Buy and hold? No, it should be sell and buy back later

Historically, the month of February is the when financial results of those companies whose Financial Year (FY) ends in December release their FY results. Then at around the 2nd half of April, it is when companies start holding annual general meetings (AGMs). And by the time when stocks go ex-dividend, it should be around early to mid-May. It is a long wait that takes about 2½ calendar months. This is almost 25% of the whole calendar year. For many people, it may be far too long. If nothing happens in between, well and good. We will get our dividends ultimately. As a whole, Singapore blue-chip companies pay very good dividends of around 3.5 to 5%, perhaps a bit higher than HK companies, and certainly much higher than many Japanese companies. With a relatively high yield, there is incentive to hold stocks for dividend. Certainly, this is one of the key reasons why we hold stocks for a long, long time. It is also coherent with Warren Buffet’s buy-and-hold strategy.

For those who have been dedicated followers of Warren Buffet (WB), the game plan is to buy an undervalue stock, hold the stock long enough in hope that the stock value surpasses its intrinsic value and, in the meantime, continue to wait for dividends year after year. Hopefully there is no need to sell the stock and that was why WB mentioned that one should have the conviction to hold a stock forever. There is nothing magical about this strategy. Especially in the American context, whereby the market capitalization of some companies are so huge that they are higher than the GDP of some small economies. As the world largest economy, it has sufficient power both politically and economically to influence how we do our business. Thus, if we invest correctly, for example to put money in the FAANG stocks, our wealth would have multiplied many times. Just 25 years ago, the Dow Jones was around 4,000. Today, it is 26,000. It has multiplied more than 6 times breaking new highs in countless number of times. So, buy-and-hold strategy should work in such a business environment. But can that be said of Singapore stocks? Twenty-five years ago, in 1994, our STI was at about 2,400. Today, it is at 3,200. It has risen only 30% over 25 years, and this is when many blue-chip companies, in particular the banks, were reporting record earnings. And, yet at this time, we are nowhere within the striking distance from the high of 3,875 in October 2007. Of course, different time frames will yield different comparison results but the stark difference in this comparison is good enough to show that buy-and-hold strategy may not work as well in Singapore as in the US.

For one, we are a driven economy. Stock prices, in particular, of those blue chips are especially sensitive to external news. The on-going trade war between the two world largest economies, the US and China, is a blatant example. In the first quarter of 2019, everything seemed to be moving in the right direction, the STI was floating around the level of 3,200. Then it started to move up as we draw nearer to book closure dates of most companies, peaking around end April 2019. The ascent in stock prices in the month of April is indeed pricing in the dividend distribution. By end April, stock prices have peaked and some have already started to fall. And by the time when the stocks go ex-dividend, the fall just before and just after a stock goes ex-dividend would more or less equal to the dividend distribution.

Now, the question is should one sell a dividend stock before the dividend distribution and buy it back later or should one simply hold it through the dividend distribution. Personally, I think many would go for the latter decision, ie. to take dividends. After all, dividend distribution is a certainty once declared. People like certainties. And that is why people are willing to place their money in fixed deposits (FDs) offering at 1-2% than to put their money in stocks providing them a return of somewhere between -5% and 20%, even though the odds is still higher than the FDs. Furthermore, taking dividend gives them their deserving rights to declare how much they have received in terms of dividends for the financial year.

But this may not necessary be the best way to take advantage of dividend distribution. It is like a game of majong (a chinese table tiles game). There is no one fixed way of winning the game. Just take OCBC as an example. On 1st April, the share price opened at $11.11, and closed on 30th April at $12.10. This price difference of $1 per share would have easily covered the dividend distribution of 23 cents per share and to pay for the brokerage plus all other charges for the sell and buy back executions. Of course, one has to be aware that it may not be worthwhile for a small trade lot of 100 shares due to the imposed minimum brokerage by brokerage houses. But, certainly, a quantity of 1000 shares would be sufficient to tip this balance. All this are within our predictions and that was why I mentioned in the last post on OCBC scrip dividend that the share price is likely to be high at the point of conversion as the date is near to book closure. Given this time when the trade-war, between the two largest economies that started in mid-2018, is beginning to bite into the real economy, shares prices are less likely to maintain its upward march or even remains unchanged after the dividend distribution. Certainly, the announcement of US tariff on the additional $200b worth of China’s goods on 10th May 2019 accelerated all that. And by now, many blue-chip stocks have already sunk to some extent, and probably more going forward, at least in the short term. In fact, the fall in the share price probably could equate to several times of the dividend distribution. By the end of trading day on 17th May 2019, OCBC shares closed at $11.15, even below the price when their financial results were announced on 22 February. Many other blue-chip stocks also exhibited the same price movements in the same period.

For those who had sold their stocks before they go ex-dividend, they are having their last laugh. President Donald Trump had shot down some high-flying ducks for easy picks on the ground. While their compatriots are away as in the saying “Go away in May”, pre-dividend sellers are probably on look-out to buy back the stocks that they had sold. With the remainder, they can buy more stocks than what the dividends can provide to create a quasi-scrip dividend as I had mentioned in my last post on OCBC scrip dividend. And certainly, a sumptuous dinner to go along with it.

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Posted in OCBC, Z-FINANCIAL EDUCATION, Z-INVESTMENTS, Z-Personal Finance, Z-STOCK INDICES | Tagged , , , | Leave a comment

OCBC scrip dividend

Along with the other banks, OCBC has recently announced the FY 2018 results. The net profit improved 11% from S$4.05b to $4.49b. Apart from its subsidiary, Great Eastern’s disappointing results, I would say that OCBC did well for FY 2018. Along with the reasonably good results, OCBC is offering a dividend of 23 cents per share for H2 FY2018, representing a dividend payout of about 41% for the whole year. This is, however, lower than its peers like DBS and UOB. The dividend payout for DBS and UOB is 56% and 50% respectively.  (Click here for the performance numbers.)

Over the years, OCBC appeared to have a greater propensity to pay out scrip dividend compare to the other two banks. This is the 12th time that the bank proposed scrip dividend since the global financial crisis in 2009 . To incentivise the acceptance of scrip dividend, OCBC is offering  a 10% discount on the final weighted average price from 3 May to 6 May 2019 (inclusive).

The question to many investors is – what is the purpose of the bank distributing scrip dividend? And is scrip dividend good or bad for shareholders? To me, there is no absolute advantage or disadvantage in having scrip dividends. It depends on what the bank’s objective and what we wanted as a shareholder. The financial advantage of scrip dividend is not exactly apparent. After all, one can create a quasi-scrip dividend exercise by using the cash dividend to buy the bank’s shares in the open market. The brokerage and administrative fees are comparative small in terms of costs as they can be easily offset if we purchase the bank stock at prices lower than the stock’s conversion price. That said, it is still good to discuss about the characteristics of scrip dividend from the bank’s perspective as well as from shareholder’s perspective.

For the bank

  1. Generally, banks (or for that matter any public-listed companies) do not like to have too much volatility in their stock prices. Essentially, they want people with long-term views. By distributing dividends in the form of scrip, it helps, to a certain extent, make shareholders hold onto their stocks longer. For one, by providing scrip dividends that end up in odd-lots in the hands of shareholders. Thus, this makes it more difficult for holders to offload their stocks easily.
  2. By providing a discount to the on-going share price, the bank is, in effect, encouraging shareholders to take the scrip  dividend instead of cash. This helps the bank to preserve cash which can be very useful during times of need. Just base on the back-of-envelope calculation, with the dividend of 23 cents per share, it would cost the bank $979.1 million in cash for just this dividend distribution. Even though OCBC is able to meet the current Common Equity Tier 1 (CET-1) requirement, it still went ahead to offer scrip dividends. This may mean that the bank is forecasting uncertain times or it may be preserving a bigger war-chest of cash for some capital investment ahead. While attempting to preserve cash capital, it is, in effect, creating a larger share base. This will have a dilutive effect. It may work against shareholders especially when times turn for the worse. Fortunately, OCBC has been buying up their own shares in the open-market. The bank had been given the mandate in the last shareholders’ annual general meeting to buy up to 212 million (or 5% of the issued shares) in the open market. Certainly, as shareholders, we would be more comfortable with companies that are able to buy back their own shares compare those that are unable to.
  3. While the bank is dabbling in the stock market buying 200,000 shares each time, it is not possible to know whether the bank is gaining or losing out in this whole exercise. After all, their job is not to make a profit by buying shares in the open market. Based on the 5% buy-back mandate from the shareholders, the bank can buy up to 212 million shares. Given that OCBC makes a purchase of 200,000 shares each time, it would take more than 100 trading days to fulfill the whole order, and not including those purchasing shares under the employees’ option scheme. This translates to about 40% of the total number of trading days in a year. In some days, it may buy high and in some days it may buy low. Generally, the stock price during the conversion days tend to be very high as they are very near to the ex-dividend date. So, it means that the conversion stock price tends to be on the high side. So, even if  the bank gives a 10% discount over the conversion price, there still may a chance that the bank did not lose out buying from the open market as its average buying price can be much lower than the conversion price. As of today, the conversion price is yet to be determined. It will be the weighted average of the trading share price from 3 May 2019 to 6 May 2019 (Inclusive). Note that a cash dividend is a certainty for the bank. For scrip dividend, this is not certain as to how many shares will be ultimately distributed. With the sweeteners (discounts) for shareholders thrown in, it is yet to be known whether the bank gains or loses out compare to cash dividend. However, one thing if for sure. Less cash will be dispensed, but, at the expense of a larger share base.

Shareholders

  • As shareholders, scrip dividend can be an alternative to cash dividends if the shareholder does not need to the money at that time. The problem of going for scrip dividends it that we end up with odd lots. This can be a bit troublesome if we want to sell them in the future. Although lot size has been reduced from 1000 shares to 100 shares, stockholders are often forced to sell  the mother lots in order to amalgamate the sales due to the minimum brokerage charge.
  • As one may point out, there is no need to pay for brokerages and the other administrative fees when we accept scrip dividends in lieu of cash dividends. However, this often not a major issue. As it is, one can create a quasi-scrip dividend by buying the stock from the open market upon the receipt of dividends. The brokerage and all the related fees are relatively small, and can be easily offset if one is able to purchase at a lower trading price than the conversion price calculated by the bank.  
  • One point about scrip dividend is that we are able to practice what is known as power of compounding. Say we have 10,000 shares and the dividend rate is $0.23. Assuming a conversion rate of $11.50, we would be entitled 200 shares. The next time when OCBC declares scrip dividends, our share base would be based on 10,200 shares instead of 10,000 shares. As our stock accumulates, we are in effect, practicing the power of compounding. From that point of view, it is true. In essence, I am assuming that the future dividend distribution continues to be the same or higher. In investments, many unexpected things can happen. It is possible that the bank falls onto bad times and have to reduce the dividend rate. A decrease in the dividend rate can have a significant effect on the power of compounding.
  • Certainly, a discount in the conversion price of the scrip dividend is a plus factor to encourage shareholders to take up the scrip dividend. It provides an additional margin of safety. This stands as a cushion in a falling share price situation when the global economy or the business situation  for the company turns for the worse. It serves as a good alternative to getting cash dividends.

At the end of the day, there is no absolute advantage or disadvantage to either the bank or to the shareholders. It is more like a question of choice. As mentioned earlier, OCBC has the lowest payout ratio (41% compared to DBS’s 55% and UOB’s 50%.). Perhaps, it has been under pressure to bring up its dividend payout as well. Instead of increasing the dividend rate, it is probably doing so by increasing the share base so that the total payment ratio reaches the mid-40%.

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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Banks’ stock prices

In the last two months since the release of bank results for FY 2018, the general comments about OCBC is that its share price is lagging behind the other banks. That appears to be my observation as well, although it is difficult to quantify the difference numerically due to the daily price movement between their highs and lows. But still, we all know that there have been general upward movement in their stock prices.

OCBC price appeared to stay low for about a month before the recent climb starting in early April. Its price ascend appears to lag behind the other two banks. DBS, also started to pick up speed in early April 2019, although it has already been inching upwards very slowly, even in the month of March 2019. There seemed to be fewer comments about UOB. But if we were to plot the price chart over the last 2-3 months, it appears that UOB and OCBC have almost same price movement characteristics. By the close of the week ending on 18 April, their prices have advanced about 6% (roughly as it is difficult to quantify the percentage due to the fairly large daily price movement between the two end points). Nevertheless, we know that there have been gains since the release of their financial results. Based on the closing price on the day of results released to 18 April 2019, DBS had gained $2.20 (8.73%) from $25.20 to $27.40, UOB $1.22 (4.77%) from $25.58 to $26.80, OCBC $0.45 (3.95%) from $11.39 to $11.84.

In effect, till date, the gains in the price movements themselves are significantly higher than their coming dividend distribution. The market appeared to be a bit slow in coming to terms with the banks good results for FY 2018. However, like in many high dividend stocks, their share prices tend to fall, and perhaps even more than the dividend once the stocks go into ex-dividend if their stock prices stay persistently high before ex-dividend. Whether their share prices are going to pick up a few days after ex-dividend would depend on the on-going news (may or may not directly related to the bank) that comes out going forward. Also, due to the uneveness in the respective share price movement, perhaps we may be seeing some kind of arbitraging in selling of DBS shares and buying of OCBC shares as we get closer to their ex-dividend dates, as DBS shares prices have already moved much more compare to the others. It is unlikely, however, that OCBC stock price in percentage terms will match that of the DBS as its financial results looks more inferior. Also, potentially DBS tends to enjoy higher Net Interest Income (NII) once interest rates start to gain traction. DBS has about 30% to 35% larger deposit base compare to the other two banks.

Just my observations and thoughts about the banks stock prices.

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Posted in DBS, OCBC, UOB, YZ-BANKS, YZ-E_commerce | Tagged , , | Leave a comment

350% in 7 trading days

Since the time when I mentioned about Y-Ventures last week, it had multiplied by 350%. It was about 7 trading days since it hit the bottom at 3.8 cents on 31 March and 1 April 2019. I had mentioned in the article that it probably worth a punt on the stock.

Given that it is a penny stock, the queue in the buy column at that time was very low at 10,000 to 20,000 shares. So, it meant that you could key to buy at a few bits lower than the trading price and, still,  somebody was willing to sell the stock to you. However, when one were to look at the the transaction volume, it was another story. It was comparatively huge, perhaps 1 to 2 million shares showing the market was full of spot sellers willing to short the stock for any ready buyer. For the past one year, the share price has been beaten down and was close to 5% of the peak value by end March/early April. This could be one of the best chance to buy the stock at fire-sale price. It can only happen when the market thinks that the company is on the brink of bankruptcy or is widely expecting a rights issue. The company was listed on the stock exchange fairly recently, of less than 2 years and the stock price has been affected by the fallen crypto-currency joint venture and the accounting fiasco that it experienced last year. 

With the quantity of shares issued at 200 million, it is possible to buy 0.1% of the company with only $8,000 at the share price of 4 cents. (The pre-IPO share quantity was 35 million from which about $7m was raised.) It means that at 4 cents, it is below the pre-IPO price valued at 5 cents. In effect, it is worth the risk to take the plunge. At most, if the company did go bust (touch wood), I would lost a few thousand dollars. The potential upside should be higher than the downside.

It would be good to execute the trade in small tranches, each time by buying 25 000 to 50,000 shares per trade. As we know, the best trades happen when nobody is looking at the stock. This is where custodian account becomes relevant. We need not pay a minimum brokerage of $25 to execute each trade. By doing so, it helps to cluster the buy price to around 4 cents. (I use the word ‘cluster’ because, very often, we do not know exactly know when is the lowest price. Sometimes when we feel that the purchase price is good, it still can drop further. So, to play it conservatively, we buy in smaller tranches once we believe that the share price has dropped to a level that one simply cannot refuse.)      

Fast forward a few days to today. The upside has been extremely sharp. The share price has advanced almost 400% from its bottom at 3.8 cents in a matter of 7 trading days! Perhaps, based on market psychology, it may still have legs going forward as it has started from a very low base. But the rate of increase should taper off as the share price increase. The purchase has been a pure luck as if one had struck a price in a 4-D. The timing was good. Certainly, it cannot be repeated or applied to other stocks easily. This can only happen, perhaps, once in a few years.

So, going forward, where will the stock price be? Well, your guess is just as good as mine. Right now, there is no fundamentals to provide us an idea of the share price, apart from making some wild guess, with some assumptions. That said, I have decided to sell one-third of my holdings. That provides me with some profit and the 2/3 of the quantity purchased at zero cost. With the change of management, hopefully, more good days lie ahead.  At today trading price at 14 to 15 cents, it is still below the IPO price of 22 cents in July 2017. If the new management proved to be good, the share price should advance in the long run.

 Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned security. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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Financial questions regarding Hyflux debts?

I chanced upon the article on “Hyflux story so far” in BT Weekend, 23-24 March 2019. Given that it had listed the debts raised in the past years, I decided to compile them into a timeline in hope to have a better picture of Hyflux’s current predicament. What really puzzled me was the perpetual raised in 2016. It was stated that the perpetual of $500m was raised to redeem the two tranches of perpetuals raised for institutional and accredited investors. The first was $300m perpetual @5.75% raised in January 2014 and the second was $175m perpetual @4.8% raised in July 2014.

Just purely from a financial management point of view, why was Hyflux willing to raise perpetual at 6% to redeem perpetuals at lower coupon rates. After all, the 4.8% and the 5.75% perpetuals were hardly 2-year and 3-year old respectively when they were redeemed. Why was Hyflux so anxious to redeem those perpetual bonds when the perpetuals were still so recent by any standard.

Without any consideration of the administrative costs involved, the $175m @4.8% and the $300m @5.75% would translate to $8.4 million and $17.25 million annually. Adding these two coupon cost together, it would cost Hyflux $25.65 million annually. Why would Hyflux wanted to raise $500 million @6% just to redeem the two earlier perpetuals. The $500m @6% would have cost Hyflux $30 million annually compare to paying the coupons of two earlier bonds that cost $25.65 million annually. Why did Hyflux willing pay additional fund of $4.35 million per year to new perpetual holders instead of just staying status quo to continue to serve the two institutional perpetual bonds. After all, the bonds are still very new especially when they are also of perpetual status. Are there some non-financial reasons that investors do not know? Wouldn’t the additional $4.35 million very crucial for Hyflux in view that they had been suffering negative cash flows for at least 5 years before Year 2016?

In fact, from financial management point-of-view Hyflux should redeem the $400 million preference shares @6% as by Call Date in April 2018, the coupon would be stepped up to 8%. Based on calculations, the $400 million perpetual coupons would have increased by $8m from $24m to $32m. So, wouldn’t it be more crucial to clear (or redeem) the higher coupon rate first?

All these make no sense to me.

Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Posted in Hyflux, Z-FINANCIAL EDUCATION, Z-INVESTMENTS, Z-Personal Finance | Tagged , , | Leave a comment

Be prepared to lose some money in our investments

I would have considered myself financial and investment savvy. But still, in our journey, there is still a possibility of losing some hard-earned money. The most recent case was in Hyflux. It was Hyflux’s first retail tranche, 2011 6% CPS.

Hyflux share price- August 2010 to August 2016

Looking back, the only bad situation surround Hyflux was probably the stock price had dropped 50% from one year ago. This can happen because Hyflux is a project-based company, and the company’s revenue and profit can be quite lumpy, just like many engineering project companies such as Keppel Corp, SempCorp Marine and a host of companies that fell one-by-one after the oil price tanked in the second half of 2014. (Lead me to a free beta-mode course on looking at engineering companies.) As of mid-2011, there was no history of negative cash flow nor negative profit for year 2010 and before. Even if there was, it would be difficult to fault a one-off situation that could happen to companies from time to time. Armed with some liquidity, I decided to put some $10,000 in the 6% CPS. After all, at that time banks were ‘paying peanuts’ for our deposits and there were no apparent signs of interest hikes. In fact, FED was still pumping $80b per month into the system through bond purchases. Certainly, at that time, an interest rate hike would have been an extremely remote possibility. In such a highly-liquid situation, it would have been rational to put a bit of money at risk in hope of better returns than just leaving it in a bank. That said, I still observe the basic conventional wisdom not to put in too much for this investment – perhaps $10,000 at most. After all, given the low interest environment at that time, I was very sure there would be many investment opportunities in the pipeline. This certainly would not be the last opportunity. By investing in small bits, we are able to stagger our investments along the way. This would help us time-diversify our investments. 

At that time, nobody would dare say that Hyflux would end up seeking court protection in 2018. I mentioned this because there are write-ups both in the mass media and social media about lessons learnt about this Hyflux saga as if they have not lost in any single investment before. Many mentioned about profitability and cash-flow. Talking is cheap. These are all discussions in hindsight. But in 2011, there was no negative cash flow nor negative profit to show at that time. It really takes the eyes of God to see through this. It was not possible to see so far ahead that this investment would have turned bad just from, at most, one year of negative cash flow until 2010 alone. After all, the Tuas desalination plant was not even up yet. It could be a right decision or it could be a wrong decision at that time. Only God knew. The only discomfort I had at that time was why Hyflux did not attempt to borrow from the bank given the low interest rate environment? Perhaps, they had. Or, could they have exhausted their means to borrow from banks and they have to resort to tapping on the retail investors by paying a higher coupon? Given this doubtful situation, I decided at most to park a small ‘bet’ into the investment. It is a situation of capital preservation before inflation started to erode my buying power if this low interest environment were to carry on for the next few years down the road. After all, it was a scenario of no pain no gain. The step-up feature from 6% to 8% was seen by investors, including myself, as a punitive feature for Hyflux to redeem the bond before it got more expensive. In hindsight, I can only say that it served well as a sweetener to attract many investors into believing that the preference shares will be redeemed ultimately.

It was a bit far back to recall why my CDP statement was registered at $5,000 instead of $10,000 as the original denomination mentioned in the prospectus was in lots of 100 shares at $100 per share. Perhaps, it was due to over-subscription, and the company decided to allot 50 shares instead of 100 shares. In hindsight, that was a thankful situation as we all know by now that the more money that we put in, the more losses we would have suffered by today.

Fast forward the next 5 years came the second tranche for retail investors in 2016. Ah, this time, it was a different scenario. The fundamentals were getting from bad to worse. On the record, there were already several years of negative cash flow. In such a situation, it was increasingly possible that the company might not be able to pay coupons and to redeem the capital. That was when the trading price of 2011 6% CPS went below par for the first time. Otherwise, it had been trading at a premium all the time. Note that this was also around the time when FED, either had already started or going to start a series of interest hikes. The risk-reward scenario was completely different from the earlier retail tranche in 2011. In fact, just before this retail tranche, many companies were rushing to beat the impending interest rate hikes. Just a year before, in 2015, four companies issued short-term bonds of coupon rates between 3.65% and 5.3%. (See Table 1.). Even before, there was the issue of Genting bonds and Genting Perpetual bonds in 2012. Investors were indeed spoilt for choice in those few years.

Unfortunately, for the investors, Hyflux’s 6% perpetual bonds was greeted with such a huge fanfare that the bond was up-sized from the original quantum of $300m to $500m. Actually, at that time, financial numbers were indicative of an imminent financial stress:

  • There were several years of negative cash flow since 2011.
  • The debt-equity was increasing substantially from about 0.7 in 2011 (which was already high) to possibly more than 1.5 by 2015.

Despite the still relatively attractive high interest of 6%, it was certainly be a no-no for me in this tranche. After all, if Hyflux were to fold, I would not want to be slapped twice. The only regret I had was I did not go one step further to sell the 6% CPS in the open market for a small capital loss. But again, it was also not out-of-mind to have held the preference shares as it was still paying coupons. Then, there was also a consideration of re-investment. After all, the amount was not big, and it was only two years away when the step-up feature to 8% would kick in. In fact, it continued to pay coupon even in the first half of 2018.  Well, we could only know by now that it had been a bad decision. In just one stroke, all the unsecured debts, irrespective of their seniority, were locked up.

So, as one can see, even if we were to put up safeguards when we execute our investments, such as investing small amounts in each investment and to diversify our investments, there is still some possibilities of a loss. What is more important is in aggregate term, we gain big and lose small. Even the best investor, Warren Buffet did also lose big at times. It may be a self-consolation by saying all these. Certainly, I still hope to get back my capital. But I am not going to lose my sleep because of this. After so many years of investing, we need to embrace the fact that we may hit some snags from time to time. I seriously pity those who plonk in big time. Perhaps, they thought that it was a fixed deposit paying 6% interest. There are huge differences between a perpetual bond and a fixed deposit as far as risks are concerned.       

Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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Who are the winners and losers from the Hyflux saga?

By now, we all know that unsecured bond holders, preference shareholders and ordinary shareholders have to once again take a deep, deep haircut following Hyflux’s re-structuring plan. The proposal (see table below) is still subject to final approval through townhall meetings in the coming weeks.

Hyflux’s proposal (yet to be approved)

Just a bit more than 2 years ago, many investors were jumping into the $300m perpetual bond issue band-wagon that was dangling at a whopping 6%. Compare this to the meagre bank deposit interest rate of 1% or less, it was like a god-send. The perpetual bonds were so over-subscribed that it has to be upsized to $500m. Still, I believe, it was oversubscribed such that the company had to carry out an allocation exercise for the subscribers. And, by May 2018, the $400m 6% CPS issued in 2011 would have stepped-up to 8% if no redemption was made. The redemption did not take place and the 8% coupon was not delivered either. In fact, no coupons were made in 2018 as Hyflux applied to seek court-protection to carry out debt-restructuring exercise following its ever-choking cash flow problem under the pile of debts.

For the last few years, Hyflux has been pinning on the hope to sell its loss-making Tuaspring desalination and power plant in order to pay down its pile of debts. But the hope became more and more remote in each passing day. It was mentioned previously that there was an interested local buyer but it appeared that Hyflux was not exactly keen. And by today, it has been established that Hyflux would be selling the company lock, stock and barrel to a consortium between Salim Group and Medco Group, SM International Pte Ltd.

So, who are the real losers in this whole saga? Although it is said in the media that Chairman and CEO, Olivier Lum, will lose all her shares in the company, she is probably not the ultimate loser. After all, she has got back her dues as a CEO and receive many years of dividends. Hyflux had established that cash dividends received by the chairman in the period between 2007 and 2017 was $58m (TODAYonline, 24 Feb 2019). Apart from the dividends, she had also been rewarded with an annual remuneration of between $750k to $1m as an executive. So, over the years, she has gotten back her dues. Perhaps the ones that suffered losses are the minority stakeholders. Many of them are working-class employees and retirees, who can only dream of earning a fraction of that $58m in their lifetime. None of these stakeholders got back what they had invested. The 6% promised yield was simply too mouth-watering compared to deposit interest rate of 1% or less at that time. The general belief for investing in the company was that it was producing a critical resource and would not likely be a let-down. Unfortunately, it failed. Many probably had lost their life-savings. Let’s ask ourselves, if a company were to pay 6% coupon faithfully, in how many years’ time will an investor get back what he had invested? It is 16.6 years not taking into account the value of money. So, base on this fact, none of the investors got back what they had invested as even the 2011 6% CPS issued by the company was less than 10 years. With the current state of affairs, there is really not much these investors can do. There is only so much money on the table for distribution and it falls so far short of the owed amount. Paying more for one group of people would mean less for another group. Certainly, the promised yield should not be the only criterion to get into the investment. (See the free beta-mode course for evaluating engineering companies.) In fact, investors should be well-aware that the higher promise return signifies that the higher possibility of losing their capital. Unfortunately, the high promised yield appeals very much to retirees as a source of passive income.     

In effect, the situation for the 2011 6% CPS was so near-yet-so-far. I was one of them. I had invested $5,000 and, all this while, the trading price has been above par. It was well and good until the last point when the issuer was to decide to redeem the preference share or to let the debt stepped up to 8%. Frankly speaking, I felt ripped off. Unfortunately, the nature of being perpetual gives the right to the issuer not to redeem the bond. What is the purpose of the step-up clause to 8% when it cannot deliver? Then, there are those who rushed to subscribe the 2016 $300m perpetual bond which was later up-sized to $500m. They enjoyed only one coupon distribution in 2017 to date. To a certain extent, it was with luck that I give this tranche a miss because I noticed that fundamentals were deteriorating badly, and the share price was descending fast. But still, if the proposal were to be accepted, I would have lost about 50% of what I invested for the 2011 tranche, not taking into account the value of money. Furthermore, the share distribution will make all the perpetual bond holders end up with odd lots, making it very difficult to buy or sell. Actually, for the perpetual bondholders, there is no way out other than waiting the bond issuer to redeem the bonds. Alternatively, they can sell in the open market, but during such critical times, the market is definitely trading at a deep discount. So, all-in-all, it has been a painful lesson for this group of investors.    

For equity holders, the picture is no better. For many years since 2011, the share price has been falling to reflect the increasing risk. At that time when it was suspended in May 2018, it was probably about 10% the price level of 2011. Unless one, can short the stock with extremely good timing, it is unlikely that one can really gain significantly by trading in Hyflux shares.

The real winner is certainly the SM Investment, a consortium formed from two Indonesian groups, Salim and Medco. They managed to buy opportunistically on the cheap, well below the projects’ book value. Going forward, it would be very dependent on how efficient the consortium is to operate as a group together with the Indonesia operations. Hopefully, they are able to reap sufficient economies of scale to operate efficiently and effectively. This, however, will take time as there are needs to make operational changes once the acquisition is confirmed.

(Lead me to a free beta-mode course on looking at engineering companies.)

Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned stock when the suspension is lifted. Everyone should do their homework before they buy or sell any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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All about brokerage charges

Let’s face it. Over the years, technology has taken toll on many middle functions. Stock broking is no exception. It is no longer the, once-upon-a-time lucrative high-profile business. Commission rates offered by brokerage houses are so competitive that there are hardly differences separating one from another. All the commission charges have two features in common:

(1) Contract value range ie. 0 and $50,000 (inclusive), above $50,000 to $100,000 (inclusive) and above $100,000.

(2) A minimum brokerage charge, of which almost all the brokerage houses charged at $25.

Generally, the only difference that separates one from another is the brokerage fee rate (in percentage term) for each of the mentioned contract value range. (See youtube video by clicking the link below.

So, once we know the brokerage rate for each contract value range, we can calculate the absolute amount in dollar terms how much one would have to pay for all the transaction fees including brokerage fees when we buy or sell SGX stocks on-line. Certainly, under this circumstance, a video would be extremely useful to demonstrate how it can be done.   

Excel spreadsheet software to calculate brokerage charges

The difference may be not be significant due to their infinitesimally small percentage compare to the trading (or contract) value. As such, a change of one or two bits upwards or downwards could have offset this difference. However, it is still important as an end-customer to know the figures are derived. This would certainly go a long way to help us optimise the brokerage charge. This is particularly true for those who trade very often. Of particular significance are at the transition point from minimum brokerage threshold as well as at the cross-over points at $50,000 and $100,000. They are marked in circles shown in the diagram.

  • Transition Point A. The transition charge from the minimum brokerage of $25. Generally, brokerage houses have a minimum charge of $25. The only difference is the transition point from $25 to either 0.275% or 0.28% for most brokerage houses. Consequently, there is a difference in the contract value amount. The higher the transition value, the better it is for the client. The difference, however, is infinitesimally small of less than $0.50 maximum. So, this factor alone is unlikely able to move traders from one broking house to another.
  • Crossover point at B & C. The brokerage charge dips quite significantly at $50,000 and $100,000 contract value mark. What do those numbers mean for clients? To help reduce the brokerage (though insignificant compare to the absolute contract value), trades may be carried out at slightly higher value than $50,000 and $100,000 respectively. Let’s look at the DBS and Jardine C&C as examples. They are trading at about $25 and $36 per share currently. If I were to buy or sell 2000 DBS shares, the contract value would be about $50,000. For $50,000 or less, the brokerage charge is 0.28%. This is calculated to be $140. However, if I were to trade at $25.01 per share, the brokerage rate would have dropped to 0.22% or $110.04. This means that I would have saved $30 in brokerage, but of course, this saving is offset by the higher trading price, which translates to $20 higher for 2,000 shares in order to reach a contract value of $50,000. So, there is actually a small saving of slightly more than $10 including GST. While coming from a viewpoint that if one is able to afford $50,000 a pop to buy or sell 2,000 DBS shares, the $10 extra in brokerage may not mean much, but still it is a good knowledge to know about. The same story goes at the crossover point at $100,000. Assuming if I am waiting to buy 3000 shares of Jardine C&C, it does make sense to buy at $33.34 than at $33.33. For 3000 shares at $33.33 would mean my contract value is $99,999 and the brokerage works out to be $220. However, trading 3,000 shares at $33.34 would mean that the brokerage is $180.04. After accounting for the higher trading value and GST, the savings again works out to be slightly more than $10. This, again, is quite insignificant compare with $100,000 in contract value. (Based on my self-programmed excel software, the difference comes to a little more than $12 for both cases.) This ‘trick’, however, is useful only for high-priced stocks, such as DBS and Jardine C&C. For lower-trading price stocks, they are not useful because it takes a sizeable quantity to reach a contract value of $50,000 or $100,000. Just allowing 1-2 cents increase would magnify the trading value so significantly that a lower brokerage rate would not able to offset the difference in the trading value.

Overall, it is a good mathematical knowledge to know although I do not think the brokerage fee alone will move customers from one broking house to another. Furthermore, they can only happen for ‘special-case’ situations like trading in DBS or Jardine C&C shares. Most of the time, they do not apply. Generally, clients only move due to a confluence of factors.

All that said, it is important that our actions to buy or sell stocks should not be based on penny-pinching decisions of one cent. After all, brokers and remeisiers do work hard in their professional capacity to service clients. Certainly, they deserved to be paid in some ways. What we should be more concerned is whether the stock that we want to buy or sell can move in our favour. That should be the more important factor to look at.                 

Disclaimer – The above pointers are based on the writer’s personal experience. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned stocks. Everyone should do their homework before they buy or sell any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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Don’t make the same mistake that I made 2 decades ago

For the calendar year 2018, the Straits Times Index (STI) retreated from 3400.91 at the close of Year 2017 to 3068.76 at the close of Year 2018. The absolute fall for the calendar year 2018 was more than 10%. It had defied the predictions of many analysts. Many of them were generally bullish at the beginning of Year 2018. By today, on the 1st day of trading for Year 2019, it retreated another nearly 30 points, -29.87 (to be exact). Surely, many players have been slowly but surely cashed out of the market as the market retreated. Even those with cash to spare were not willing to get into the market. Just as we know in economics, there were more sellers than buyers for year 2018. That, precisely, was the reason for the market to fall.

With each market fall, it flushes out some players. The unfortunate thing is market retreats and advances are never linear with time. They are never exactly predictable, especially over a longer of period of 6 months and longer. Market volatilities are due to the changing political, economic and social conditions that are thrown out into the market from time to time. Frankly who is able to predict what an influential political figure will say or act next week or next month or next year. Most of the rise and falls were due to some smart Alex out there trying to anticipate the moves of these people before things really happen. Unfortunately, time and again, it almost always sucks in new players and throw out some others as the market rise and falls in a falling trend. Many players, who were unable to take the market gyrations would have cashed out of the market, and stayed in cash in hope to fight for another day.

Let me say this. Market gyrations are not an easy thing to stomach, especially for those who are very watchful of the market movements. In fact, many are willing to take losses and leave the market instead of riding through the market ups and downs as sentiments get hazy. Along with the falling market, I am quite sure a number of us have this floating thought “I would rather take a small return of even 1-2% to protect my capital than to see my capital dwindling with time.” That precisely became the guiding principle that drives their action. So, instead of staying liquid after cashing out, they choose to put the money into more certain investments. They gladly put their money in longer term plans, such as fixed deposits and Singapore government bonds and even insurance plans that can only yield rewards (if there really are any), at least, 1, 2 years or even a few years down the road. I mention this because I happened to see some posts in social media lately. Some people seemed to have decided to take this course of action. Frankly, this was exactly the mistake that I made 20 years ago.  

STI was retreating for several years. It hit 805 in Sep 1998. It sprang back to 1500 by end 1998 and then to 1500 by end 1999.
STI from January 1997 to December 1999

For at least 2-3 years leading to the peak of the Asian Financial Crisis, the market had already been retreating. As a rookie who had never seen a long-drawn market retreat, I was holding out very hard in hope that the market would turn around. It never did. It was down and down. Then, suddenly, the stock market fall started to gain momentum, as the Asian Financial Crises started to bite. That was the time I caved in and sold out. Instead of holding the much smaller sum in cash, I put them in fixed deposits. That appeared to be the wisest thing to do at that time. Between a steep falling stock market and a high fixed deposit (FD) rate of 5%, it was almost a no-brainer to put the money in FDs. The reason for the relatively high rate was that liquidity was drying up as the neighboring countries were battling to stamp the falling value of their currencies due to massive currency outflow. Along with the falling currencies, stock markets were retreating at an accelerated pace. My naive thinking was this – one year is not a long time, and hopefully by then, the market would be calm again for us to re-invest. Meanwhile, we should let the money work hard for us by channeling it to an avenue that yield the highest possible return.  

It was a wrong move. While the cash was still in the FDs, the market was making a huge turn around. For the next three months (or around end 1998) after the bottom, it gained 50% (In fact, 50% was an understatement) – see diagram. What the hack! I had effectively traded off a 50% gain within 3 months for a mere 5% gain in a year down the road. From the low of 805 in September 1998, it zoomed all the way to around 1500 by the end of 1998.  Then, it gained another 50% from 1500 in the year that followed. So, by end of 1999, it was at 2,500, recovering all the losses that it incurred in the previous few years.

What were the lessons here? Cash is king during a crisis. So long as it is not invested, cash remains as cash. Cash is no longer the king when the crisis is over. Count ourselves lucky if we had sold out before a huge market fall. But we need to re-invest at the right time to make significant gains. In other words, we need to be right twice, to time the selling correctly and to time the buyback correctly. When it is too late, just ride through. It’s a matter of the survival of the fittest. In fact, consider to invest more if you have the means. You may have the last laugh.

Disclaimer – The above pointers are based on the writer’s personal experience. They do not serve as an advice or recommendation for readers to buy into or sell out of the market. Everyone should do their homework before they buy or sell any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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Are we over yet?

Just two days ago, the FED raised the interest rate by 25 basis points to 2.5%. Going into year 2019, it is expected that there will be another two more hikes. In a scenario when global stock markets have already been battered for some time in the last few months, this certainly drove the final nail into the coffin. Stock markets all over the world tanked further. Even the apparently strong Dow Jones (DJ) also succumbed to selling pressure. For the week, from 17 December and 21 December, the DJ fell more than 1600 points or close to 7%.

As of today, it appears that there are more uncertainties compared to, say, 6 months ago. Most of the major economic blocks are, in one way or another, entangled in some kind of political and economic tussles. Amidst the impending interest rate hikes, there are at 5 issues that are still in a limbo and they appeared to have higher propensity of tilting the balance negatively than it would positively.

The growth of the US economy

Although the US economy is still showing signs of growth and low employment figures that are enough to trigger FED to increase the interest rate, and even signalling another two further hikes in 2019 to achieve its long-term sustainable target, there are concerns that the accelerated pace may tip the US economy into a recession. This can happen very quickly. The Dow Jones stock market reacted just that, declining more than 1,600 points for the week. Perhaps, the low experienced this week may not be the lowest for now. The sentiment can remain weak for some time.

The trade war between the US and China

Many of us probably have under-estimated the impact of this trade war when it first started. When two largest economies are at logger-heads, the other smaller economies suffer. The initial tit-for-tat tariff war imposed by the US and China seemed to have gone a step further, involving the detention of important key personnel and the race to attain 5G network capability. As the trade war starts to widen in its extensiveness and depth, an easy resolution is not going to be come by so easily. On paper, or at least in the short term, US appears to be at the upper-hand due to the significant trade imbalance between the two countries. But this may not be so in the longer term. For one, the next administration may not hold the same view as the current one, but the Xi-administration in China may be a long eternal one. In the meantime, perhaps China is adopting a ‘buy-time strategy’, awaiting an internal implosion to happen. In fact, it appears to be so, given the number of departures in the Trump administration. In the meantime, China is extending its reach to fill up the voids left out by the US in the Trans-Pacific Partnership (TPP) and the ‘one-belt-one-road’ initiative. These have longer impact for putting China to become the centre of influence in years to come. But, of course, in the short term, it is still a question of who will enter the ‘threshold of pain’ first. Still, whether the balance is going to tilt towards China or US, it would not be favourable for the trade-dependent economies and the global stock markets. In all likelihood, most of the smaller economies have direct exposures to the two economies. 

The Brit-exit

Comparatively, our exposure with UK is relatively small, but still it is one of the major economies in the world. The more worrisome situation would be the contagion effect that can trigger any one of the 27 countries to move out of the EU. In fact, there was a precedent in 2011. Greece was literally bankrupt and, in a way, appeared to almost bring other economies, such as Portugal, Italy, Ireland and Spain along with it. The STI at that time retreated around 15%.  

Denuclearisation in North Korea

While some efforts are being carried out, the full nuclearization at the Korean peninsula appears to be still a far-off reality. In fact, just recently North Korea threatened to re-start the nuclear programme unless US lifts off the sanctions (ST 4 November 2018). While US wanted a full nuclearization before lifting the sanctions, North Korean insisted the lifting be in lock-steps with the denuclearisation effort.  It could be a deadlock situation that takes a long time to resolve. Although we have practically no exposure to the North Korea economy, we cannot fully eliminate the fact that other surrounding countries such as Japan, China and South Korea may get involved in this long-drawn tussle as well.

The recent spat between Singapore and Malaysia

While most of the people on both sides of the causeway wanted issues to be resolved amicably, there will always be some discomfort among investors whenever border issues were brought up. So long as there are these teething problems remaining unresolved, it would not be good for the stock market, whether it is SGX or Bursa Malaysia.

In fact, there are more, such as the on-going tension in the middle east and the over-lapping claims among many countries around the South-China Sea.  In the midst of climbing interest rates, liquidity can evaporate very quickly, and that is when we start to experience huge falls in the stock indices as seen in the Asian financial crisis and the global financial crisis.

While I may have unconsciously painted a dark picture for the stock markets, I personally believe we should not completely extricate ourselves from the stocks. I am not saying that sentiment would turn for the better soon. In fact, I believe it will possibly continue to get worse going into the next year (please take this as a personal opinion) or, at best, remains the same. Right now, there are no apparent catalysts to trigger huge purchases. The tough investing market, in the last few months, have elbowed out many marginal players out from the world stock markets, leading to an approximate fall of 20% fall from their respective peak positions.    

As of today, stock prices have come down to a more comfortable level to nimble. Unless there is a huge dividend cut across the board going forward, especially among the blue-chip counters, dividend yield has reached a fairly attractive level. From my personal experience, stocks are one of the best inflation hedge instruments if we take a long-term view. That said, it is also not the time to go in a big-way as if there is no tomorrow. Amidst the increasing interest rates, liquidity could evaporate very quickly and stock prices can fall off the cliff in a free-fall fashion. So, the key is to take a long-term view and nimble slowly if you believe that stocks have reached a reasonable level for purchase.     

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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