Hock Lian Seng returns 100% and more!

One of the things that I like to do is to buy into what looks like a fundamentally sound business when insiders are accumulating. One such stock which has amply rewarded me over the years is Hock Lian Seng.

I already had a small position in Hock Lian Seng but decided to buy more in 2011 when I observed insiders buying. Back then, I paid 24c a share. 





Fully confident that the company would be able to continue with a dividend per share (DPS) of 1.5c, I was looking at a dividend yield of 6.25% back then. That was in October 2011. Read blog: here.

A few months later in February 2012, Hock Lian Seng declared a DPS of 2c which translated to a dividend yield of 8.33%! That it represented only 32.8% of earnings was pleasing. 





They were retaining earnings which increased the value of the stock. Read blog: here.

In both 2013 and 2014, Hock Lian Seng declared a DPS of 1.8c. In between, I had an opportunity to add to my investment, paying 26c a share in May 2013, confident that a DPS of 1.5c remained undemanding. Anything more would have been a bonus. I was not disappointed. Read blog: here.





Almost a year later in February 2014, Mr. Market gave me a chance to buy again cheaply. That time, I paid 25.5c a share. I would have liked to accumulate more later on but Hock Lian Seng received positive media coverage by end of 2014 and its share price quickly rose. Read blog: here.

In 2015, Hock Lian Seng declared a DPS of 4c! Mr. Market's exuberance went through the roof!

I cautioned that the 4c DPS was a one off event and unlikely to be recurring as Hock Lian Seng saw its share price rocketing. 





Too many analysts and investors were waving the 4c DPS around as if it was a regular event. 

I won't be surprised if there were many newly minted Hock Lian Seng investors that year. 

I did not add to my investment but, throughout the buzz, I held on to my investment and enjoyed a dividend yield of 15.38% to 16.66% that year. Read blog: here.





In 2016, Hock Lian Seng declared a more normalised DPS of 2.5c. Mr. Market wasn't enthused and its share price reflected the mood. However, its share price did not go below 30c. If it did, I would have bought more. 

Of course, it stands to reason that Hock Lian Seng should not trade at below 30c a share. It is a more valuable company today than it was in 2011 from retaining earnings for so many years.






Yes, on top of the dividends I have received over the years from Hock Lian Seng, my stake in the business has also appreciated in value. The total return has been more than satisfactory.

Hock Lian Seng's sound fundamentals might have caught the attention of Mr. Market and its share price recently went ballistic. 

I don't pretend to understand everything but I understand that selling about half of my investment in Hock Lian Seng would make my remaining investment free of cost. This is without taking into account the dividends received over the years too. 

I talked to myself, I listened and I acted accordingly. Spooky!






Hock Lian Seng could possibly announce a DPS of 2.5c sometime in the near future. Based on 52.5c per share, that would give a dividend yield of 4.76%. 

Based on my cost, however, I would get dividend yields of 9.6% to 10.4%.

Wait a minute, since my remaining stake in Hock Lian Seng is free of cost, what should my dividend yield on cost be? Alamak. How to calculate like that?






I shared in a blog many years ago that my investment in First REIT was for keeps. To be fair, there are a few other investments in my portfolio which I feel the same way about.

My blog is not very cerebral in nature because I am not a very intelligent person. I am not being modest here. I am being honest.

Not being very intelligent, I hope to be rewarded by simply staying prudent, pragmatic and patient. 





I believe we don't have to be smart to be rich. If AK can do it, so can you.

Related posts:
1. First REIT: This one is for keeps.
(In five and a half years, I would have recovered my capital. )
2. Don't have to be smart to be rich.
3. Robust order book at 3 year high.

Croesus Retail Trust 1H FY2017 Hong Bao.

This was from a recent conversation:

Reader:
"Croesus Retail Trust reported good results but an investor I know sold all his shares already."

AK;
"We have our reasons for buying or selling. If our facts are right and if our reasoning is sound, we should do OK. We could consider facts and reasons offered by other investors in reviewing our investment thesis but don't be influenced by their buying or selling."

Mallage Shobu, a CRT mall in Saitama.

That Croesus Retail Trust (CRT) has done well is something I should really celebrate twice because it was with the funds that I got from selling my rather big investment in Sabana REIT years ago that I invested in CRT. 

I should celebrate that I was lucky enough to get out of a terribly managed REIT with fairly decent gains and I should celebrate that I was lucky enough to build a good size position in CRT at fairly good prices.

CRT has announced a distribution per unit (DPU) of 3.6c for 1H FY2017. Based on a unit price of 87c, CRT currently offers an annualised distribution yield of 8.28%. 

Gross revenue went up. Net property income (NPI) went up. Distributable income went up. DPU went up. This is what we want to see. All is well.

Now, I want to share a couple of things. If we see distributable income up and DPU is down, how like that? If we see gross revenue down and NPI up, how like that? 

To me, these are a couple of things which might hold me back from making an investment or adding to an investment. I would have to investigate into the reasons and see if something was wrong and if the wrong was enduring.

If you don't understand what I am saying, never mind. I am just talking rubbish, as usual.

Mallage Saga, a CRT mall in Saga.

Anyway, back to CRT. I will make only a few points because the presentation slides are pretty self explanatory:

1. One of the benefits of having an internal manager is cost savings and the savings we saw in 1H FY2017 should be more pronounced in 2H FY2017. This is because the cost savings only started more than halfway into 1Q FY2017. CRT's DPU should have some support from this.

2. I said before that I like AIMS AMP Capital Industrial REIT because they engage in asset enhancement initiatives (AEIs) and redevelopment of existing assets. Doing something with our existing assets to enhance their income generating ability is always preferred and usually less costly compared to simply buying another asset. CRT is pursuing organic growth too. How to say I don't like?

3. The negative interest rates in Japan are not going away anytime soon. This is good news for domestically leveraged entities in Japan like CRT. USA's interest rate hikes will have no direct impact on CRT which is not the case for many S-REITs as Singapore imports her interest rates from the USA.

4. Although CRT's gearing ratio has gone up from 45.3% to 46.1%, the interest cover ratio has also gone up from 3.7x to 4.2x. Higher level of debt is not alarming if debt service ability has strengthened.

I like what I see and I will stay invested.

See press release: HERE.

See presentation slides: HERE.

An incomplete analysis of SingPost.

SingPost was a company I was looking at just a few months before Alibaba came into the picture. Thinking of adding it as an investment for income, I was waiting for the share price to go a bit lower before buying. 

However, Alibaba came in and bought a 10% stake at $1.42 a share and the share price went ballistic. 

This was in 1H 2014. I told myself I should be patient and wait. 




Then, Alibaba increased their stake late last year to more than 14%, paying $1.74 per share. 

Many people tell me SingPost is doing the right thing to embrace e-commerce and that the partnership with Alibaba is a good thing. 

Instinctively, I know that they are probably right. 

If an IT dinosaur like me buys things online, e-commerce is a success story that will continue to grow. 

Of course, I want to benefit from that story as an investor.

Source: HERE.

If you want to continue reading, please take note that I do not have the expertise to analyse SingPost completely. 

In fact, I do not have the expertise to analyse most businesses, including those I am invested in, completely. 

All I can do is to understand the big picture and use a bit of common sense. 

Hopefully, I get it approximately right most of the time.







BIG PICTURE

With SingPost, we know that its traditional mail business is in decline. 

The weakness is not seasonal nor cyclical. It is a structural issue which means the problem is here to stay and will likely get worse. 

SingPost is part of the old economy and to survive in the new economy, it must re-invent itself to stay relevant. 

Logistics and e-commerce are the drivers in this reinvention and they make for logical choices.





Having said this, transforming a business on such a large scale takes time. It is not going to happen overnight. It also means trying new things, taking on risks and spending, in some cases, a lot of money. 

Evidently, the transformation has not been an easy one for SingPost and it is still ongoing. They will surely get some things wrong. 

However, if they get things right more often than wrong, eventually, they should do well enough.



COMMON SENSE

Mr. Market was willing to pay as much as $2.06 a share for SingPost in January 2015. 

It didn't make any sense to me and I said as much on my Facebook wall. 

SingPost's net profit improved about 6%, year on year, and Alibaba paid $1.42 a share in 1H 2014 which was already more than 10% higher than what I was looking to pay that time. 

Pay 45% more for a 6% improvement in net profit? Unless we were sure that SingPost was going to deliver a 40% improvement in profit in the following year, why do it? 

Now, why did the share price go up as much as it did? 




Incidentally, SingPost delivered only a 7% improvement in net profit in the next year which was pretty decent but, of course, Mr. Market was disappointed.

In 2016, SingPost's capital expenditure (CAPEX) shot up, free cash flow went negative and its profit took a big hit. 

Of course, with a change in dividend policy, their status as a predictable dividend payer is also no more.

In better years, SingPost generated earnings per share (EPS) of more than 7c. Going by what we already know, SingPost's EPS should be much lower now. 

With a new dividend policy to pay 60% to 80% of earnings as dividends, even more realistic investors who are expecting a reduced dividend per share (DPS) of 4.2c to 5.6c a year could be disappointed. 




Those who still think they are going to be paid a DPS of 7c are delusional.




When SingPost registered a massive drop in quarterly EPS to 1.28c, we had to ask why? 

Ask if the reasons for the decline in earnings are enduring?

The reasons given were:
1. Higher expenses in e-commerce business.
2. Costs related to new logistics hub.
3. Loss of rental income at SPC Mall.
4. Decline in domestic mail volume.

To me, only item 4 is enduring in nature. 

Items 1 and 2 are probably CAPEX items which could happen again but are not permanently recurring in nature. 

Item 3 is definitely temporary in nature. 

So, things could look grim for a while more but they should start looking up given enough time. How much time? Years, maybe. I don't know.




Since I don't know, I don't want to be too optimistic. OK, I know I said before I should not be too pessimistic either. 

However, since I don't know, erring on the side of caution is probably a good idea. So, I am going to be more pessimistic this time and you will soon see that there is maybe a method in my madness.

Assuming all the reasons for the massive decline in EPS are enduring and that a quarterly EPS of 1.28c is the norm, we get an annual EPS of 5.12c. Remember that this is just an assumption as you continue reading this blog.






With the new dividend policy, we might get a DPS of between 3c to 4c, therefore, which is a big reduction from the more familiar 7c. 

Investors for income who want at least a 5% dividend yield and who are used to receiving 7c a share would only buy if share price were between 60c to 80c then. 

Did you ask how likely is this? Never say never.

SingPost is no longer an attractive investment for income at least for now although its management is still committed to paying a dividend. 

To invest in SingPost is to want to have a stake in the new economy. To invest in SingPost, we must be willing to accept a lower dividend yield while we wait for better days.

How much lower a dividend yield is acceptable in the meantime? This is pretty subjective but it is probably good to have an idea in order to make a decision on what are sensible entry prices. 




I feel that a 2.5% dividend yield is acceptable. 

I came up with this number by using an example. Mr. Kuok thinks Wilmar was cheap at $3.00 a share and Wilmar had a DPS of 7.5c.  Wilmar paid out about 50% of earnings as dividends.

I know SingPost and Wilmar are in different industries but they are both undergoing transformation, facing their own challenges. Shareholders should expect lower dividends.

You can disagree but don't bite my head off. I know that the comparison is not entirely appropriate but, on an intuitive level, it makes sense to me. I am a simple minded person and rely on stories I know.

Based on the above thinking (and the assumptions made earlier about SingPost's earnings), if we were to match Wilmar's 50% payout ratio to achieve 2.5% dividend yield, then, we should only buy SingPost at about $1.00 a share.

Since SingPost is going to pay at least 60% of earnings as dividend, we would get a 3% yield at $1.00 a share, using the assumption in this blog which gives us a DPS of about 3c.




I don't know if SingPost's share price would go lower and if it should go lower, how much lower might it go? 

I have been waiting for a while. I am used to waiting. So, I am going to wait and see.

SingPost shares hit by risk of impairment for US e-commerce acquisition

"TradeGlobal accounted for S$169 million in goodwill and S$43 million in customer relationships - an intangible asset - in SingPost's 2016 financial statements.

"But TradeGlobal incurred a significant loss instead of a projected profit in the third quarter peak season, and is expected to make a loss for the full year, SingPost said on Friday (Feb 10)."

More income from Ascendas Hospitality Trust expected.

Quite a few readers asked me about investing in hospitality trusts and they usually ask me about FEHT or CDL HT. 

This is not surprising because they have a stronger presence in Singapore.

I don't have a stake in either and with the oversupply of hotel rooms in Singapore, it is probably the case that hospitality trusts with a bigger exposure in Singapore will continue to struggle. 




Beyond this, I don't have anything more specific to say about the trusts.

Having said this, I do have a good size investment in a hospitality trust, namely, Ascendas Hospitality Trust (AHT). 

Newer readers might not know this but I first invested in AHT in 2014. 

I did not invest in AHT during its IPO as I found the financial engineering to boost DPU distasteful. You can read more about this in related post #1 at the end of this blog.

Back in 2014, I thought that Mr. Market offered me a pretty reasonable price to invest in AHT, a price which was about 20% lower than its IPO. 




With the effect of financial engineering expired, it was also clearer what my return on investment realistically was going to be. A distribution yield of 7.64% was attractive enough, I thought.

In August 2015, when AHT's unit price suffered from a severe bout of market pessimism, I was pleased to accept Mr. Market's offer to increase my investment in AHT. 

Purchases in that month grew my nibble of an investment in AHT in 2014 to a much more significant position, large enough to generate enough passive income to replace a month's worth of earned income (when I was still gainfully employed). 

My investment in August 2015 would receive a distribution yield of more than 9.5% based on the numbers I used for my purchase in 2014.




AHT has a portfolio of hotels in Australia, China, Japan and Singapore. However, its exposure to Singapore is limited to one hotel, Park Hotel Clarke Quay which was purchased in 2013. 

So, the effect of oversupply in hotel rooms here will have less negative impact on their results overall.

Most of AHT's assets are in Australia which contribute 56% of Net Property Income (NPI). Japan is the second largest contributor accounting for 24% of NPI. 

The much stronger performance by these assets more than compensate for poorer performance in Singapore.




Year on year, 3Q's DPU improved by 13.1% to 1.64c as a result. 

Gearing is at 33.3%. NAV/share 85c.

In 2014, I said that an appreciation in the A$ would benefit AHT. Together with the stronger JPY, I am hopeful that DPU for 4Q could similarly receive a boost.

The oversupply in hotel rooms in Singapore was already apparent in 2014 and AHT was probably a better choice than FEHT or CDL HT. I was lucky to make the right choice.

Source: SBR, 20 Mar 14.

Despite the oversupply of hotel rooms in Singapore, I expect AHT to be a better passive income generator for me this year.

Unit price declined 16.4% from
$1.645 (15 Sep 14) to $1.375 (10 Feb 17).

Unit price declined 27.6% from
81.5c (15 Sep 14) to 59c (10 Feb 17).

Unit price rose 3.4% from
73c (15 Sep 14) to 75.5c (10 Feb 17).

Download presentation slides: HERE.
Related posts:
1. AHT: A nibble.
2. 9M 2015 income from non-REITs.