Category Archives: Z-INVESTMENTS

Is a $20 stock expensive and a $2 stock cheap?

We still see and hear people talk about a stock being expensive because the share price is high. It may be true but only to a certain extent. It depends on the situation. For example, when DBS share price hit $20, there were people mentioning that the share price of DBS was too expensive. Instead, they chose to buy other company stocks instead. This can be a naïve action to take because it may mean that highly-priced stocks (or generally the blue-chips) never get into their portfolio. A lot of opportunities could have been missed! That may also implicitly means that these people are holding a lot of low price penny stocks or, at best, held some high yield stocks like REITs, which are not so ‘highly-priced’. But if we look back into the price history for the past several years, one would have found that, generally, it is the blue-chip stocks that had made significant price gains. They gained from strength to strength. On the other hand, those stocks that were left behind were the low-price penny stocks and low-performing ones. In fact, some of them have been under long-term suspension and cannot be traded at all. To summarize it all, despite the bull market in the recent years, one may not able to enjoy a significant upside if he holds on the belief that high-price stocks are expensive stocks. Moreover, the share-consolidation exercise 2-3 years ago to meet the minimum trading price (MTP) criterion could have even made the situation worse. The share price of many penny stocks gets even lower after the consolidation, ending up in extremely low price and illiquid situation. This really is value-destruction. On the other hand, we now know that DBS share price has reached more than $22 or 10% even if we had bought it at $20 per share. Of course, I do not mean to say that buying high-price blue-chip is a sure bet to being a winner in the stock market. What I meant is that by viewing high-price share as expensive purchases would unconsciously prevent us from buying into them and probably lost out some investing opportunities.

Actually a high-price stock is not necessary an expensive stock. By the same argument, a very low-price stock is not necessary cheap either. This has been explained in my book “Building wealth together through stocks” from page 110 to page 114. In fact a high price stock of say $20 per share can be a lot cheaper than another very affordable stock trading at $2 per share. Instead of looking at the share price alone, we should look at a company’s market capitalization (or MktCap in short). It is the product of the shares outstanding and the share price. In a very practical sense, it is the dollar value of the company of how the market, as a whole, evaluates it. In other words, it is the ‘market price-tag’ of the company. DBS, for example, has 2,562,052,009 shares outstanding on July 2017. Given the share trading price closing today, 7 Aug, at $21.15, the MktCap is S$54.19 billion. This is the market value of the bank. This means if you have $54.19billion, you can theoretically buy up all the outstanding shares. However, this only exists in theory because once you start to buy the shares in the open market, the float gets smaller and the price will shoot up due to its market liquidity. Of course, this is also barring the need to carry out a general takeover exercise once we held beyond a certain threshold.

Let’s say for some reasons DBS wanted to make the share price affordable to around $2 instead of the current price of around $21.15. (Note: making the share price affordable does not mean making it cheap) The management simply cannot depress the share price by a stroke of the magic wand without doing something else. To bring it down to a share price of $2 from about $20, the bank has to introduce a lot of shares into the market. This, essentially, involves a share split of breaking down one share into 10 shares in order to bring the share price to that level. This means that shares outstanding would be magnified by 10 times to 25,620,520,090. The market-value of the DBS simply cannot evaporate overnight. The market, as a whole, still recognizes that DBS has a market value of a $54.19 billion unless the bank performed so badly that shareholders started to sell out the shares over time. Apart from the arduous administrative work involving existing shareholders, there is absolutely not much incentive for the directors to do share splits just to make shares affordable. If affordability is really an issue, then investors should instead buy smaller lot size instead of 1000 shares. By doing so, that should reduce the outlay from paying $21,190 to buy 1000 shares to $2,119 to buy 100 shares or the multiples of it. That essentially, was the purpose of smaller trading board lots of 100 shares instead of 1000 shares introduced by SGX about 2 years ago. In fact, in more sophisticated stock exchange like the NYSE, we can even trade just one share instead of a board lot of 100 shares.

Essentially, the above also helps explain why OCBC is trading at around $11 per share and is almost 50% of that of DBS on per share basis. Otherwise, in no time OCBC share price would play catch up and go higher to reach to $21 or it could be DBS share price sinks to $11.21 to match with OCBC trading price. Certainly, that is unthinkable. For that, we shall leave to the next post.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Technology destroyed some traditional businesses (1): SPH

By now, many would have noted that SPH share price has been on a decline from $4, slightly more than a year ago.  It has not been this low since the global financial crisis when it touched $2.32 on 12 March 2009, which coincided with the low of the Straits Times lndex (STI). Following the crisis, it had been oscillating at around $4 for a long, long time before the recent decline to its current price at around $3.25. In fact, since the share split of 1:5 in 2004, the share price has not really enjoyed any strong upside although investors had been lavished with generally good dividends in the past.

In fact, SPH is not the only victim of the technology onslaught. Newsweek, Washington Post, Financial Times, Reader’s Digest and many national newspapers suffered declining sales volume as well.  Technology, in particular the internet, had swept across the globe at such a huge pace that it wiped out many traditional news and printed media businesses. Readers are no longer happy to receive news 1-2 days after it happened, not even hours. We are now talking about minutes or even seconds. Financial market for one is very unforgiving as far as the speed of news is concerned. The news that appeared in print today was already a history that had already moved the market. Certainly, the financial market players are too impatient to wait for the print to reach them before they reacted. Look at US presidency election, the BREXIT, British election, the market had already reacted even before the news were casted in print. By the time the news appeared on the dailies, many snippets would have already splashed all over the internet. Just a simple search through a search engine, one would be able to pick up at least 10 pieces of news stories on the first page of the engine search.

Personally, I think that the management saw it coming at that time, and that was why they decided to sell several properties into SPH REIT in mid-2013. By so doing, it hoped that it can earn a ‘passive income’ as a sponsor and a major shareholder of this REIT. Unfortunately, the rental income is not sufficient to offset the decline in the print business. And this could continue to be so for a long time to come. To be straight to the point, the internet is not going to go away any time soon. In fact, it will definitely not go away unless it is displaced by another faster and more convenient transmission means. That said, it is a long-term threat unless SPH is able to side-step it by finding another growth business.

To be fair, I would think that the management has been doing their best to maintain shareholder’s value. The share price could have declined even more steeply had it not been for the high dividends that were distributed in the last few years. Unfortunately, this is an encroaching external threat that is difficult to defend against, unless they do not want to be in the business at all or to lessen the blow by finding another lucrative business. The final consequence, unfortunately, is an ever-declining share prices, a deep cut in future dividends or both.

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

 

 

 

Averaging down

Abstract: A post by a pseudonym Luminac in the InvestingNote on 29 April 2017 mentioned that a close friend of him had invested in stocks like Cosco(F83), Noble(CGP), Hyflux(600) and had been accumulating them for over the past 10 years. She realized that the loss was too big and was on a crossroad of what to do next. I herewith share a similar life experience when I was in that situation some twenty years ago. No mention of the stock name shall be made in this post.

 

The share price was around $1.90 to $2.00 when the desire to re-own this stock became extremely burning. After all, I had owned the stock before and had sold them for a reasonably good profit. So, it cannot be very wrong to buy back this stock at around $2 when the highest price that it reached after a share split was $5. The company had made several mistakes and took extreme risks that on hindsight would have made me stayed far, far away from this stock. Unfortunately, my focus then was on the stock price. To me, the $2 price tag was a 60% discount against the $5 level that the stock had once reached.

Big mistake…the company was taking on so much risks and making so many bad business decisions that it had to make a rights issue at a huge discount. I cannot remember the exact ratio, but I think it was in the ball-park of ten rights for every one share owned. Certainly, it was forcing the minority shareholders to take on the rights to assume part of the huge risk. The share price tanked from about $1 just before the rights issue to around 10 cents. From then on, I started to follow more closely on the company developments and not on the stock price alone. A check on the past financial reports showed that the top man was still being paid in the region of either more than $750k or even more than $1m when the company was either earning insignificant profits or even suffering losses. Furthermore, the huge part (close to 90%) of the total remuneration was in the form of fixed salary and was even entitled to a few percent of ‘other benefits’. The percentage allocated to the bonus was far too little. So basically, the management is bleeding the company through their fixed salaries at the expense of the minority shareholders. In fact, the top man drew such a huge salary that he need not have to care much about the prospects of the company going forward. I believe all that was in his mind was he hoped to find a white knight who was stupid enough so that he could sell off the company lock, stock and barrel after bleeding it for so many years. A further check showed that at least one independent director was there for more than 10 years. As we know, independent directors are usually the ones that form part of the remuneration committee. Furthermore, during annual meetings, motions were almost always seconded by the same few persons as in the past meetings and so were comments quickly shot down by the management. The way I see it was that all these years, the company was simply wayang, wayang moving from one business type to another while waiting for a white knight to come along. After all, the people forming the management are getting old and they have no energy to turn the company around. Meanwhile, they continue to draw good salaries. I realized that I had bought a confirmed ticket to disaster. Are the minority shareholder interest protected at all? Surely not.

Certainly, I need not have to say much about the stock price with a company like that. It was $5 during the good times, and was $2 was I re-purchased it, and then it tanked to around 10 cents after the huge rights issue. If only I had read into the fundamentals, I would have painfully cut loss or simply just not do anything. My loss would have been, at most, a few thousand dollars. My big mistake was that I keep on averaging down while praying that the stock price would turn around. Just like many gamblers did, I did not simply average down, I bought more than our original holdings in hope to quickly breakeven, but somehow the tide was always against me. The descent was steeper than what I could average down. I also found it got more and more difficult to average down because of the increasing stake when it was on its way down. I did manage to sell some when the stock price blipped up temporarily, but the realized gain was simply too insignificant to offset the unrealized loss. It went on a long time when I suddenly realized that the hole was just too big to patch. It had already lost 90% to 95% of the value that I initially bought. Selling off at this time would not lead me anywhere and averaging down is not the answer for such a stock. Furthermore, I was too focused on this loser that I missed out many winners out there. I had lost a lot in terms of opportunity cost.

So, for many years, I had been sailing on a pirate ship without realizing it. Summarizing the whole episode, the management took the company as an ATM to draw their huge salaries. The minority shareholders were bearing the business risks all because they made bad and lousy business decisions. And, yet as a minority shareholder, I have no say in the company affairs. Do you think one should continue to be vested in the company stock? After all, the company founders have recovered all their capital from the IPO and could have even profited greatly from it. What incentives do they have to bring the company to the next level? It all boiled down to the responsibility of the management.

To get out of such disaster, I need to change my mind-set. It is no point in buying and selling stocks that make us can’t eat or sleep at peace. After all, we invest for our retirement or for times that we become incapacitated. Stocks must withstand a passage of time. Why should we be in the situation that we invest our money in exchange for more problems? Don’t we already have been facing a lot of challenges in our daily lives? To date, all these going back to basic thoughts have been a big blessing in my investing journey. I managed to benefit from the GFC in 2008/2009, averted the penny stocks clash in 2013 and the high yield bonds that still plaque many investors even today and many nonsense investing scams that mushroomed over the past years. Several good stocks have become multi-baggers, and two of them have been bought out and privatized. Sure, good stocks can also tank during financial disasters, but history has shown that they come back stronger when the crisis got past us.

Now, let me add a last paragraph to the mentioned stock in this post. If the above episode on that single stock had not been painful enough, here comes the salt on the wound. Just 2 years ago, the SGX introduced the minimum trading price (MTO) rule of $0.20. All stocks below 20 cents have to be consolidated. I did not know the exact trading price then because it was no longer important to me. It was probably less than 1 cent at that time. Doing a 10 to 1 consolidation had no meaning as it would still be below 20 cents. So, it ended up with consolidating 100 shares into 1 share, which theoretically meant that the stock should be trading at $1 after the consolidation. With the consolidation, the stock became extremely illiquid. The trading volume was low and the buy-sell spread was far in between. Perhaps a lot of investors would have realized by now that for fundamentally lousy companies, consolidation equates to value destruction. The stock price fell to around 60 cents after the consolidation and, by today, it is around 30-40 cents. By this time, my loss is 10 times that of the original loss. However, all these no longer matter because the final value on paper is a very tiny black dot on my portfolio.

So, if you ask me should we average down, my answer is if it is fundamentally lousy stock is …never. Never catch a falling knife. But if it has good fundamentals that can possibly translate to a price upside in future, then perhaps, it may worth a second shot.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

Capital reduction

We all know that for a company to operate, there is always a need for capital. Capital can come in the form of cash input from the owners of the company and, if the company has been profit-making, funds can also be re-channeled into the business instead of distributing to the owners. If the business is a public-listed company, then additional capital can be raised through IPOs and rights issues. All these form the equity capital for the business. There is also another type of capital known as debt capital. This involves borrowing from financial institutions such as a bank or through unsecured borrowing such as raising bonds and notes. Then, there is also preferential share, which depending on how one looks at it, can be seen as equity capital or debt capital. All these form the various avenues for the directors to tap upon to enable the company to operate as an on-going concern and, of course, to optimize shareholders’ value.

 

When a business is in need of funds, the directors would have to look into what channels can be tapped to inject funds into the business before the business run into cash-flow problems. In the past one to two years, we have seen several offshore and marine related companies and business trusts running into cash-flow problems because the business were deprived of capital injections. Swiber Holdings, Erza Holdings and Rickmers Maritime are just few eye-catching examples that cropped up recently due to difficulty in seeking additional funds for their businesses.

 

 At the other extreme, there are also companies that have ‘extra’ capital in the form of cash that it becomes necessary to carry out a capital reduction in order to optimize the capital structure of the business.  Capital reduction can come in several forms, and this usually ends positively for shareholders. It can be carried out through share-buyback program in which a company buys back its own shares and then cancels them out at the treasury. This, in the way, reduces the number of shares in the market and thus increases share price per share. OSIM as well as several American companies had previously done this after emerging from the global financial crisis in year 2009.

 

Another form of capital reduction can be in the form of returning capital back to shareholders. A good example is IPC. IPC had been a penny stock before its consolidation of 10:1 in 2015. Its share was around 3 cents in year 2004 and around 6 cents during the global financial crisis. During the normal times, the stock price had been oscillating between 9 cents and 17 cents. The business had undergone a significant transformation changing from a PC manufacturing company in the 90s to a hotel operator today. With the sale of 7 hotels in Japan followed by a share consolidation of 10 shares into 1, the company returned a total of about $136.5m to the shareholders. Hence on the balance sheet of the FY 2016 financial report, the share capital was reduced from $169,658,000 to 33,190,000. Each shareholder got cash return of $1.60 per share after consolidation even though the number of shares that one holds remains unchanged. This means that those investors who had purchased the share at an average price of 16 cents or below before the shares consolidation would have recouped and profited for investing in IPC. Of course, the share capital on the balance sheet of IPC’s financial statement is set back by $136.5m, meaning that the scale of the business has been down-sized, but who really cares if we are in a business with no money down and had enjoyed the dividends that had been distributed previously. Hopefully, going forward, the management continues to deliver and help increase shareholders value. This would help maintain the stock price and possibility of future dividends in the currently scaled-down business. Perhaps, the cash return had been partly due some pressure from the substantial shareholder, Mr Ooi Hong Leong, who owns 30% of the business. But, again as an investor, is it not what we are looking for – an investment that provides us a solid return somewhere in the future with consistent income along the way?

 

At the moment, unfortunately, the stock has been quite illiquid due to the mandatory stock consolidation. Even though there is a trading price of between 50 and 60 cents per share, it is still not worth trading the stock as it is difficult for one to buy or sell the shares optimally due to its trading liquidity, which resulted in steep share price changes.   With the only hotel business left in China, it is hoped that company delivers another magic to maintain the share price that come with future dividends. Of course, it does not preclude the fact that it may have to raise funds for expansion in the future. But at the moment, it’s a nice feeling of enjoying a significant profit and, at the same time, participating in a business with no money down due to its capital reduction exercise. 

 

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

   

 

Striking the football with two legs, not one

Several days ago, The Straits Times published an article entitled “Singapore stocks pay best dividends across Asia”. Indeed it is true. Even with the current market run-up, many blue chips companies have been paying a nominal dividend of about 3-4% at today’s market price. Should one had bothered to explore further and bought into an undervalue stock some time ago, the return could have been much higher offering both capital gains and good dividends such that one would not even bother to sell them. A lot of these shares could even displace high-yield instruments like REITs and perpetual bonds that offer a yield of around 5%-6% on average. While REITs and perpetual bonds offer comparatively good yields for investors, they do not have much buffer in terms of liquidity. REITs, for example, have to distribute 90% of their income to avoid the corporate tax. When there is a credit crunch or when there is a need for funds, they either have to sell off the properties or to raise funds by issuing rights.

 

As pointed out in the last post, many investors got into stocks were partly because the interest offered by banks had been too low for too long. So, buying into REITs and perpetual bonds appeared to be no-brainer due to their high payout. Hopefully somewhere in the future, they are able to recover their investments through the dividends they received…..the higher the better. (See Figure 1) The setback is that when the interest rates start to perk up, these investments are likely to be beaten down more drastically. This could result in capital loss, thus offsetting the higher dividend payout.

  

Stocks tend to have more leeway when comes to dividend distribution. Usually the payout is in the region of around 35-60%, depending on the discretion of the directors. There is usually more room for paying out higher dividends when the company has no urgent need for funds. They could even tap into their cash hoard should there be a need for expansion. In fact, I was a little surprise that 15-18 months ago, many blue-chips counters at their lows against the declared dividends in the previous year. For example, DBS was trading between $13 and $15 per share, resulting in a dividend yield of more than 4% based on the declared dividend of $0.60 per share in the previous year. By the same token, OCBC was trading between $8 and $8.50 per share when the declared dividends in the previous few years had been $0.36 per share. The dividend yield would have been more than 4.2%. The gap between the blue-chips had been too close, and it would be either that blue-chip trading price to increase or REITs price to fall going forward. Today, the share price of DBS and OCBC is around $19 and $9.60, and still offering a relatively good yield of 3.15% and 3.75% respectively.

 

For both capital appreciation and dividends, I never forget about how this stock darling – Cerebos Pacific. It is a company that sells the Brands of Chicken. The stock is relatively illiquid with the main shareholder being the parent company Suntory Ltd. The free float was only 15%. (Note: it is important to note that holding illiquid stock is not necessary a good thing. If we wish to hold illiquid stock, our mindset should be to hold as long as it needs.) My purchase price averaged around $2.50 per share by 2003 after consolidation. The dividends had been 9 cents standard dividend and 16 cents special dividend. That went on for a total of 9 years from 2003 to 2012, providing a yield of 10% over an uninterrupted period of 9 years. The special dividend was given every year so much so that shareholders think that the 16 cents special dividend was considered to be a new normal. Needless to say, by the 6-7 years down the road, existing shareholders were collecting dividends and laughing all the way to the bank. At the same time, the share price has been creeping upwards. All these happened in the midst of the global financial crisis in 2008/2009 and also when the company was setting up a new plant in Thailand also around that time. By the time, Suntory took the company private, it had already paid out 9 nominal and 9 special dividends over the 9 years. That would have enough to cover 90% of the initial investment. The buyout price in 2012 was $6.60 per share, offering yet another 6-digit return with little money down. It was like a 10-year bond paying a coupon of 10% and paying the 260% of the capital invested. David Clark in the book “Warren Buffet and the interpretation of financial statements” would have called this equity-bond. It is a form of equity, but it works like a bond from investors’ perspective.

Happy investing!   

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

The key lies in the operating environment

We know that a bond is a lending instrument. It involves putting up a sum of money upfront as an initial capital or outlay to a company or organization. To compensate for the loss of use of the money, we are rewarded through a series of coupons throughout the loan tenor and then a full return of capital at the end of the loan period.

Of course, people have become more creative and many variations of it have been dished out to attract investors.  There are discounted bonds, zero-coupon bonds, convertible bonds and perpetual bonds just to name a few. Then, there are also many kinds of investing instruments that attempt to work along the same principle, such as gold trading, land-banking, tree-planting and even REITs. We know from news that from time to time, defaults on these types of instrument did happen. But then, why are people so attracted to these instruments? The answer lies in the fact that the interest rate has been too low for too long.  In fact, I cannot remember a time since when I started to pay for my HDB flat in the late 90s after the Asian financial crisis to the time when I completed paying for it in 2005, that I ever paid more than 2.6% interest. Even if there was, the period had been too short and the increase was too insignificant for me to remember. Obviously, the interest rates for the ordinary account (OA) also remains fairly unchanged at 2.5%. When the Global Financial Crisis hit us in 2008/2009, the already low-interest rate depressed even further. Some countries even entered a negative interest rate regime. Simply put, depositors have to pay the bank to safe-keep the money instead of the bank paying interest to depositors.

 

So, what is the effect on us? Over the period of seventeen years or so, since the beginning of the new millennium to this very day, we have been enjoying a state of extremely low interest rates. It has become a new normal especially for those people who have not seen local banks paying 5% and 8% for fixed deposits (FD) like those in the late 90s and early 80s respectively. Even to this day, it does not pay to put money in the bank just for a paltry interest of less than 1%. Needless to say, a lot of those monies that otherwise would have been put into banks had already found their way into riskier assets like properties, equities, bonds and many non-regulated investments.           

Coming back to the subject on bonds and its similar instruments, in a situation that the environment does not change at all, the price of these instruments would have been fairly flat. But the ever-decreasing interest rate had caused hunger for yield to become insatiable. Many high yield instruments, like REITs,  were exactly designed to work in such environment, and that was why the price of REITs was seen to be climbing for quite a number of years and even jumped further when the FED embarked on the $80b monthly bond purchase in 2012. Those who had bought early might have eaten the low-lying fruits, but those people who joined late in the party had to pay a much higher price for the REITs. This means that it will take a longer time for the late entries to recover their capital due to the loss of capital when the interest rate rises. So, depending on the time when we buy, a high yield investment can be a tricky situation after all.

 

Actually, I believe in the minds of investors of high yield instruments, they are not looking into capital gains. They are in fact looking for high interest rate instruments to park their money instead of putting it in the bank earning a paltry interest. If the bank deposits interest is high enough, a lot of these monies would have found their way back into bank deposits. Unfortunately, many of us have been conditioned that along with high gains come with high risks. So a medium percentage that investors were prepared to accept was 5%, and this seemed to have been a magic number for quite a number of years. Any investment that gives a return of 5% or above would attract a huge herd of investors tipping it to become oversubscribed during IPOs. REITs that generally pay more than 5% were bided up and perpetual bonds that pay 5% were oversubscribed. Unfortunately, just like in soccer, we cannot depend on one leg to strike at goals. We need both legs. And both legs must be equally efficient. In the same way, to be adequately compensated as investors, we need both capital appreciation as well as dividends. Many late entrances into high yield instruments believing that these instruments are no-brainers would have been grossly disappointed. Perhaps, they believe that by parking into high yield instruments, they could shorten the payback and get back their capital quickly. Unfortunately, all it takes is a default to crash the whole game plan causing the transaction price to fall drastically. Indeed many high yield corporate bonds, like offshore marine and shipping, were caught in this perfect storm when their business turned for the worse. Even if there was no default, the prices of these assets have come down drastically because they have been bided up too high when the interest rate was falling. At the end of the day, we still need a margin of safety to put us in a safe position.      

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

 

Five reasons why I do not want to convert my stocks to an investment property

A close friend of mine threw me a question – why don’t you divest all your stocks and buy a property instead. That was a few years ago, and the rental market was still relatively vibrant. That led to me ponder for a while. Certainly a few things crossed my mind to kill the idea:

(1) Tenancy
Without doubt, both stocks and properties are good hedge instruments, but they can differ very much in their usefulness. If they are applied inappropriately, one may even suffer as a result of holding them. Property, for one, is a high-ticket item. In all likelihood, we need to take a loan to own a property. In order to service that loan, we likely have it rented out to at least cover the monthly mortgage payment. Certainly, it is a question of the bigger the loan, the greater the pressure. Even if there is no need to service the loan, we still have to find a tenant so that we can derive an income (hopefully a passive one). Otherwise, the property is only a dead asset, just like holding an art painting or hoarding gold bars. The only way to gain from it is a huge appreciation in price some years down the road, which may or may not happen.

(2) Liquidity
Then there is a question of liquidity. It refers to the ease of converting the asset to cash especially during times of need. Unlike holding a portfolio of stocks, we can simply liquidate some stocks while leaving the other stocks un-touch. In other words, we can down-size our stocks portfolio to remain relatively liquid. In the case of a property, can we simply sell off a toilet or a bed-room? It is a question of either a whole property or no property, and not somewhere in between. Furthermore the time needed to liquidate a property during times of need may force us into selling a property at a not-too-ideal price. While we can also end-up in a fire-sale for stocks in times of need, we can at least time the sales such that all the stocks need not be sold out in a single go.

(3) Government curbs
Authorities around the world tend to be more decisive on clamping down property speculations and the Singapore government is no exception. Frenzy properties speculation usually end up miserably, just like what we have seen in the sub-prime situations leading to the global financial crisis, sky high properties that it takes three generations to fully pay for a property in Japan prior to the crash of Nikkei during the late 80s. Until today, the situations in Japan have still not fully recovered, and Japan had already suffered two ‘lost decades’. Whether in Europe, in China or in Hong Kong, the story is always the same. What about shares? Until today, I have not heard about curbs on shares trading, except for those on the watch-list imposed by the broking houses. They are not real government curbs so far. In fact, many governments would want to maintain their stock market as vibrant as possible. After all, the penetration rate is still very low, and to be seen as a real financial centre, it should be free from government intervention. Whether in China, in Japan, in Hong Kong or in US, we do not hear of government curbing stocking investing activities. In fact, they are the ones who help to prop up during a huge meltdown, just like what we seen during the global financial crises in 2008/2009.

(4) The exit
One of the considerations of a good investment, which a lot of people have overlooked, is that it can be exit as easy as we enter. (That’s why in the last two years, those held corporate bonds were not able to dispose their investments even at a loss because there were simply no buyers due to illiquidity! It was easy to enter by throwing in an enticing coupon rate, but to get out of it requires some form of cross matching between a seller and a buyer.) By the same token, it is also more difficult to get out of a property than on shares. It probably takes about 3-6 months to decently sell off a property at hand. In this period, there are a lot of advertising and selling activities such as bringing prospects to see the property, putting advertisements on the newspaper, talking to potential buyers and agents. It is only after all these ground-works that we are likely to find a prospective buyer to sell off the property decently. I admit that I have no patience for all these, and therefore getting a property for investment is out of question.

(5) Other considerations
Of course, there are other considerations as well. Leaked pipes, over-flow toilet bowls, electrical short circuits are teething issues that can make our tenants call us right in the middle of the night. Every night, we have to be on our toes and, every evening, we have to pray that nothing of that sort happens in the night.

After all these thoughts, I still want stick to stock investing. Unless, of course, I already have $2 million dollars cash sitting in the bank and is doing nothing for me at the moment. In that circumstance, sure, I may get a property without a loan.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Cosco Corp : Buy out by its parent

The fate of Cosco Corp has now been sealed. China Cosco Shipping Corp, the parent company, is acquiring of Cosco Corp (Singapore)’s shipyard business in Dalian and Nantong. While the details have not been released but this is probable course of action after years-and-years of non performance.

Cosco Corp was listed in great fanfare in early 2006. Personally, I do not know the IPO price for this stock, but a check of the 1st day trading price was between $1.15 and $1.17. (Based on the sentiments at that time, I would expect the IPO to be around $0.80.) Throughout 2006 and into the last quarter of 2007 before the global financial crisis, the share price went up all the time hitting a high of $8.05 on 18 October 2007. But it went downhill to around $1 by January 2009 in the middle of the global financial crisis. At the point of writing, the share price is at $0.32. The counter was suspended when the share price was at $0.28 pending the announcement of the buy-out. It has since climbed about 4 cents perhaps, perhaps in anticipation that the parent company will make a premium over the share price in the buy-out proposal. 

Fundamentally, Cosco is not doing well at all. Its cash flow is always negative year after year and has been a net borrower since I start tracking it in 2009. Basically, the profits recorded in the early years were supported by borrowing, and not by its intrinsic operations. As it turns out, the borrowing cost becomes so heavy that it eats into the profit of the business causing it to suffer losses for the two financial years FY2015 and FY2016. In fact, the cash flow and borrowing were bad enough that I had pointed out in my posts a few years ago that it might do the shareholders a great favour by selling all its assets and return the funds to the shareholders. (Of course, it is not likely they will do that as it is a subsidiary of a big giant!) It is no point to be in business when it gets into losses projects after projects. The foray into the oil rig business a few years ago was a clear-cut mismanagement.  The learning curve was far too steep. Just because it saw Sembcorp and Keppel Corp were doing oil rigs, it also wanted to get a hand in it. But the timing was far too wrong. While it is still on its learning path, the oil price crashed and all the oil rig businesses were wiped out. In fact, it is the only company that I have seen so far that it had suffered two years of negative gross profit (I really mean negative gross profit).  This means that in a very simplified way, the project price offered to customers is not even able to cover the direct costs for those projects. This also means that it is almost certain that the business will suffer a loss in view of other overhead and financial costs. To date, it has negative retained profits. It means that the undistributed profits that it managed to accumulate in the good years were wiped out in these two years of losses. In the eight years of listing in Singapore, the business retained an accumulated loss.

Cosco’s cash flow

Cosco’s P&L statement

Cosco’s balance sheet

Unfortunately, for the investors and existing minority shareholders, there is no much to expect from such a business that goes wrong all the time. However, it may not be all bad for the parent company. Depending on how the share are structured and priced during IPO, they may even gain the difference in view of its current dogging share price. They may have the last laugh after all.

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Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

The local banks – DBS, OCBC and UOB

The local banks have just released their financial results for the financial year 2016. All the three banks suffered a decrease in profit for FY 2016 compare with FY 2015. OCBC seemed to have it worst, while UOB did comparatively well. Before the results were released, it was widely expected that the banks would suffer a decrease in profit in view of the flagging economy, and most importantly their exposure to the offshore and marine industries that had turned sharply for the worst following the sharp decline in the crude oil price last year. For almost whole of last year 2016, we have seen several major defaults and major loan re-structuring exercises in this sector. Surely, in such a scenario, it would be a miracle if the banks can go through the year unscathed.

One interesting thing to note, however, is the impairment charges that the banks set aside in FY 2016. OCBC and DBS increased the impairment charges by 48.8% and 93.0% respectively, while UOB decreased it by 11.6%. One deduction, I can make is that UOB felt that it had already accounted for all the problem loans, and there was no longer a need to make further provisions. Meanwhile, OCBC and DBS were still making provisions for loans that might deteriorate in time to come. One possibility is that they are pre-empting the possibility of Ezra that can go in the path of Swiber or Swissco. Due to this significant impairment charge, the EPS of OCBC and DBS were marked down by 13.7% and 3.0%. The drop in the EPS of UOB is mainly due to the higher operating costs for the year, and is a different nature from the other two.

For the net interest margin (NIM), the fate is entirely different for all the three banks. OCBC’s NIM remains unchanged at 1.67%, UOB decreased from 1.77% to 1.71%, while DBS increased from 1.77% to an uninspiring 1.80%.

On the whole, the business risk for the banking sector has increased. Asset qualities were decreasing, and decreasing at a very fast rate. In the meantime, the share price for the banks has been on the uptrend for several months. All this translate to the fact that the ‘margin of safety’ continues to get thinner as the days passed.          

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 Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.