income and instead of being purely a market speculator, she decided to have me help her invest some of her money. She now gets more than $1,000 in passive income from stocks per month which is a nice bit of extra money for a person in her 60s.

More recently, my dad asked me if I could help him invest some of his savings as well. Of course, I have to do it. Why? He is my father. No other reason needed.

I told him that I could possibly get an 8% yield for him but the principal sum will have to be locked up for at least 5 years. That was my only condition. So, he has to be sure that it is money he will not need. At the end of the 5 year period, he will get 100% of his capital back if that is what he wants or he could stay invested.

How am I going to achieve this over the next 5 years? Honestly, all things remaining equal, with great difficulty, I suspect.

I could consider investing in the following:

1. Sabana REIT
2. Croesus Retail Trust
3. SPH
4. NeraTel
5. Hock Lian Seng

There are many things we can say about Sabana REIT but the distribution yield is rather attractive with unit price just 1c shy of $1.00 and there is a chance it could go a bit higher with an occupancy level of under 92% now. This allows ample room for improvement.

Croesus Retail Trust has retreated in price since going XD. It is now close to my entry price. This Trust is going to deliver a higher distribution yield than Sabana REIT and if things go the way I expect them to, it could do even better in future.

SPH has always been a favourite of mine as a blue chip investment for income. With the listing of SPH REIT, I like SPH more now and increased my long position in the stock last year. SPH will increasingly morph into an asset light property play even as it tries to reverse the decline in its traditional print business.

Regular readers will remember how I increased my long position in NeraTel by 10x last year in an effort to divert resources into stocks which will not be affected badly by any increase in interest rates. NeraTel is still a net cash company with strong earnings which should see meaningful improvements over time as the company sets up offices in new markets.

Hock Lian Seng is an investment I have held for a few years now. I initiated a long position in the stock shortly after its IPO. It has a strong balance sheet and rather stable earnings. It pays out about 40% of its earnings as dividends. It is one of those stocks that I almost forget I have until it is time for it to pay a dividend again.

If I were to divide my dad's money into 5 equal portions and invest in the above, I estimate that I could possibly get a yield of about 7%.

So, how am I going to deliver the estimated 8% yield?

I am going to cheat.

OMG! AK is going to cheat!

Bad AK! Bad AK!

OK, I am so ashamed of myself. You can stop reading now.

Pause.

Pause.

Pause.

Er... Still reading? You really want to know?

Let there be light!

OK, then, my plan is to keep the money that my dad is entrusting to me in my war chest. Then, I will deliver the 8% yield from my existing investments while I wait for prices to go lower before accumulating with bigger margins of safety.

There is no hurry for me to buy anything from Mr. Market. Well, maybe I could increase my investment in Croesus Retail Trust which I believe is rather attractive if 87c should be retested.

What if prices did not retrace lower but stay at current levels or go higher?

Well, anyway, I have always planned on using a good part of the income that is generated by my portfolio to support my parents when they are no longer working. So, this proposed arrangement is just a matter of utilising my passive income earlier than planned.

It will make my dad happy and that gives me a peace of mind.

Note: If anyone is wondering whether to start an investment portfolio based on the 5 securities I have highlighted in this blog post, please read the disclaimer found at the end of the page first.

Related posts:
1. A strategy to grow wealth and augment income.
2. Hock Lian Seng: DPS of 1.8c.
3. Croesus Retail Trust: Luz Omori and Niz Wave I.
4. SPH: Results are within expectations.
5. Sabana REIT: Am I buying or selling?

OUE C-REIT.

OUE Limited is spinning off OUE Bayfront in Singapore and Lippo Plaza in Shanghai into a REIT. Seems like OUE Limited is actively recycling capital and trying to catch whatever remaining interest investors might have in a REIT IPO. Just barely half a year ago, they listed OUE Hospitality Trust and I blogged about that here.

OUE C-REIT is the name of the latest offer. It will be priced at 80c a unit and will offer a distribution yield of 6.8% or a DPU of about 5.44c.

I believe that this IPO is a plus for OUE Limited shareholders just like the listing of SPH REIT was good for SPH shareholders. However, I don't think OUE C-REIT is attractive as an investment for the same reason that I thought SPH REIT was not attractive compared to SPH as an investment. You might be interested in that blog post. Read it: here.

I like the fact that OUE Limited has given a commitment to support the REIT by offering assets at a discount to valuation in future. This is something that the Lippo Group has done for LMIR and First REIT as well. After all, it is the same family that is in control of OUE Limited. Yes, OUE Limited is a 55% owned subsidiary of the Lippo Group.

I also like the fact that OUE Limited will retain a 45 to 50% stake in OUE C-REIT which will see their interests more aligned with those of minority unit holders in the REIT since any action taken which might hurt minority unit holders will hurt the sponsor, OUE Limited, most.

Having said this, we have to remember that the sponsor would have reaped most of the benefits from the IPO and the higher distribution yield is a result of income support given by the sponsor. If there were no such support, the distribution yield is actually 5.56%, almost 20% lower.

Over the next couple of years, if the REIT manager is able to fill up all the vacant space in the two initial properties and achieve positive rental reversions in re-leasing, the REIT could deliver a yield of 6.8% without any support.

However, with interest rates set to increase, we could see a heavier debt burden come 2017 when most of the REIT's debt mature. This could wipe out any hope of maintaining the relatively attractive distribution yield now unless unit price of the REIT declined.

The REIT could grow DPU through accretive purchases from its sponsor, of course, but with gearing ratio relatively high at 41% or so now, it would probably have to resort to equity fund raising either in the form of a rights issue or private placements. Unit holders should be prepared for this.

All investments are good at the right price and to invest in OUE C-REIT for income, I would only be interested if it should offer a much higher distribution yield, given the considerations above.

Related posts:
1. A strategy to grow wealth and augment income.
2. 2013 full year income from S-REITs.

A strategy to grow wealth and augment income (2013).

I am primarily investing for income and in my last blog post, in what has become a yearly practice, I revealed my full year income from S-REITs as well as how they fit into my investment strategy. They are relevant to income investors but with the spectre of rising interest rates in the years ahead as well as a peaking in the real estate cycle here, it is sensible not to be overly optimistic about S-REITs in general.

So, apart from a large purchase made in Saizen REIT in the middle of 2012, I have devoted most of my resources to stocks. These should be undervalued and are likely to continue growing for years to come. Since I want to have income from my investments, I would also like for these stocks to pay dividends.

Marco Polo Marine's yard in Batam.

Now, with these stocks, the main strategy is to buy and hold. However, I am not averse to trading around my investments. So, I could divest partially or fully if it is a good idea to do so. For 9M 2013, I revealed that I locked in gains of S$188,625.13. Has the number changed?

Well, I mentioned that I partially divested my investment in Sabana REIT last month. This added S$12,860.03 to gains from trading in 2013.

So, total trading gains in 2013 is S$201,485.16.

What about adding to my long positions?

What I hope to do primarily is to identify good companies, initiate long positions in them at fairly good prices and then wait to add to these positions if there should be bad news which send their share prices down. These are companies which I am comfortable to stay invested in for years, knowing that they possess some competitive advantages which differentiate them.

Warren Buffett famously said that we should invest with the thought that the stock market could close the next day and not reopen for five years. What does this mean?

Invest in stocks of companies which we are confident will do better over the next five years. We wouldn't be bothered by any volatility in their stock prices in the meantime unless it is to add to our long positions with greater margins of safety. If we understand this, we will know what stocks to avoid. How? Do an inversion.


With this in mind, in the last three months, I added to my long positions in NeraTel and Yongnam as their share prices declined due to bad news which I believe are neither long term nor recurring in nature. I have received fairly good dividends from these stocks and I also made some money trading these stocks earlier in the year.

I also added to my long position in SPH. I was paid both the special dividend and the year end dividend for this as well.

Marco Polo Marine is still my single largest investment although its share price has not declined significantly enough for me to add to my long position. The much higher dividend per share paid out recently was a bonus.

I also retain long positions in CapitaMalls Asia and Wilmar International. These are strong companies and leaders in their fields. They are likely to do better in future.

So, was anything new added to my portfolio?

I initiated a long position in Croesus Retail Trust and even added to this position by using funds freed from a partial divestment of Sabana REIT.

Wait a minute? Didn't I say that I am wary of rising interest rates and a possible peaking of the real estate cycle? Yes, I did but Croesus Retail Trust owns malls in Japan and the BOJ is bent on keeping interest rates really low. Abenomics demand this. The Trust has a relatively low cost of debt which is locked in for 5 years.

Luz Shinsaibashi.

Japan has also suffered from continual deflation for 20 years. If anything, the real estate cycle should have a greater chance of bottoming than peaking. Anecdotal evidence tells of a recovering real estate market in recent months that is likely to pick up speed in future.

Although my strategy, with a generous dose of luck, has worked well this year, I can only hope that it will continue to work in the new year.

To grow wealth and augment income? Yes, indeed, that is the plan.

Related posts:
1. 2013 full year income from S-REITs.
2. Yongnam: Substantial shareholder increased stake.
3. NeraTel: Added to my long position.
4. Marco Polo Marine: Exciting times ahead.

SPH: Results are within expectations.

Some people have expressed disappointment at the final dividend of 15c per share announced by SPH. Some people have expressed disappointment at SPH's business performance. What about me?

I am neither disappointed by SPH's final dividend nor its performance because they are within expectations.

I have blogged about how we could see an annual DPS of 21c in future from SPH. If this year's interim and final dividends should become the new norm, then a DPS of 22c a year is 1c more than my lowest expectation. I also said that if I could get a dividend yield of 5% by being a shareholder of SPH, why would I be interested in SPH REIT. That was when I revealed that I increased my long position at $4.20 a share.

SPH's weaker performance when it comes to revenue from its print businesses has been discussed and, some would say, beaten to death. The pertinent question to ask is whether this weakness is going to kill SPH rapidly. Have naysayers focused too much on this and painted a negative picture that is too dramatic?

If we believe that SPH is going the way of the Dodo, then, we should not invest in it. If we believe that SPH has predictable earnings with predictable weaknesses and that its strong balance sheet is able to withstand certain headwinds, then, to be invested for a 5% yield doesn't sound so bad.

Apart from my more recent purchase at $4.20 a share, the majority of my investment in SPH are at prices much lower. Now, even with those purchased at $4.20 a share, I received the recent special dividend of 18c a share. If I do not sell these shares, I would receive another 15c a share later in December this year. That doesn't sound like a bad deal, does it?

SPH is a fortress for anyone investing for income. It is less convincing as a growth story even if we should take into consideration Seletar Mall which is still under construction. Of course, things could change in future and they very often do.

How would Mr. Market react to the results? Your guess is as good as mine. The important thing, as always, is to know what to do in any situation.

See press release: here.

Read a recent guest blog by Mike:
Fundamental Analysis of SPH.

Related post:
SPH or SPH REIT?
"My purchases last month were the highest prices I have ever paid for SPH's stock. Prior purchases were made at between $2.86 and $3.55 a share. However, believing that the management has unlocked value for SPH shareholders in this latest exercise, I am willing to pay reasonably higher prices for the company's stock."

Tiger Balm Liniment by Haw Par Corporation.

When I was a boy, I used to wonder why older folks liked to rub medicated oil on their temples. I didn't like the sharp and stinging scent.

You know what they say about how only time can teach us certain things. This is one of those things.

For about 10 years now, I have been using medicated oil regularly. 10 years? Do I keep a record? No, I kept the empty bottles:

First bottle on the extreme left was manufactured in 2002 while the one on the extreme right which is the one I am using now was manufactured in September 2011.

Two lessons from this:

1. Often, we can only really understand why older people are the way they are when we grow older ourselves. We should be more patient when interacting with our elders.

2. I could have bought shares of Haw Par Corporation in the past when it was much cheaper but I did not. A pity. It last traded at $7.45 a share.

Based on its financial statements, I am estimating a PER of almost 15x at current share price. It seems to have a fixed annual DPS of 20c which gives a dividend yield of 2.68%. The stock has a NAV/share of some $10.71 which means it is trading at a discount of 30.5%. Its balance sheet is very strong too.

Some might ask if it is better to invest in SPH. Well, if SPH were to pay a DPS of 21c, at $4.10 a share, we would get a yield of 5.12%. From this angle, SPH wins hands down.

However, if Haw Par Corporation were to pay out all its earnings as dividends, we could see a higher yield of 6.7% or so. Of course, I am not suggesting that it would but, comparing it with SPH thus, it seems stronger compared to SPH.

It is probably safe to say that anyone investing in Haw Par Corporation probably looks at it as an asset play. It does not seem attractive in any other way to me as an investor at its current share price.

Remember, "you could sit on an undervalued situation your entire adult life and the stock wouldn't budge a nickel." (Peter Lynch, One Up On Wall Street.)

Still, all investments are good at the right price and if PER were to decline to 12x or if the stock were to trade at a 40% discount to its NAV while maintaining a DPS of 20c, it could be a very compelling buy! Well, I can always dream.

Related post:
How to be "One Up On Wall Street"?

9M 2013 income from S-REITs and more.

Three more months to the end of the year. Lots of things have happened in the first 9 months of the year. I want to zoom in on the investment front and record some of my thoughts.

The strategy to be invested in S-REITs for income is still working. Of course, with the spectre of the Fed cutting back on QE and a possible increase in interest rates in the next 2 or 3 years, Mr. Market has turned cautious on leveraged investments like S-REITs. This is only natural. Unit prices of S-REITs have become more realistic as a result.

When Mr. Market is pessimistic, that is when we are likely to get good deals. As to what is a good deal, I am sure this is rather subjective. Every person would have a different idea of what is an acceptable margin of safety. Every person would have a different perception of a REIT's prospects.

Having built up a relatively large portfolio of S-REITs, I devoted more resources to investing in what I believe are undervalued stocks, something which I continue to do in 2013.

So, essentially, what I have done is to keep what has worked well for me thus far while expanding my investments in certain companies, recognising possibly more difficult times ahead for S-REITs. 

This is an approach that requires more work than simply getting passive income from S-REITs but the time when it was a no-brainer to buy and hold S-REITs probably ended sometime in the second half of 2012.

For 9M 2013, how much did I receive in passive income from S-REITs? 

$92,872.65

Full year 2013 income from S-REITs is most likely going to be lower compared to 2012 because I sold a significant portion of my investment in LMIR earlier this year and also because Saizen REIT distributes income half yearly (i.e. there is no income distribution in December from Saizen REIT).

Also, we might want to bear in mind that, although hedged, the weaker Indonesian Rupiah and Japanese Yen could result in lower income distributions in S$ terms for unit holders of these REITs in the year 2014.

With twice as much industrial space being scheduled for completion in 2014 and 2015 than any single year in the past decade, the possibility of stagnating or even a reduction in income for industrial S-REITs in future cannot be discounted. This is why looking at WALE (Weighted Average Lease Expiry) of industrial S-REITs is more important now.

Although I would have liked nothing better than to sit back and collect passive income regularly from S-REITs, doing very little else, I decided to move out of my comfort zone. For sure, there were bumps along the way but my efforts have generally been rewarding thus far. 

What did I do?

I increased my investments in stocks which are likely to be dependable passive income generators such as SPH and NeraTel. 

I also hold long positions in stocks which I believe would benefit from the Chinese consumption story such as CapitaMalls Asia, PCRT and Wilmar. 

Any dividend from investing in these stocks and any gain from trading would go towards cushioning the possible decline in income from S-REITs in future.

Up to 15 September 2013, the total gain from trading this year amounts to: 

$188,625.13

It was fortuitous the way the China Minzhong saga turned out. It preserved my trading gains and grew it rather significantly at the same time. Apart from my long position in Wilmar, all other investments are in the black. 

So, what is my plan for the future? 

Nothing profound really. 

If prices were to decline much more, I hope I would be brave enough to buy more. If prices were to rise much more, I hope I would remember to sell some.

The grand scheme is to augment and not to replace my passive income portfolio. 

For sure, it doesn't mean that I think S-REITs are going the way of the Dodo. Indeed, they are still good investments for income at the right prices. For me, passive income from S-REITs will still be an important pillar in achieving financial freedom. This is unlikely to change in the foreseeable future.

Remember, this blog is not meant to instruct but if anyone finds it inspiring, I will be happy enough.

Related posts:
1. 2012 full year income from S-REITs.
2. Never lose money in real estate and S-REITs?
3. Do not love unless it is worth the loving.
4. Motivations and methods in investing.
5. Be cautious climbing the S-REIT tree.
6. Be comfortable with being invested.

Tea with Mike: A fundamental analysis of SPH (Part 2).

Now, let’s talk about the recent move to spin off some properties to become SPH REIT. There was some very misleading info and I thought it might be a good idea to clear it here once and for all.

 

SPH has stated that NET gearing would fall to 9.3% from 40.6%.  That led some to think the interest cost might be lower now, and given such low gearing now, SPH could gear themselves up to 40% again without any new consequences to develop their malls.

First of all, I do not know how the management will utilize the proceeds, and whether they will pay down debts using the proceeds. But NET gearing fell simply because the cash level went up. Absolute debt remains the same and hence finance costs will remain the same.

Also, it is very unlikely SPH will increase gearing further to fund the mall management business.  If they do increase gearing, and start using their cash, NET gearing is going to jump quite drastically.

So let’s assume, they simply use their proceeds for mall expansion, they will have a warchest of $760 million, and gearing will be back at 40%.

What can $760 million do?

Clementi Mall is valued at about $560 million. Well, it depends on which valuation report you take. So, the money can be used to buy or develop another mall of such a scale. If Clementi Mall is any guide, the potential mall would have an NPI of $31 million.

 

Seletar Mall has GLA of similar size to Clementi Mall. So, let’s assume they have the same NLA, and we take a 30% discount to the NPI, and that given the fact that Seletar Mall is  only 70% SPH owned, Seletar Mall will contribute $15 million. $15 million is hardly exciting but more than enough to offset the deterioration of revenue from the Classified section.

So, in conclusion, if you are looking for growth catalyst in SPH, and hence higher dividend yield, don’t get your hopes too high, but if you are worried that SPH might start going to the dogs soon, I think you worry too much.

Buying SPH will be buying into a stalwart, with a yield of between 5-6%, which is unlikely to see downward revision anytime soon, is not too bad a deal for me.

 

Read Part 1: here.

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AK71: I agree with Mike in that SPH is a good investment for income and it is a stock I will be accumulating on weakness. If share price should retreat to $3.60 a share, a DPS of 21c to 24c would mean a dividend yield of some 5.83% to 6.67%. Pretty decent.

Peter Lynch classified stocks into 5 categories. "Stalwarts" are "big companies which are not likely to go out of business. The key issue is price, and the PER will tell you whether you are paying too much. If you plan to hold the stock forever, see how the company has fared during previous recessions and market drops." (Page 230 in "One Up On Wall Street".)

See also: SPH is a better investment than retail S-REITs.

Tea with Mike: A fundamental analysis of SPH (Part 1).

SPH is a media company and many believe it has a dying media business. However, in the short to medium term, I think we cannot be so sure to deliver such a verdict.

First, let us look at the table below.

Click to enlarge.

 

Advertisement revenue has some correlation with economic activity, and the number we look at here is the GDP.

 

Margin is also not declining in a straight line but is rather volatile, with better margin during boom years, as can be seen in 2010 and 2004.

But, what about the onslaught of digital platforms? Do they not have an impact on SPH? Well, the answer is  "no". Huh? Am I contradicting myself here?

Advertisement comes from three segments: Display, Classified and Magazine & Others.

As I have posted in a forum before, if we track the revenue of these segments from 2009 to the most recent quarter (i.e. the most recent trough to recovery), the weak 2008 Q4 to 2009 Q4, Classifieds and Recruits ads suffered the biggest drop as compared to Display. When the weak recovery started in 2010, total advertisement revenue was smaller than in 2012 and 2013 YTD, yet Classified's revenue was higher in 2010 than in 2012 and 2013 YTD.

Hence, declining business was due to the decline of the Classified segment, which included the Recruits segment. It makes sense too, if you want to buy a house, or look for a job, you may no longer turn to the newspaper Classified segment anymore as there are many websites offering such services.  However, if you are talking about M1 or other telcos, or the supermarkets trying to market their promotions, chances are they will still do it through the Display segment of the newspapers.

The "Display" sections will probably be around for a long time and might even grow from strength to strength due to Singapore's growing economic strength with a bigger domestic economy over time.

The "Classified" section revenue was 28% of 2012 Ad revenue, at 218 million and continues to shrink in 2013.

Now, to look at it from the perspective of whether SPH's other businesses can offset this shrinkage, a 5% annual deterioration is only $11 million which is about 1.3% of annual advertisement revenue and less than 0.5% of total revenue. I seriously do not think it would be a tall order to offset this.

Another concern is circulation figures, the circulation of printed papers have been in constant decline, 2012 figures was pumped up because they included digital subscriptions, which I feel resulted in double accounting as the print and digital version would likely overlap (i.e. people who subscribed to print would automatically be given digital accounts).

 

So, if circulation keeps falling, wouldn’t Display advertisement revenue be affected too? My personal opinion is that as long as there is no drastic fall in circulation, Display segment revenue will be more affected by economic activity than by circulation, simply because SPH is a monopoly (and we might want to remember that they have a stake in Today too) and there are no credible alternatives.

 

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In Part 2, Mike will talk about SPH REIT and what it means for SPH: Continue reading here.

SPH: Something for traders and something for investors?

SPH is looking interesting as Mr. Market has become extremely pessimistic about it, it would seem. SPH's share price has been retracing to supports on lowering volume since 12 April 2013. This seems like a classic low volume pull back.

The MFI, a momentum oscillator which looks at both price and volume, has dipped further into oversold territory but this does not mean that share price will turn up from here immediately, of course. The CMF which measures money flow shows a possible higher low and this is what is interesting for me. Yup, a positive divergence, perhaps.

If my reading is correct, price might drift a bit lower with the 150% Fibo line at $3.99. It might also overshoot to the downside. Then, there could be a rebound and share price could go on to test channel resistance. $4.30, maybe?

OK, I know I shouldn't have done that. Done what? I just gazed into my crystal ball which is actually a bowling ball and tried to look into the future. Bad AK! Bad AK!



Clementi Mall

For income investors, fundamentally, buying at $4.00 a share for a possible annual DPS of 21c to 24c is not a bad idea, is it? We are looking at a dividend yield of 5.25% to 6.00%.

Some people say that investing in SPH is still risky compared to putting money in a 10 year government bond. The SGS 10 year bond now yields some 2.43%. In 2012, the yield was 1.3%.

Source: MAS

Imagine how bond holders were crushed recently but that is another topic.

Well, with gearing level at almost zero and a strong cash position, SPH is a relatively low risk investment for income now, I would argue. So, it is still a good investment for income especially if it is able to yield at least 6% per annum.

For traders who are thinking of doing some counter trend trading, there could be an opportunity here. For investors who are thinking of increasing their long positions for income, lower prices will make SPH even more attractive, of course.

Related posts:
1. Motivations and methods in investing.
2. SPH or SPH REIT?

OUE Hospitality Trust: Considerations and comparisons.

Some might be more interested in OUE Hospitality Trust than SPH Trust because the distribution yield the former has promised is higher at 7.46% compared to the latter's 5.79%. 

Although the two are not strictly comparable since they are holding different types of real estate, let us look past that for now and just concentrate on the numbers to see which one is a better deal.

Mandarin Hotel.

OUE Hospitality Trust is being offered at a small discount to NAV while SPH REIT is being offered at a small premium to NAV. Oh, I like a discount!

OUE Hospitality Trust is going to have a gearing level of some 32.8% while SPH REIT's gearing level is 27.3%. Oh, I like SPH REIT more now because its gearing level is lower.

Leverage, of course, makes it harder to see the underlying yield. If we were to remove leverage and assume that there was none, we see that OUE Hospitality Trust approximately yields 5.62% while SPH REIT yields 4.55%. The former still gives us 1.1% more a year!

SPH REIT's Clementi Mall.

OUE Hospitality Trust has 2 properties and apparently they have 44 years left to their leases. SPH REIT has 2 properties too. The Paragon will have a fresh 99 years lease while Clementi Mall has a few years lesser than that. I like longer leases, for sure.

So, although OUE Hospitality Trust is able to generate 1.1% more return per year compared to SPH REIT, the life of its assets is less than half of SPH REIT's, assuming the status quo is maintained.

Ariake Sunroute Hotel

OUE Hospitality Trust is a stapled security and not a REIT per se. I have blogged about Ascendas Hospitality Trust before which is also a stapled security. For anyone who might want to find out more about this, I have provided the link at the end of this blog.

Like OUE Hospitality Trust, Ascendas Hospitality Trust also had its IPO priced at 88c.

Ascendas Hospitality Trust last traded at 85.5c which is still at a slight premium to its NAV. At 85.5c, it has an estimated distribution yield of 8.57% and a gearing level of about 35%. 90% of its assets are in Australia and Japan. These are freehold in nature!

AK is just talking to himself.


Related posts:
1. Ascendas Hospitality Trust.
2. SPH or SPH REIT?

Motivations and methods in investing (UPDATED August 2018).

I recently started to blog about NeraTel and revealed that I increased my investment in the company. 

Someone asked me what led me to increase the size of my long position when I did since its share price shot up shortly after I made my move. 

Did I have inside information?

Well, I cannot say for sure if I did have a distant relative or two in Myanmar or not. 

Such is the reach of the Chinese diaspora. 

However, I am quite sure that I do not have the benefit of knowing anyone who might be in the know with regards to the Telco contracts awarded by the Myanmar government recently.

Indeed, increasing my investment in NeraTel had much more innocent motivations.




I have been blogging for some time about how the very low interest rates cannot persist forever and that they will one day rise. 

I have also cautioned that we should not be overly optimistic when it comes to real estate investments in Singapore and also S-REITs. 

So, what is someone who is investing for income to do?

A big portion of my investment portfolio is in income investing. 




I got into S-REITs in a big way during the GFC and bought more of AIMS AMP Capital Industrial REIT and Sabana REIT in late 2011 when prices took a hit. 

Whenever prices took a hit, I would buy more. 

For example, I quadrupled my investment in Saizen REIT in mid 2012 when its warrants were close to expiring and its unit price plunged. 

Conditions were benign for REITs and buying more with an increased margin of safety was, well, safe.

Now, with the spectre of increasing interest rates on the horizon, the sea that is called REITs could become less placid. 

It could become choppy. 




Of course, thinking that REITs will go the way of the Dodo simply because interest rates are going to rise is ridiculous. 

However, not recognising that S-REITs will face headwinds as interest rates rise in future is myopic.

So, the 10x increase in my long position in NeraTel stems from a need to look for alternative investments which are high yielding but with a low or zero probability of being affected negatively by interest rate hikes. 

I like the comfort that comes from having a steady stream of dependable passive income and this remains my biggest motivation for investing in the stock market. 




The following graphic gives a good idea of how I think.

Source: edwardjones.com

..




My investments for income, together with my war chests, form the wide base of the pyramid. 

On top of these but smaller in total value are my investments in certain stocks for growth and income or for growth only. 

At the tip of the pyramid and also representing the smallest total value are more speculative investments which sounds like an oxymoron, doesn't it?

Certainly, like I have always said, there is more than one way to growing our wealth in the stock market and I am not trying to say otherwise by showing the above graphic. 




My methods which are by no means immutable simply reflect my motivations for investing in the stock market.

Ask what are we trying to achieve (i.e. our motivations) and we will know where our money should go. 

Use the right tools (i.e. methods).

If you have read this blog carefully, position sizing is important too.

There is nothing to say that good investors cannot have speculative positions but good investors should keep speculative positions relatively small.




Related posts:
1. Never lose money in real estate?
2. Be cautious climbing S-REIT tree.
3. CPF or SGS?
4. Perpetual bonds: Good or bad?
5. For those who have paid higher prices.

SPH or SPH REIT?

Some people are surprised to learn that I am not all that interested in SPH REIT. Instead, I am more interested in SPH. Why is this so?

I do not think SPH REIT particularly attractive with an estimated distribution yield of about 5.6% although a gearing level of about 30% is comfortable. A yield of about 6% without a higher gearing level would be what is needed to attract me. Otherwise, I think I am better off increasing my investment in SPH.

Simplistically, if I could get a 5% dividend yield by being a shareholder of SPH which will also see its gearing level drop to almost zero with a bigger cash hoard after setting up SPH REIT, why would I still be interested in the REIT?

OK, before I go on, I must say that I am speaking from the point of view of someone who already has a substantial exposure to S-REITs. For someone who has no exposure to S-REITs yet, SPH REIT's IPO does seem like a decent enough proposition.

Some quick calculations show that SPH will see a slight decline in its income by having its ownership of the two malls diluted. So, logically, we would see a decline in its annual dividends paid to shareholders as well, everything else remaining equal. Proportionally, instead of 24c DPS, we could see 21c DPS in future.

In the recent market weakness, I bought more shares of SPH. Assuming an average price of $4.20 a share, a 21c dividend represents a 5% yield. On top of this, the management has promised an 18c special dividend because of the REIT's IPO. This is an additional 4.28% return.

My purchases last month were the highest prices I have ever paid for SPH's stock. Prior purchases were made at between $2.86 and $3.55 a share. However, believing that the management has unlocked value for SPH shareholders in this latest exercise, I am willing to pay reasonably higher prices for the company's stock.

Technically, a pull back could see SPH's share price retreating to test support at $4.22 while any further rise in price could meet with resistance at $4.39. Fellow SPH shareholders want to approach this cautiously since the stock is spotting a downtrend and we don't want to be caught buying at resistance.

Related posts:
1. Which stocks have I been accumulating in June 2013?
2. SPH: A REIT investment.
3. SPH: Better investment than retail S-REITs?