Graduating soon? Take steps towards financial security.

Received an email from a reader who is about to graduate and join the workforce:

Hi AK,

I am C and this is actually my first time writing to a blogger.

I've recently found your blog and you've been such an inspiration to me and my "future financial life".
 
Would like to sincerely thank you for setting up this blog to benefit us youngsters in Singapore. :)

I am about to graduate soon in a couple of months and I'm just wondering if you can provide some advice to me...
 
Upon graduation and receiving my first pay check, would you recommend me to first set up my emergency fund or invest in FDs or buy insurance or voluntarily top up my CPF or invest in a SRS account or a combination of some? 

There just seem to be many things I should do but I'm not sure which one I should focus on to get my priority right.

Thank you for your kind advice, AK.

Warmest regards
C

My reply:

Hi C,

I am not allowed to give advice but I am happy to share with you what I would do if I were in your shoes. :)

1. Buy a term life policy. 

Very important if we have parents or other dependents to care for. 

How much should the coverage be? 

It is up to you but I feel that $500K is probably more than adequate for most.

2. Buy a good H&S policy. 

Personally, I have NTUC Incomeshield with Assist Rider. 

We don't want to be sunk by hospital bills. 

How much you would spend here depends on whether you are comfortable with Class C, B or A wards or if you want to stay in private hospitals.

3. Buy a Critical Illness policy. 

We need this money to help pay for long term treatments if we should be diagnosed with one of these illnesses and not die. 

I am covered for $300K but, for a start, I think $100K should be comfortable.

4. Set up an emergency fund. 

Slowly build this up so that it is enough to cover at least 12 months of regular expenses (including insurance expenses). 

My preference is for 24 months. 

In case we lose our jobs or are unable to work for some reason, this is the fund we would draw upon.






Once we have done all these, we can start thinking about investing for a second stream of income.

Of course, if we can pay less taxes, we should. In planning for retirement, you want to consider topping up your CPF-SA to a maximum of $7K a year. Of course, you could also start an SRS account.

The tools are out there to help us achieve financial security. You will do quite well if you make good use of them. :)

Best wishes,
AK

If anyone has any ideas to share, please leave comments here and I am sure C will read them. Thank you.

Related posts:
1. Why a meaningful emergency fund is important?
2. How much for hospital and surgical insurance?
3. Tea with Solace: Getting ready for investment.
4. Build a bigger retirement fund with CPF-SA.
5. SRS: A brief analysis.

Invest in real estate for high returns!

A reader, Gary, asked me for my opinion about something he saw in Bukit Merah Central.

"... Saw a roadshow in Bukit Merah Central which displayed "24% per annum"! Company is Islandia and I'm not so sure if really can get 24% per annum! Sounds like scam but the strange thing is that there are people manning the booths!"






So, with some help from my friends, Victor Chng and Matthew Seah, I discovered that Islandia is actually a proposed integrated resort to be developed on an Indonesian island called Pulau Abang Besar. 

Apparently, construction work started in the middle of last year.

See PDF file:
http://www.cuffzholdings.com/News/The%20Islandia%20AsiaOne%20Feature.pdf

This project is a joint venture by Cuffz Holdings and Huafa Assets.

Digging around a bit more, we found that Cuffz Holdings is actually partnered with IOC Group Limited.

IOC Group Limited is listed on the MAS Investor Alert list: http://www.mas.gov.sg/IAL.aspx?sc_p=I

Scroll down the list and you will see it.

What is the MAS Investor Alert list about?






"The Investor Alert List provides a listing of unregulated persons who, based on information received by MAS, may have been wrongly perceived as being licensed or authorised by MAS."


If I were approached by anyone promising me a return of 24% per annum by investing in a piece of real estate, I would be very wary.

If I were approached by anyone promising me a return of 24% per annum by investing in a piece of real estate that is under construction, what should I do?

Related post:
Invest $10,000 and get 24% yield in 24 months.

An annuity plan for retirement needs.

Sharing an email exchange with a reader and I hope to hear what readers have to say:

Hi AK,

I am P, one of your loyal followers in your blog. I have a silly
question that I ponder the past 2 days that I could not decide. So, I
thought you are very financially wise, maybe you can help me.

It is like this: I am 45 years old. I am thinking of buying an annuity
that will gave me $300 per month for life from age 65.I need to pay 10
years of premium totaling $45562. If I die at age 66, my dependents
will get $50, 798. This is the same for my dependents even if I die at
age 86. If I die at age 86, I will get $300 per month for 20 years.

Another alternative, I could invest for income and maybe buy OCBC
shares, I will get a rate of 3.5 per annum. It seems higher.

I am at a loss at what to do, what will you do if you will me?
Assuming that you do not invest in high yield income and only at OCBC
shares. What will be your considerations? For me, I am more worried
about my dependents and hope that they will be happy and not to always
worried about money. That is why I hope to give them an income for
life. It is the only thing that a mother can best give to her children
and also to teach them to be financially literate.

Hope you can help me.

Thank you, AK for your kindness.

Regards
P

My reply:

Hi P,

I am not a financial advisor. So, I am not going to give you any advice on this but I will share with you what I think.

You did not say when must you start contributing to this annuity which will accumulate over a 10 year period. So, I will assume that you must start contributing now at 45 years old since you are thinking to buy one now.

I will also assume that you are contributing the same amount every year over a 10 year period. Total: S$45,562 means S$4,556.20 a year.

The guaranteed payout is S$50,798 in the event of your death at any time from age 66 to 86. Otherwise, you would get S$300 a month over a 20 years period or a total of S$72,000.

The attraction of an annuity plan to me is really the predictability it provides which is important in our old age. Of course, we hope that the insurance company doesn't go bust.

Now, predictability is good but is it that difficult to do better than what an annuity promises to do for us?

Assuming inflation is 3% per annum, the initial sum of S$45,562 which you have progressively contributed from age 45 to 54 should become at least S$54,798 at age 55 just to keep pace with inflation. By age 66 when you start drawing $300 a month, this sum should then become S$73,644.

A 5% draw down per year from age 66 would give you about $307 a month which approximates the $300 a month you have been offered. Assuming that nothing is done to the money to grow it over the 20 years draw down period (e.g. keep the money in a biscuit tin), the money would be depleted over the same time period. Don't ask me what happened to the excess $7 a month.

The annuity will deliver maximum monetary benefit to you and your estate if you were to live up to age 85 years and 11 months. Total benefits: S$ 71,700 + S$50,798. To me, it is almost like a game of chance and it probably is.

Now, assuming that you did your own investments and you managed to only keep pace with inflation at 3% per annum, that S$73,644 you would have accumulated by age 66, if invested, would probably still grow at 3% per annum and even with that 5% draw down a year, you would not end up with nothing at age 86.

After 10 years, at age 76, by my calculations, you would still have S$53,907 for your estate. After 15 years, at age 81, S$43,380. At age 86, $28,512.

Hypothetically, if you could consistently receive a 3.5% yield by investing in OCBC alone, the difference is even more stark and would beat this annuity plan flat.

Of course, share prices will most likely fluctuate but if the business is strong and grows over time, that 3.5% yield on cost is likely to grow as well and with it, the share price of the company.

Best wishes,
AK

Related posts:
1. Will I retire happy?
2. Retiring a millionaire is not a dream.

Will I retire happy?

I received this email from a reader recently:

Hi Mr. Tan,

I stumbled upon your blog and read about your analysis on the inflation-adjusted retirement plan. currently, I have a term plan and am currently considering on a retirement plan, which I have recently signed.... 

And it is the above-captioned one.




I am 35 and based on this plan, I expect to retire at 55 and this plans covers me up to 70.

I will be paying total premiums of $70,875 for 15 years,


In which there will be a 5-year accumulation period.

Thereafter, my total guaranteed retirement income is $115,875 from age 65 to 70.

If I assume the inflation rate from now is 3% p.a., I should expect my guaranteed payout to be $115,171.88 for 15 years. 

Which seems like the plan is marginally palatable. 




But now that you got me thinking about the returns on my capital, it looks like I am losing the returns during the 5-year accumulation period. 

Am I right? Should I be worried?

I have already signed the plan and realized that there are more demerits to my proposal than I thought it had because I was focused on reserving retirement income while having a longer coverage on death & terminal illness. 

Like I cannot surrender it before retirement age, or else I lose everything.

Also, it would be great if you could post an article advising on securing more $ for retirement for worried young Singaporeans.

I hope I can get your advice on this.

Thank you very much!

SI

My reply:

Hi SI,

Er... I am not a Mr. Tan. 

I think you might have mistaken me for one of the 4 presidential candidates in the last presidential election. ;p

If you have already signed up for the plan, there is little else you can do about it, I suppose, short of terminating it and suffering losses.

I think that if you follow my reasoning and calculations in the blog post you mentioned, you will see why I don't think the product will do the job it says it will do.

Anyway, I don't wish to cause you further anxiety. 




There is a non-guaranteed portion in the product. 

It could work out nicely for you in the end if they deliver on that, much delayed though it might be. :)

As for how to secure more money for retirement for 'worried young Singaporeans', I blog about it on and off:

1. Earn more
2. Spend less
3. Invest for a second stream of income

This is my peasant mentality to financial freedom. :)

Best wishes,
AK

Related posts:
1. Inflation adjusted retirement income plan.
2. To be a happy peasant.
3. Very first step to becoming richer.
4. Wealthy nation cannot afford to retire?

Saturday with Victor Chng: Becoming a better investor.

In case you missed the blog post on what is happening this Saturday morning, a friend of mine, Victor Chng, is going to share his views on an unloved sector of the economy and how we could potentially make quite a bit of money by capitalising on this.

So, if you are interested in Victor's analysis and if you are free this Saturday, get your tickets at:

Level Up Life Series.

Price: S$9.00 per ticket.
Bring a friend and pay S$15.00 for a pair.
If you are a student, show your matriculation card at the door and you go in for free.

If you want to bring it a step further at the end of the half day event, ask Victor about the discussion forum he is organising. That will be another value for money learning experience.

I try to be a better investor by listening to better investors. I believe that Victor is a better investor than I am.

The book Victor wrote with Rusmin Ang.

Related post:
Saturday morning with Victor Chng: Level up..

AIMS AMP Capital Industrial REIT: Good price?

A reader, Mark Wong, asked this in the comments section:

"Hi AK71

"The REIT is trading at $1.315 now. Will you consider this as a good price to enter? I have not yet holding any of the REIT at this moment."

As I feel that many do not read the comments section of my blog and I really think that my reply to Mark could be of interest to others, I am publishing my reply as a blog post instead:

"Hi Mark,

"I feel that the more important question is to ask whether you are getting the value you want. What do I mean?

"Referring to the blog post above, a realistically optimistic distribution yield at $1.08 a unit (the price of the rights units) is estimated at 9.26% , post rights issue.

"So, at $1.315 a unit, we are looking at a prospective yield of 7.6% with the added benefit of a stronger balance sheet which could allow the REIT to do more AEIs which could increase DPU in future. So, everything else remaining equal, we could see distribution yield inching up from 7.6%.

"By my estimate, the REIT is currently not trading at any discount to NAV whereas, previously, at a higher unit price, it was. $1.315 per unit is probably close to valuation.

"So, if you were to ask me, I would say that the REIT's units are fairly priced although $1.315 (post rights issue) looks "cheaper" than $1.415 (pre rights issue), that is just an illusion created by prices.

"There is nothing wrong with buying at a fair price, of course. So, I won't tell you if now is a good time to buy into the REIT. You have to answer that yourself."

Related post:
AIMS AMP Capital Industrial REIT: The rights' value.

Singapore Short Stories: Man collects rent from his boss.

Everyday, Mr. Tan went to work in a local SME in an industrial estate on a sunny little island called Singapore.

Mr. Tan was a model employee and was always on time.

Mr. Tan was also rather frugal. 




He would prepare his own food to bring to work and saved a big portion of his earned income. 

Mr. Tan's biggest fear was to be destitute in his old age.

Mr. Tan always remembered what a famous man called Warren Buffett said:

"We never want to count on the kindness of strangers in order to meet tomorrow's obligations."




Mr. Tan was a regular guy and didn't have any dreams of greatness.

Sometimes, after a trying day at work, Mr. Tan would wonder if he could stop going to work and still receive an income? 

Being rather practical, he dismissed it as wishful thinking.

Then, one day, he had a conversation with the accountant in the company he worked for.

In the conversation, the accountant said that the company had to pay rent and salaries every month but the difference was that the landlord didn't have to work for the money while they had to.




Hey!

Get paid every month?

Didn't have to work for the money?

Idea!

A few years later, Mr. Tan still worked in the same local SME in the same industrial estate on the same sunny little island called Singapore. 

A big difference was that some of the rent paid by the company every month to the landlord ended up in Mr. Tan's bank account regularly, enough for Mr. Tan to stop working for a living if he had wanted to.




Now, how did that happen?

Let me ask my bowling ball.



Is this an easier way to be a landlord?

Related posts:
1. Building and preserving our wealth.
2. 2015 full year income from S-REITs.

Tea with Matthew Seah: Same stock, different results!

Recently I met up with a friend. Naturally being me, as we conversed, we veered more toward talking about investing. As we talk, I found out that this friend of mine had invested in the same US company as I did back in August 2011.

Back then, he had asked me what company I was investing in. At that time Gap Inc (GPS) was falling some 32% from its high of US$23, to below US16. Of course after doing much due diligence, I deemed that GPS was undervalued (I shall spare the fundamental analysis portion), and I told him I just bought GPS and told him the reasons why I think this is a good company to invest in. And without doing due diligence, he bought…

Coincidentally he had bought at the same price as me – US$16.16, although the exchange rate and broker fees might be slightly different. After 2 and a half years, how does each of us fare?

Friend: loss of S$65
Me: sitting with a 100% return of investment, with some 54% of my original shareholdings earning residual dividends + capital gains!

Apparently, right after he invested, the price of GPS went up and down several times. So much so that he could not take the emotional strain and he sold his entire stake in early October, 2013. He didn’t even manage to receive a single dividend during the time he was invested and made a small loss. The chart below shows what happened.

As for me, I have been holding since I bought it till June 2012, when I sold 46% of my shares for a total return of my original investment capital, plus a bit more. My remaining stake has gained some 163% In value and I have also received some dividends every now and then from the company. The chart below gives a pictorial view of what I have described.

Why such a big discrepancy?

I’m sure readers of financial blogs would know that emotions affect one’s decision in investing and trading. Emotions and personality can often get in the way of successful investing. As a result, many people have tendencies to:

1. Buy on tips from other people

2. Buy on a whim

3. Buy the hype

4. Ride a winner till it goes bust

5. Fail to exit a loser

As an investor, we should recognize our own emotional strengths and weakness, and approach investing in a way that is more suitable to our investing style. It is paramount that you know what type of investor you are and not follow other investors blindly. Their investing style might be very different from yours!

Read other guest blogs by Matthew Seah: here.

The world is full of nice people.

I shared this on Facebook earlier:

As I was also filling out a donation form for Singapore Children's Society, I asked readers who are following me on Facebook to make a donation as well, if they can afford to.

See what $10, $25 or $50 can do for needy children:

Yes, just $10 can make a difference to a child's life.

Donate online at:
Singapore Children's Society.

Thank you for your kindness. :)

Related post:
An appeal by AK for funds.

Saturday morning with Victor Chng: Level Up!

My blog about how AK feels like Bilbo Baggins might still be quite fresh on your mind. In case you are wondering, I am still meditating on the issue and wondering what kind of disguise would work.

While I am still meditating, the boat has to leave without me. Well, it can't be helped, I guess. There is always another boat and, maybe, by then, I would have made up my mind.

However, quite honestly, I didn't know about this particular boat until 2 nights ago.

Well, at least, I can help spread the word about this event which is happening very soon:

Venue:	SPH News Centre, Auditorium 1000 Toa Payoh North Singapore 318994
Date:	15 March 2014, Saturday
Time:	9:00am - 1:00pm (Registration starts 8:30am.)

It is just slightly more than a week away. Rather short notice.

Hear from one of the brilliant analytical minds I mentioned somewhere in my blog's comments section before. I spoke with him at length again recently and I was really impressed. His name is Victor Chng and he will share with you his insights on what is currently unloved by Mr. Market.

Click to enlarge.

Someone else whom you might learn something from is Chris Chan. I learned quite a few things from him about insurance in his presentations before. Get the right kind of insurance at the right prices. Although I have taken his advice to heart, I have yet to defrag my insurance policies. Maybe, one day, I will have a chat with Chris.

I was told that there are only about 200 tickets available for sale. So, if you want to attend the event, you have to be fast.

Oh, I haven't told you the ticket prices:

$9.00 for one ticket.

Bring a friend and you pay only $15.00 for two tickets.

Here is the link: Level Up Life Series.

If you are a student, just show up at the venue and flash your matriculation card. Why? You get to go in for free! This is the promise my friends made. So, go early and get your free seat!

Remember, go with an open mind and I think there will be plenty of useful knowledge to take away.

If you do not think you need more guidance or the services offered, don't sign up for anything. This is the same thing I said about attending Value Investing Summit in 2013 and 2014.

However, if you feel that you need more guidance or if you feel that you do not have time to do due diligence, then, consider signing up with Victor for his discussion forum!

The forum will not cost you thousands of dollars. It will not cost you one thousand dollars. It will not even cost you half a thousand dollars.

Victor has put a lot of thought into the design of the discussion forum and I believe that it will be truly value for money.

My friends are taking baby steps to fulfil their vision of promoting financial literacy without charging high prices and to channel a percentage of their earnings towards charitable causes at the same time.

If you have the time and a few dollars to spare, spend a Saturday morning with Victor Chng and see for yourself this young man in action (and you will know if AK had postage stamps over his eyes).

Related post:
AK feels like Bilbo Baggins.

Invest $10,000 and get a 24% yield in 24 months.

I received an email from a reader regarding an investment opportunity and he asked me for my opinion:

Hi !

I heard about your blog from my father and I am very impressed! I would like to ask you if you know about the German Real Estate Investments through XXXXXXX Wealth Holdings. The minimum cash in is $10k and the yield is 24% over 24 months. Is it too good to be true? Is it a scam? Could you help me look into it please and give me advice on whether to cash in or not. Thanks!!

IL

My reply:

Hi IL,

Ask them how is that 24% return on investment over a 24 months period achieved. If they cannot explain it to your satisfaction, don't touch it with a 5 feet pole.

If an explanation is given, see if they are paying you from cash flow generated by the properties or are you simply taking back some of your own money.







I visited their website.

Their "dedicated and talented management team" has over 25 years of combined industry experience. I wonder how many people are on their team?

At the bottom of the page, it says that they are not regulated by the Monetary Authority of Singapore. That doesn't sit well with me.

I don't know if it is a scam but when in doubt, I stay out. :)

Best wishes,
AK







Apology: Due to an administrative oversight regarding an advertorial earlier, I had to take down this blog post and re-publish it today. Very sorry for causing any discomfort to some readers. :( - AK, 4.52pm, 6 March 2014.

AK will always be AK.

Apology: Due to an administrative oversight regarding an advertorial earlier, I had to take down this blog post and re-publish it today. Very sorry for causing any discomfort to some readers. :( - AK, 4.50pm, 6 March 2014.

My reply to a reader's email:

Thank you for taking the time to write to me. I appreciate it. :)

Do you trust me when I say that I will not do anything which I think is against the interests of my readers? Please tell me you do. -.-"

I will stay true to the spirit of being AK (which always has an element of fun and laughter)! AK is a just a regular guy who shares what little he knows and loves value for money. AK believes that luck is important in everything he does. AK believes in being charitable. None of these will change. :)

I am more comfortable being anonymous and will probably stay so for some time to come. One day, when I am brave enough and ready to deal with the consequences, I might let it go. However, there is no saying whether that one day will ever come. ;)

AK is but a frog in a well.

Win a car in the Phillip-Macquarie Warrant Challenge!

Regular readers know that I won a car many years ago. Quite lucky, that. I always say that luck plays a part in the grand scheme of things. This is true in our efforts as investors too.

Now, there is a chance that you could win a car and unlike lucky draws at NTUC Fairprice, Harvey Norman or Courts, for examples, I suspect that there will be less participants in this lucky draw and your chances of winning are higher! Why?

This car is the grand prize in the Phillip-Macquarie Warrant Challenge and I don't think this is something that will have a big following of "shoppers". So, chances of winning are higher, I surmised.

You know what is the best thing about this Challenge? You don't have to use any real money!

If you have some experience trading warrants before, you possibly have an advantage over the rest. However, if you have no experience at all, you won't lose any real money anyway.

Like they say:

"It’s the perfect way to get started if you’ve never traded warrants before but always wanted to, and you stand to win your share of the $30,000 in cash prizes. Overall prize winners will also be entered into Phillip Capital’s Grand Lucky Draw to win a Mazda 6 worth S$90,000*"
*Terms and conditions apply.

To learn more or to take part now, go to:
Phillip-Macquarie Warrant Challenge!

Have fun and good luck! Hope one of my readers win! Huat ah!

Saizen REIT and Croesus Retail Trust: Much ado about Yen.

A reader sent me an email and expressed worry that the JPY might weaken further against the S$. With exposure to Saizen REIT and Croesus Retail Trust, he is worried.

For sure, the JPY has weakened dramatically in the last 2 years (and a few months) against the S$. By now, it has weakened some 25% or so. It might weaken further or it might not. I am sure there are arguments made in favour of both cases.

I think, as investors, we have to know clearly what is our motivation for investing in Saizen REIT and Croesus Retail Trust. If we are investing for income and if we have not overpaid in either case, I feel that we have little to worry about.

Luz Shinsaibashi, Osaka.

Both Saizen REIT and Croesus Retail Trust hedge exchange rate risk. So, even if the JPY were to weaken another 10% in the next six months, their next income distribution in S$ will barely be affected. Similarly, if the JPY were to appreciate significantly in the next six months, don't expect any big gain in DPU, everything else remaining equal.

Of course, the income distribution after the next could be hedged at an even lower exchange rate if the JPY is weaker by then. Yikes! Yes, this is one of the risks that comes with investing in anything that receives income in a foreign currency.

With Saizen REIT trading at 88c a unit and giving a DPU of about 6.5c, we are looking at a yield of 7.38%. Croesus Retail Trust is trading at about 89c and will offer an annualised DPU of about 9.3c, by my estimate, or a distribution yield of 10.44%, after its recent acquisitions. Double digit yield, anybody?

Of course, we have to remember that Saizen REIT has a much stronger balance sheet compared to Croesus Retail Trust and that they own different types of properties.

In the event that the JPY weakens another 5 or 10%, what would the impact be on the distributable income in S$ terms? Yield falls to 6.64% for Saizen REIT and to 9.45% for Croesus Retail Trust? Is that so unpalatable? Is that a catastrophe?

Photo of the Great Buddha in Kamakura I took on a trip in December 2011 when JPY was at its highest against the S$.

Investing for income is supposed to give us some measure of equanimity even if the equity market sails through a storm. If the slightest hint of choppy waters scares us to bits, we might want to look at our motivation for being invested again and also check to make sure that we have not invested with money we might need in the next few years.

There must be a reason for our fear. Find it.

Related posts:
1. Saizen REIT: Is the DPU sustainable?
2. Croesus Retail Trust: Recent acquisitions.
3. Motivations and methods in investing.
4. Be comfortable with being invested.

AK feels like Bilbo Baggins.

The good thing about being an anonymous blogger is that I feel more comfortable to share more openly many things about myself, including what is my annual passive income from investments, for example. Anonymity gives me some protection and that gives me courage.

Over the years, I have been invited to speak at various public events or to be interviewed. Predictably, I have declined all such invitations with only one exception.

Bilbo Baggins. Source: Wikipedia.

Recently, I met a group of big hearted people who feel that many people will benefit from me sharing in person my little ideas about financial well-being and investing. Of course, my immediate response was to decline the offer. No surprises there.

However, I was so won over by what they are setting themselves up to do that I offered to them my blog which represents more than 4 years of dedication. To me, if my blog is able help fulfil the noble vision which they have, it would give me great satisfaction. Well, of course, I would still be blogging. I still enjoy it enough not to give it up yet.

They are very decent people and they think that it is not right for them to take my blog. They reasoned that it is not right to take it without fair compensation. They do not like the idea they will benefit from the arrangement but not me. This is the kind of people they are. Despite telling them that it doesn't matter to me, they refused.

Instead, they asked me to seriously consider doing greater good by inspiring people in person. I understand the argument that many people do not read blogs. I understand that many prefer people to people contact. However, there are already so many speakers and trainers who are doing a good job of inspiring people. Why me?

I am just a regular guy who works as a manager in a family controlled SME. I make a mid 4 figure salary and have 14 days of annual leave a year. I make use of common sense and try to be prudent with money. I also try to make my money work for me by investing for a second stream of income. There are many people who are like me in Singapore, I reckon.

Fear of the loss of privacy is the biggest thing that is holding me back from making a public appearance. It would also be terrible if, by making a public appearance, I cause my family to be subjected to scrutiny as well.

I told one of these friends that I feel like Bilbo Baggins and that, to me, he is Gandalf who has come knocking on my door. Should I pack up my stuff and go with him?

I am a worrier by nature and, already, I can imagine how things could go wrong in more ways than one. I wonder is this going to be worth it?

Related post:
Common but admirable people.

Hock Lian Seng: DPS of 1.8c.

Hock Lian Seng's strong balance sheet, cash flow as well as high gross profit margin attracted me. Even if it is not a good investment for growth, I believe that it is a good investment for income with its record of paying out meaningful dividends.

Hock Lian Seng reported a gross profit margin of 40% on the back of lower revenue but higher gross profit. NAV per share improved from 24.9c to 27.8c. EPS reduced slightly from 4.9c to 4.7c, year on year.

A DPS of 1.8c has been declared. This means a payout ratio of 38.3% and a dividend yield of 6.67% based on the price of 27c a share.

Realistically, Hock Lian Seng will face headwinds in future and the management has said that:

The Group will continue to participate selectively in the some of the upcoming infrastructure projects tenders called by the Singapore Government. However, the Group is expected to face stiff competition from large foreign contractors, higher construction costs and a shortage of foreign workers.

So, although there is reason to believe that Hock Lian Seng will do reasonably well based on past track record, the landscape has definitely become more challenging.

Its exposure to property development could also be ill timed:

On the property development front, the Singapore Government has implemented property cooling measures to both the residential and industrial property market. The Group believes that the measures would create a stable and sustainable property market in Singapore.

The construction of the two industrial property developments are expected to be completed by early 2015. The joint venture residential project at Dairy Farm Road was launched in September 2013.

Having said this, now, with a PE ratio of 5.75x and trading at a slight discount to NAV, the stock does not seem expensive.

See: Full year results.

Related posts:
1. Hock Lian Seng: Buying on weakness.
2. Hock Lian Seng: Dividend 1.8c per share.

Yongnam: DPS of 0.6c.

With plans to double the MRT lines in Singapore by 2030 and with more public sector construction projects, investing in Yongnam seemed like a natural choice and I have blogged about this many times over the last couple of years.

Unfortunately, last year was a very bad year for Yongnam and they presented a more or less expected set of nightmarish numbers for FY 2013. To be fair, the management already warned way ahead of time that numbers are likely to be bad. So, no one was caught unaware and Mr. Market seemed to have taken the results in his stride. Yongnam did not see any big plunge in share price.

In summary, the problems were:
1. Significant cost overruns in 3 projects.
2. $8.1 million loss in selling off some steel pipe piles.
3. $5.1 million provision for bad debt.
4. Additional costs from alteration works for 2 projects.

All these meant that net profit fell 87% to $5.5 million, year on year, although revenue rose 20% to $362 million. ROE fell from 15.9% to just 1.3%. EPS fell from 3.45c to just 0.44c.

In an earlier blog post on Yongnam, I said that the question to ask was whether the problems were one off events or recurring in nature. If we believe that they are one off events and that Yongnam's business is still fundamentally sound, then, we should make use of market weakness to accumulate its stock.

Yongnam's order book stood at $340 million at the end of 2013. $185 million will be recognised this year. Of course, Yongnam is also taking part in tenders this year and winning some of these potential projects would bump up revenue figures. Expectations are for project wins with total value of almost $300 million.

As long as nothing like what went wrong last year happen this year, I believe that Yongnam's numbers for 2014 couldn't get any worse. Guidance is for gross profit margins to normalise to 20% this year and even if Yongnam did not win a single contract this year, which is highly unlikely, they would still be able to deliver a similar or stronger EPS.

On 31 October, I said that, "With a 3Q loss, they might or might not pay a dividend for the year although a lower DPS should not be demanding. Without major CAPEX in the year, this is a possibility."

Yongnam declared a DPS of 0.6c which is higher than their EPS of 0.44c. This signals Yongnam's ability as well as determination to reward shareholders despite having had a tough year. I appreciate it and, to me, it also shows that Yongnam is likely to reward shareholders more generously when its numbers improve again in future. Will it happen? Very likely, it will.

Someone told me that with EPS of only 0.44c, if we value Yongnam at 8x earnings, its shares should be worth only 3.5c each. I told him that I am a generous person. So, I value Yongnam at 11x earnings and will buy from anyone who is willing to sell to me at 5c per share. Any takers?

See presentation slides: here.

Related posts:
1. Yongnam: Substantial shareholder increased stake.
2. Yongnam: Profit guidance 3Q 2013.

Croesus Retail Trust: Luz Omori and Niz Wave I.

I really shouldn't be blogging now because I am so sleepy but I just couldn't resist looking at the announcement and, then, I'm trapped. OK, this will be a short one (I hope). Here are some things which got my attention.

DPU Improvement

In an earlier blog post, I said that the Trust would probably use the funds from the MTN they issued soon. Otherwise, we could see a 5% decline in DPU.

Now, with the acquisition of 2 new properties, Luz Omori and Niz Wave I, we will see a 5.7% increase in DPU instead of having to worry about a 5% decline. Good news for income investors!

Borrowings

The two properties are purchased at a slight discount to valuation which is good. However, the total value is still some $176.3 million. This is much more than the $100 million MTN the Trust issued last month.

In an earlier blog post, I was wondering if a placement or a rights issue would happen. Instead, the Trust has taken on more onshore debt, specifically, a 5 year debt facility with Mizuho Bank. They were able to borrow rather cheaply and the effective interest rate for this debt facility and the MTN together is 2.96% per annum.

With these purchases and borrowings, by my estimate, gearing level has gone up from 42% to approximately 55%.

The properties

The information provided by the Trust is mostly clear enough. I really like the fact that the Trust chose to purchase both the properties in Tokyo. These properties are located in areas which have seen growing populations in recent years and are within a few minutes walk to train stations.

What I want to point out is that Luz Omori's land is not freehold but leasehold in nature. This probably explains the relatively small price tag of S$42.7 million which is also at a slight discount to the valuation of S$44 million. The lease on the land expires in July 2059, 45 years from now.

As for Niz Wave I, the situation is bizarre because the building sits on 4 parcels of land of which 3 are freehold and 1 is leasehold and this lease expires in December 2029, 15 years and a few months from now. Would they have to tear down a quarter of the building then and return the land in original condition? Bizarre.

I am inclined to believe that the owner of that particular land parcel would probably allow the lease to be extended when the time comes since that one parcel of land is unlikely to be of much use to anyone if the surrounding 3 parcels of freehold land are owned by the Trust. Then, the question of price will have to be answered but it can only be answered when the time comes.

NPI Yield

These two buildings together have quite a decent NPI yield of some 8.1%. The 4 malls in the Trust's initial portfolio have an average NPI yield of about 7.8%. So, in addition to being DPU accretive, the purchases are NPI yield accretive but it could possibly have something to do with the fact that Luz Omori sits on land with a relatively short lease. Yields for leasehold properties are generally higher since they are usually cheaper to buy.

See Media Release: here.
See Acquisition Announcement: here.

Related post:
Croesus Retail Trust: Cap rates and growth.

Marco Polo Marine: Drilling for higher income.

I am going to take another trip down memory lane and this time to look at why did I invest in Marco Polo Marine. Then, I will look at the most recent development in the business.

I first invested in Marco Polo Marine in the middle of 2012 when I spotted persistent insider buying. I got in at 31.5c and 32c a share. Since then, I have been accumulating. The highest price I paid was 42c a share and the last time I bought more of its stock was on 24 June 2013 at 37.5c a share.

The combination of a few factors gave me the conviction to make Marco Polo Marine the largest investment in my portfolio:

1. Insider buying.
2. Chairman of the company has close to 60% stake.
3. A relatively consistent ROE of about 15%.
4. Timely emphasis on building a fleet of AHTS vessels.
5. Enforcement of cabotage laws in Indonesia.
6. Relatively cheaper valuation compared to peers.

A complaint I had was that it was moving too slowly and I wished that it would leverage up and buy OSVs to immediately take greater advantage of the higher charter rates in Indonesian waters.

In the current climate, it is hard to buy OSVs at what might be considered good prices and it is not difficult to understand why. So, Marco Polo Marine would rather build OSVs in their own shipyard than to buy from others. However, they did manage to get a good price for MP Prevail last year. I think that shows that the management is rather savvy when it comes to acquisitions.

With their gearing level on the rise, however, I was rather concerned about the strength of their balance sheet but if the business chugs along with the progressive deliveries of the OSVs being built in their shipyard, we should see progressively stronger earnings in the next couple of years, everything else remaining equal.

Of course, we now know that everything else did not remain equal because Marco Polo Marine issued some MTN and decided to buy a jack up rig. This was totally beyond my expectations and it took me a while to digest the news.

My initial reaction was to ask how Marco Polo Marine, a company with a market capitalisation of S$135 million, was going to pay for a US$214 million rig? That was a natural reaction. However, when we think of the S$300 million MTN they have in place, it all makes sense.

Marco Polo Marine drew down S$50 million in MTN in the last quarter and this attracts some S$0.7 million in finance cost every quarter. As they only have to pay 10% of the rig's total bill this year, I have an inkling that they might use the remaining money to pay down debt. They only have to pay another 10% of the rig's total bill by 11 February 2015. The balance 80%, they only pay when they take delivery of the rig in 4Q 2015.

What this means is that we could see lower profit this year. However, if some debt is paid down and if the two 8,080 BHP AHTS vessels are completed on time, we could see the impact lessened. Assuming the status quo, then annualising 1Q 2014's numbers, we could see a 22% reduction in EPS to approximately 4c or so, year on year. This assumption is, of course, unrealistic, and would form my worst case scenario for the company.

The cabotage law in Indonesia will include drilling rigs by December 2015 and to time the delivery of the rig in 4Q 2015 really makes sense. There is no need for a huge capital outlay in the meantime while Marco Polo Marine sees more own built OSVs joining its fleet in the next two years which should improve earnings as the vessels enjoy higher charter rates.

When the time comes to take delivery of the rig, Marco Polo Marine should be financially more robust but it would still need to draw from its S$300 million MTN program to pay for the rig. This is the hard truth but it is good to know that financing is in place.

Chances are high that Marco Polo Marine will be able to secure a contract for the rig a few months before they take delivery of it. Chances are also high they will be able to get pretty good rates as there is a lack of such high specs rigs in Indonesia and, of course, the enforcement of cabotage law in the country for rigs by then tilts the scales in Marco Polo Marine's favour.

Now, how significant an income contributor could the rig be?

According to AM Fraser, the Pacific Class 400 jack up rig which Marco Polo Marine ordered commands a day rate of some US$ 160,000 in Thailand. With the cabotage law in Indonesia, the rate could be higher when Marco Polo Marine takes delivery of their rig end of next year. I know that AHTS vessels enjoy a 20 to 30% premium in Indonesian waters. Could we expect the same kind of premium for rigs come December 2015?

If we were to do some quick mental sums, we would be able to conclude that this is probably going to be a very good investment. Simplistically, just putting the rig to work 11 months in a year could bring in some serious money without factoring in any possible premium. In such an instance, the return on the investment would quite easily exceed the 5.75% coupon payable on the MTN.

So, my assessment of this latest development is that it will lead to some short term earnings depression due to higher finance costs but it is not going to cause the company any distress. By 2H 2014, things would start to look up and by 2015, with more AHTS vessels in its fleet, enjoying higher charter rates, earnings would look even better. Then, when the rig is delivered by end of 2015, we should see a big boost to earnings, if everything goes as planned.

Do we share Sean Lee's vision and are we able to take the same leap of faith? Or do we think he has a few loose screws in his head?

Related posts:
1. Marco Polo Marine: Exciting times ahead.
2. Marco Polo Marine, Mermaid Maritime and Jaya Holdings.