Keppel Corporation

What a pleasant surprise! Temasek Holdings (TH) through its wholly owned subsidiary, Kyanite Investment Holdings, is proposing a partial offer to acquire 30.55% of Keppel Corporation to increase its shareholding from its current shareholding of 20.45% to 51.0%. Based on the latest annual report, as of 5 March, the 30.55% would translate to about 555 million shares. At the offer price of $7.35 per share, the total bill would come to about $4.08 billion. Mopping up 30.55% from the other 79.55% would certainly help push up the current market price, which has been in doldrums for the past 3 years or so.     

As always, before you jump into the bandwagon, do your homework. Perhaps, the following pointers would be helpful for assessing the situation.

Why can’t TH buy from the open market quietly instead of offering a premium of 26% above the last traded price of $5.84?

Theoretically, TH can do so in the open market. But to increase its shareholding from 20.45% to 51.0%, it would either take a long, long time without causing too much disturbance to the market price or to cause a sudden upheaval in its trading price if it wanted to do so within a short time. It may even cause the trading price to overshoot way above its intended proposed price of $7.35, thus negating its intended purpose of open-market purchase. Imagine, pouring $4.08 billion on the buy side for the next one year or so, it would surely make it even more expensive and takes a longer time for TH to reach the 51% threshold. Unlike the minority shareholders who can buy 1000 or 2000 shares without causing market ripples, a major shareholder’s move would push up the share price significantly within days and even within hours. As it is, the major shareholder looks at the control side of things. Certainly, an offer of this nature, it is inaugurating a strategic move. To all intents and purposes, the action has to be swift and decisive, hopefully in one swipe. In fact, it has already been discussed extensively in the media that TH may use this acquisition to merge offshore unit of Keppel Corp and SembCorp Marine to level the playing field given the strong competition from Korea and China. After all, TH has already had almost 50% of Sembcorp Industries, which is the parent of Sembcorp Marine with a shareholding of 61%.  It certainly makes sense for the merger given that Keppel share price is at its low end of the price spectrum. Once that is done, the next step for the merger would be just a breeze. 

Why not arbitrage by buying from the market and then sell to TH at $7.35?

I believe many investors also think likewise. After all, there is a significant price difference between the trading price and the offered price. Again, theoretically, it is true. But before you do that, it may be important to look at the various scenarios. The end-results of the offer can fall into any of the three broad scenarios:

  • Case 1 – The total shares put on offer falls short of the 555 million shares. In this situation, TH is likely to buy up all the shares on offer and then bridge the shortfall by buying from the open market. In this situation, the minority shareholders will be generally happy because all their offered shares were being taken up. Perhaps, if the offer falls too short of 555 million, TH may let the offer lapse as in the pre-conditions for the partial offer. As a matter of opinion, in such a situation, it is likely TH keep the offered shares even if the offer falls through. After the moratorium period, TH can then make a fresh offer. Personally, I think TH has done sufficient homework that offering at the price of $7.35, a premium of 26% over the last trading price, should be able to attract sufficient quantity of shares for it to reach 51%.  
  • Case 2 – The total shares put on offer is exactly 555 million shares. This is a happy situation for everybody but the chance of it happening may be slim compare to the other two cases.           
  • Case 3 – The total shares put on offer exceeds 555 million. This scenario is quite likely. Given that the share price has been sinking gradually for several years and falling under $7 per share for more than a year, many shareholders would be very willing to offer their shares at $7.35 to TH. However, this situation can be quite tricky. If the quantity of offered shares is only slightly higher than 555 million shares, maybe TH might simply buy up the extra shares. If offer shares are significantly above 555 million, chances are that minority shareholders, who offer their shares, end up with some odd lots. Imagine if you decide to offer 1000 shares and the total shares on offer is 1 billion (about 55%). In such a pari-passu situation, TH will only buy 555 shares from you, leaving you 445 shares. Of course, only god knows the final quantity on offer, but given that weak share price of late, this situation remains a high possibility. If your average price that you paid for your shares is reasonably low, say below $6 per share, it may not make you distinctly unhappy. But if the trading price is already very close to the offer price, then maybe it does not make sense to arbitrage as there remains a possibility that the offer falls through.       

Will all the other 79.55% offer their shares to TH given the low share price now?

Shareholders so long as they are not subject to moratorium requirements can offer their shares. However, not all are willing to offer their shares. Perhaps, there are shareholders, for sentimental reasons, do not want to sell them. Perhaps, there are people who bought their shares way above the offered price and decided to become super long-term investors. Or, some may believe that its value is much higher than the offered price of $7.35 per share. And, maybe some may want to offer only part of their Keppel shareholdings to TH. So, it is not likely that all the 79.55% will be put on offer. The fundamental truth is that the higher the premium over the last trading price, the higher the likely quantity put on offer. Similarly, the longer the trading price stays depressed, the higher the likely quantity of shares put on offer.

Will Keppel Corporation issue new shares instead of buying shares from existing shareholders?

It won’t be the case. Issuing new shares to a corporate or another person is a private placement and do not involve existing shareholders. It has already been clearly stated in the document to SGX that TH is making a partial offer by buying off from existing shareholders. The purpose is to have a majority control likely for some strategic reasons, so why do they want Keppel Corp to issue new shares. The offered fund does not go to Keppel Corporation. It comes from TH and goes directly to the pockets of existing shareholders. Issuing of new shares would make sense only if Keppel wanted to expand, pay debts etc. Only then would the fund get into Keppel Corporation for its operation. Private placement by corporate and offers made by the majority shareholders are two distinctly different things.    

If you are already the shareholder of Keppel Corporation, the offer documents will reach you soon. As for me, just wait for the offer document and then decide the quantity to put for offer. I do not want to short-change myself by selling in the market at lower price compare to the offer price at this time. It does not matter whether TH takes my offered shares in whole or in part. The offer by TH is already on the table. It won’t run away. The only uncertainty is what is the aggregate shares put on offer. For that, I have no control. So why should I worry about it. Just sit back and wait.

Best of luck! Happy investing!       

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 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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What is the difference between investing and gambling?

This question pops out from time to time – what is the difference between gambling and investing? I bet many of us have some idea, but unable to clearly explain what really separates the two. That is why we often see people rushing to buy stocks with a gambling mindset.  For most of us, buying stocks and buying 4Ds are all in a mixed bag categorized as ‘money-making opportunities’, as both of them make use of money to make money.

In the book ‘Building Wealth Together Through Stocks’, I have dedicated 4 pages of it to explain the difference. I hope readers take time to ponder over the issues discussed. A financial book of such nature should not be read like a novel. Certainly, in its very simplistic form, it could be easily completed within a day or two. But if one were to do that, he is likely to miss out some salient points. The idea of making it simple is to enable readers associated the salient points with their own experience as a backdrop and draw up important lessons from there. This is the best way to learn financial lessons. As one goes through the book, he should be asking mind-boggling questions like – why the author is doing this and not doing that. If I were in that position at that point in time, what course of actions should I take given the future unknowns. Obviously, in our investing journey, there are always rights and wrongs that we had made when we review things in hindsight. By getting into these pertinent questions, then one can draw out the critical lessons to help frame our financial journey ahead.

Before we start to identify the differences between investing and gambling, let us point out the obvious. Whether we are investing or gambling, we need money upfront. If we do not have money as a form of ‘bet’, nothing works. That said, the huge difference lies in the outcome.

First and foremost, there is the mouth-watering payout. In any form of gambling, the payout is the most attractive part. It is a huge magnet to draw in punters. Take the case of 4D. The first price wins $2,000 on a dollar. The second goes for $1,000. The third gets $500. Even the consolation price gets $75 on a dollar. The ratio between the payout and the outlay is many times. This is the most attractive part of gambling – making ‘big money’ out of a ‘small investment’. Due to this huge difference in the payout against our ‘bet’ or investment outlay, we often see long queues in 4D outlets, especially during times when there are promotions offering strike prices going into millions of dollars for TOTO draws. In investing, however, it is a different story. It is quite difficult to gain even 50% on a dollar within a very short time to begin with, let alone hitting a multi-bagger. It can take years and even decades to do so. In fact, if one were to review his portfolio, some stocks may not even touch 2 x bagger at all.

Then comes the next few points. The best way of illustrating it is to bring out a story. There was once a big-burly 16-year-old teenager, Mike, who liked to play the same old prank on a 10-year-old boy named Jack. Mike flashed out two coin – a 10-cents dime and a 50-cents half a dollar. Every time, when the game was played, the Jack chose the 10-cents dime and he got to keep the coin. It had already been played for 11 occasions, when older boy decided that he should reveal to a common friend, Joe, how stupid Jack was. On the 12th occasion, the Joe decided to witness the game and to better know the level of financial literacy of Jack. Once again, Jack chose the 10-cents dime instead of the 50-cents half a dollar. Unable to control himself, Joe decided that it is time to let Jack knows how stupid he was. In the absence of the bigger boy, Joe spoke, “Obviously, you are not smart enough to choose the high value coin. Don’t you know that the 50-cent coin has bigger monetary value than the 10-cent coin?”. I am quite sure many of us would have the same thought as the Joe, right? Please do not go further beyond this point until you really sit back and think over this issue.

This was the answer from Jack. “I know I am very stupid to choose the 10-cent coin. But if I were to choose the 50-cents coin, he would play the game only once and it is a game over for me. I have played the game with him for 12 times and I have gotten $1.20 so far. I can play this game forever so long as he does not know what I am thinking”.

What lessons can we draw from this simple story? There are, in fact, a few overlapping take-aways:

  • In the story, there are two choices and the outcome is one of the two choices. In other words, it is a binary decision. We choose one or the other. In gambling, it is a binary outcome, either we strike or we don’t. But, unlike the above story, the probability of a strike is so low that net probability (in mathematics, we call it expectation) is always in the favour of the house. In other words, if we buy all the possible 4D numbers of $1 each, the returns that we got from all the strikes is still unable to cover the total cost of $10,000 to buy up all the possible 4D numbers. The net effect is that the house always wins. When there are more players, better still for the house. It is the summation of all the net gains from each individual. In investing, there are actually three possible outcomes. One can gain, one can lose and a less obvious one, one can draw or just break-even. In a normal circumstance (or unbiased situation), the probability of the gain and the loss are quite equal, but the probability of the breakeven is significantly less compare to the two. The gain and loss are also not significantly discrete like in gambling whereby we know the payout. While the gains and losses in investing are still discrete, they can span over a huge price range such that the win-loss probabilities can be transformed into a continuous bell curve. So, in effect, some gains and losses are significant while others are not. That explains why some people made big gains while others make small gains out of just one particular stock.
  • What attracts me to investing is certainly is not the number of outcomes per trial mentioned above. It is the number of trials that we can play per investment. In the mentioned story, Jack is not worried out about the quantum of each return he played. What he is worried about is that he could only play the game once. This is exactly the situation of gambling. In gambling, the outcome happens only once. In other words, we bank all our hopes in that one and only outcome. For example, in a 4D draw, we place a bet for a certain date, If we strike, we are happy, but if we don’t, we don’t get a second chance. In investing, we get multiple opportunities actually. If we are unhappy with the selling prices (or outcomes) for the day, we can come back another day to sell our investment. In other words, we have plenty of opportunities to buy or to sell an investment. In fact, the opportunity is infinite so long as the stock is still trading and the stock market is still there.       
  • Another advantage but often neglected point about investing is the timing of the outcomes. In gambling, we have no idea of the outcome. Up until the draw, nobody knows exactly what the outcome is like. Think of a 4D draw. Nobody is certain what is going to come out as the 1st price, or the 2nd or the 3rd. It is a total bet based on luck. It occurs once and only once. But one thing is obvious. We have to place our bet before we can enjoy (or angry about) the outcome. In other words, our action is before the outcome. In investing, due to the multiple outcomes, there are actually precedents to guide us on the trading price. If we are more or less happy with the on-going trading price, we key in our trades. If we don’t, we sit by the sideline to drink coffee and be an observer. Even if we missed out in buying or selling a stock, there is always another opportunity down the road. In other words, we can wait and sit on it. In a certain extent, the outcome comes before our action and we can choose whether to act on it.      
  • In the story, Jack definitely adopted a long-term strategy. He knew that if he took the 50-cents coin, he could only play the game once.  But if he were to take the small gains each time, he could do it over a long time. Over time, the cumulative returns, unknown to the others, surpassed the one-time significant gain. In gambling, the outcome for each trial happens only once. The outcome for the next trial is independent of the first and has to start off with a fresh bet. In others, the two trials are mutually exclusive. If there are more trials, they are also independent of the earlier trials. In other words, we are unable to set a long-term strategy. In investing, it is possible to set up long-terms strategy. If we believe a stock has a good long-term potential, we can consider to hold it long-term. Over-time, we can buy more, accumulate them, benefit from the dividend distribution while waiting for the stock price to go up. This can go on and on, so long as the stock is still trading and the stock exchange continues to operate.           

These points are sufficient pointers to help readers relate the lessons learnt with true experiences. There could be more. So, I hope readers draw in their life financial experiences while reading the chapters of this book.  

From now till 30 September, the ebook will be promoted at $16 and the physical book for a local address is priced at $18 + postage charge. (Postage charge to be borne by addressee. All purchases to be made via SingPost). Payment for the ebook can be made via www.investingnote.com. Purchase for the physical book shall be made via www.bpwlc.com.sg/contact-us, stating your name, mailing address, quantity to purchase. All payments shall be made upfront before the physical book is mailed out.             

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.

I want to have a free ebook on “Ten golden rules of stock investment” NOW!

More news on www.bpwlc.com.sg.

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OCBC is still growing

Once again, Overseas-Chinese Banking Corporation (OCBC) is dishing out to scrip dividends to existing shareholders. With the discount of 10%, this translates to a mouth-watering conversion rate of $9.57 per share. Given the steep discount, it is likely that many existing shareholders would choose scrip dividends over cash unless the bank share price tanks unexpectedly from now to 18th September. After all, we all learn about power of compounding and it makes sense to continue to invest in this bank whose history existed even before the 2nd world war.

In an effort to keep up with the growing dividends offered by other banks, the declared dividend for the 1st half of 2019 financial year is $0.25 share and is 2 cents higher than that declared for the second half of financial year 2018. Over a period of 10 years, the annualized increment in dividend rate in spite of its increasing share base translates to about 5.8%. With the latest declared dividend of 25 cents per share, it translates to a hefty distribution of more than S$1billion in dividends just for the 1st half of 2019 alone. With the huge dividend payout, and relatively low conversion rate, it is likely to push more shares in the float. It is certainly no child’s play.

But then, why does the bank want to offer scrip dividends to expand its share base? Certainly, it is going to affect the return on equity (ROE) going into the future, unless the bank can better deploy the conserved cash. Without dwelling too much into detailed calculations, the bank appeared to be purchasing its own shares from the market at between mid-$10 and mid-$11 on average, and this scrip dividend distribution at a discount of 10% would have benefited existing shareholders at the bank’s expense. After all, it had already met its CET-1 requirements and there is no necessity for the bank to conserve more cash. So, the only conclusion is expansion plans are on the card, and OCBC beefing its war-chest for such future acquisitions.

A few possibilities are:

  • Buy up the last 13% of Great Eastern shares (GE) and take it private. This is highly unlikely. OCBC had already tried 2 times (maybe more). The last was offered at $16 per share. Unfortunately, the die-hard shareholders held steadfastly to their shares that the take-over bid failed miserably at that time. Now with the share price oscillating between $25 and $30 per share, the possibility to buy up the last few percent is even more remote. It needs a huge premium to dislodge the shares from these shareholders’ hands. Given the expensive exercise, it is very likely that OCBC will leave it status quo and focus on other regional opportunities.
  • Buy up OCBC NISP. Possible, but comparatively unlikely. Again, the last 15% shareholders are likely to hold steadfastly to their shares. Furthermore, there is an authority to deal with, which can come in a surprise. Just a few years ago. DBS’s plan to buy Indonesia’s Danamon Bank (Indonesian’s 6th largest bank) was foiled by the authority placing a 40% limit by foreign institutions. Of course, there is a possibility that OCBC looks to acquire other Indonesian banks, but then it may not serve significant purposes given that it has already had a presence offering banking services there.  
  • Increasing its presence in the Greater Bay Area (GBA) in China. This appears to be more likely situation. The CEO has indicated 1-2 year ago that his target is to increase the return from the GBA over the next 5 years.  In all likelihood, more resources are likely to go into this region. To date, OCBC has a shareholding of about 12% in the Bank of Ningbo (BON). More recently, it had successfully, acquired Wing Hang Bank in Hong Kong. So, we should expect OCBC to push its growth trajectory for this region.

But then again, to shareholders, growing and acquisitions would mean taking on more risks. If we choose to take the scrip dividend in lieu of cash, we are in a way proportionally taking part in the risk-sharing process made by the bank, for good or for bad. The risk part of the equation, quite often, is conveniently forgotten or, perhaps, obscured by the attractive scrip dividend conversion rate.  

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.

I want to have a free ebook on “Ten golden rules of stock investment” NOW!

More news on www.bpwlc.com.sg.

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

Yangzijiang

A former student messaged me on the eve of our National Day that Yangzijiang (YZJ) share price had dropped 20%. For the past 2 weeks or so, I have been very busy and have no time to look at how my stocks performed. What am I busy about? (Click here). Indeed, by the time I was able to avail myself some time, it was already national day on 9 August. The stock price had plunged 20% to $1.04 per share from the previous day close of $1.30 per share. It had already been suspended. Following the national holiday, there was a super long weekend. It was with luck that I had sold 40% of my holding in April. I would have called it an ‘insurance’ sale, taking a leaf from Jerome Powell’s insurance cut of interest rate of 25 basis point on 31 July 2019 to guard against global uncertainties. The stock price has been oscillating stubbornly high between $1.40 and $1.65 recently. Since 2011, the last high around this level was 2 years ago. Given the on-going trade war, it would be a miracle if the share price can continue to remain this high for the rest of the year. Certainly, it would be prudent to take some money off the table and do what I wanted to do, while waiting for an opportune time to buy back the stock when the time comes. With that sale in April 2019, it was a great feeling that all the remaining stocks were held at zero cost down.

Actually, in the last 6 months or so, the stock price seemed to be out of sync with the other stocks. It was especially glaring in view that all the other stocks had already fallen quite a fair bit amidst the trade war between the world’s two largest economies (see previous post – As we approach mid 2019).  However, YZJ share price seemed to be extremely resilient even though China has been a direct target of the US in this trade war. In fact, the share price has been defying gravity when it was less $1 per share less than a year ago. 

When the suspension lifted on Thursday, 15 Aug, its share price had run up from the close of $0.86 to $0.99 on Friday helped by the company’s open market purchases. With the relatively small percentage float held by shareholders of less than one million shares, it is no wonder that the share price can move ferociously in both ways. With that, it has been a great opportunity to replenish my stock holding again at almost 50% discount. However, there is a still one unclear hurdle. It is interesting that the chairman takes a leave of absence in a police investigation. Although the recent news release somewhat cleared the air, it is important that we should not let our guards down. A slight ripple can affect the share price again. We know from past incidences that when a bad news strikes, it topples the share price very fast. This is especially true for corporations whose operations are far away from our shores. That said, it is always good to know that a corporate has a succession plan in place.  

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.

I want to have a free ebook on “Ten golden rules of stock investment” NOW!

More news on www.bpwlc.com.sg.

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Happy National Day

Happy National day to friends, colleagues and students.

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Stock analyses

Analyst report – what really matters?

As stock investors, it is almost an everyday affair to come across stock analysis reports. It is not uncommon to across analyst reports comprising 5-6 pages of graphs and write-ups. Perhaps, it is meant to instill in readers that painstaking analysis is real hard work, and that not many people are capable or willing to do them. Actually, the way I see it (and perhaps many readers out there would agree) is the final conclusion of whether it is the ‘Buy’ or ‘Sell’ call that matters to everybody. The target price is probably all that matters. To make it especially appealing to readers, most brokerage houses design this most important conclusion to be at the most significant part of an A4 page, usually the upper right-hand side of an A4 page. So, within 3 seconds or so, a reader knows the conclusion of the whole report. The rest of the contents in the report is quite secondary. Most of it is to spice up or to reinforce how the conclusion was arrived at. In all likelihood, most people give the details a miss, and will not question the analyses or the assumptions behind those analyses. After all, people gave the benefit of doubt that nobody is really able to predict the future.

Relying too much on analyst reports

From an investor’s perspective, following a report and acting on it, is a wisest way of doing things. After all, many of us do not have much time to even read a report, let alone researching and feeding data into our analysis to arrive at some decent conclusions.  In very plain words, it is a lazy but a clever way of doing things by leveraging on someone else’s hard-work. After all, it is really herd mentally. If everyone believes in it, the truth actually presents itself. In fact, this is how technical analysis came about.   

Why are some stocks heavily covered while others do not?

Brokerage houses issue reports to get people interested, in particular, the big, blue heavy weights. The reason is that they are liquid and are of very high value. These stocks generate highest income for brokerage houses. The higher the frequencies of trade in these stocks, the more income they would generate for the middleman. Almost always, illiquid stocks do not get to be covered by analysts. What is the purpose of covering a stock when the daily trade is only a few hundred shares a day, right?

Differences in analyst opinion

Analyst reports may give conflicting conclusions. Remember, stock investors do not expect analysts to be just stock reporters. The general expectation is that analysts must be able to read or extrapolate into the future. In so doing, analysts have to make assumptions when making analyses. This can result in huge differences in their opinions. For example, a recent case of Capital Commercial Trusts, (CCT). Following the purchase of an office building at Main Airport Center. from its sponsor, Capitaland, in Frankfurt, Germany. I came across three analyst reports offering three different conclusions. One said ‘buy’, one said ‘sell’ and the last said ‘Hold’, perhaps taking a neutral position as a safer option. The fact is that nobody can tell the future. Therefore, it is common to make assumptions in order to make projections. These assumptions can be grossly wrong. Even if the assumptions may appear to be reasonable at the time of analysis, disruptions may happen in reality causing the actual trading price to differ significantly from the projected stock price.

(Since, I am on the subject of Capitaland. I remember for many years, Capitaland’s stock price has always be valued about $4 per share. That went on for many years as far as I can remember. To date, I noticed that it never even stayed above $3.70 per share convincingly.)  

Analysts are humans too

I am not sure of the internal checks of brokerage houses. Analysts are human beings too. They can have personal bias. Perhaps, it may be difficult for an analyst to issue a ‘sell’ call when he fell in love with a stock. Or, he may be under pressure to issue, at worst, a ‘Hold’ because the everyone is optimistic about a stock. Over the years, my observation is analysts tend to issue ‘buy’ calls more than ‘sell’ calls. Perhaps most of the stock coverage is in blue chips. Certainly, a ‘buy’ call is the natural choice because the actual stock price seldom reaches the target price as no one wants to hold the last baton. Even if a stock price is about to reach its target price, new reports are issued to reflect a higher target price. (I remember years ago even before the oil price crashed in 2016, Keppel Corp share price was projected to hit $13-$14 per share when it was trading around $10 to $11 per share at that time. In the best of my memory, it did not even hit $12 per share from then until now. To date, it is trading below $7 per share.)

Why analysts then?

Some people say just treat analyst reports as a pinch of salt. They are never accurate. If that were the case, then why do we need analysts? In my many years of observation, I notice that analyst reports may have some influence on share prices. There are a few things that analysts can help as far as the stock market is concerned.

  1. Being a full time professional, they are more focus in their job. Investors believe that they are able to provide more in-depth studies of the company and its operating environment. Furthermore, they have the benefit of conducting interviews with the company executives and visiting the company premises. Many investors do not have such opportunities, especially those on 9-5 jobs. To certain extent, company executives welcome them. Such communications serve as a conduit for company executives to provide the right message to investors. 
  2. They can help provide additional thought process. As individuals, we do have blind spots. We may have overlooked or even missed out things completely. We may have personal bias or fall in love with certain stocks, even though we may not openly admit it. We may not agree with the analyst reports totally, but they do provide different views surrounding a stock.
  3. In certain situations, such as a falling market, they can help stem a straight fall to lessen the pain of stockholders. They can help turn-around situation to provide a floor for the stock price. Perhaps, it may be a situation of self-fulfilling prophesy. But still, it works. Of course, in a similar way, they can also stifle the upside by issuing a sell call.

Getting recommendations from analyst report won’t produce the biggest upside

It is hard to say whether analyses report help or does not help in one’s buy/sell decision. But at end of the day, it is end user’s decision to make the judgement to buy or sell a stock. Stocks analysis can only do so much, at most be used as reference. To me, the best way to profiteer from stocks is really to do your homework. Remember, by the time when analyst reports land in the hands of investors, the stock price could have already gone up by 20%-30% because you are not the only one who knows about it. By then, tens of thousands out there would have already get their hands in it. So, when you spot a good stock and is out of the radar screen of the analysts, keep that to yourself. Load up the stocks and wait for the stock to come to live. It could be a few days, a few weeks, a few months or even a few years down the road. Just be patient. 

Doing it alone

But there are always the negatives if you are doing it alone. Remember, no one is beside you for you to seek solace when things go wrong. The journey can be quite lonely since no analysts are alongside with you. Apart from that, you must be daring to go for broke. Say, you have spotted an undiscovered stock with a huge upside potential. Are you prepared to put aside $10,000 and prepared to lose it all if things do not go your way? Let take OSIM for example. The lowest price during the global financial crisis in 2009 was $0.05, and the 1-to-1 right issued at that time at $0.05 was heavily undersubscribed. The amount of $10,000 would have bought 200,000 shares. Following that bad quarter, OSIM went into 23 quarters of growth and the trading price at the highest point was $2.94. That was equivalent to a whopping $558k on $10k investment. In other words, it was a 5880% upside! In hindsight, many would not mind putting $10,000 for a dream of 58.8 times upside. But really, during that time, many were more concerned about losing their $10,000 than trying to chase their dream of getting multi-bagger returns. And that was the exact reason why the share price sank to such a miserable state.

Taking stocks

At the point of writing, it has been more than 10 years since I left my full-time job. Thanks to the stock market, so far so good!

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.

I want to have a free ebook on “Ten golden rules of stock investment” NOW!

More news on www.bpwlc.com.sg.

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Save our Earth!

We just celebrated the 50th anniversary of man’s first landing on the moon. This photo was furnished by NASA. Look at this beautiful planet with natural oceans, tides and winds looking from the moon in 1969. There is no other planets that mankind knows of as beautiful as this Mother Earth. Do not destroy it by our own actions. Pass this beautiful place to our children, our grand children and great grand children….. Save the earth. Use less plastics…..PLEASE!

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As we approach mid-year 2019

Since the last post, the STI did indeed fell further forming a trough by early June. By this week, the STI regained some of its lost territory, landing at 3214.85. Banks are still lagging as the fall out of the US-China trade war began to infiltrate into smaller economies. It is a situation that when giants fight, all the others feel the ripples. For the 1st quarter of 2019, the actual GDP growth of 1.2% fell short against the forecast of 1.9%. Economists are now downgrading Singapore’s yearly growth rate from 2.5% forecast in March 2019 to 2.1% for year 2019. Certainly, the banks stocks are not going to fare well when the state of the economy worsens. Just months ago, it was widely expected that the FED would continue to increase the interest rate well into 2020. This would help mop off the liquidity in the system, resulting in higher net interest margin (NIM) for the banks. Right now, more and more are expecting the FED to lower the interest rate in response to the slowdown due to the on-going trade war. This would inadvertently slacken the interest margin again. Banks, which have been increasing their deposit rates recently, in preparation for higher interest rates may find their efforts come to naught if they are not able to lend them out efficiently.

Stock prices between 1st May and 14 June 2019

As mentioned in the last post, perhaps, it may worth not to take the dividends and to sell the stocks pre-dividend and then buy them later. The descent in May, indeed was more than selling the stocks pre-dividend and paying for the brokerages in both directions. To date, the bank stocks are still below their pre-dividend prices, but they could be up again possibly soon. In fact, for those who had bought around end May/early June should have gained a little bit by now.

Manufacturing stocks, like Venture Corporation, that were beaten down hard during the month of May have already seen their stock prices rising sharply in the last two weeks. In fact, their stock prices could have already gone above the pre-dividend prices. So those who have ridden through in May, especially those who were gutsy enough to swim against the tide to buy more during late May, should be sitting on some gains by now.    

In the last quarter, banks and REITs were both moving in the upwards direction. Recently, they find themselves on opposite poles. The bank stocks were weakening but REITs were gaining strength. Bank stocks were weakening for the reasons stated above, while the REIT prices climbed after several weak quarters due to widely expected interest rates hikes. As the interest rate hike cycle is expected to end by 2020, and now with the increasing possibility that interest rate is moving down again, REIT prices are now picking up again. More recently, the property developer stocks are also gaining favour just as REIT prices continue their climb. This optimism should hold as long as the interest rate is expected to be on downtrend. Personally, I think if the FED were to decrease the interest rate in this or the next FED meeting, it is likely to be a symbolic action in anticipation of weak economic numbers due to the fallout of the trade war. It is unlikely to mark the beginning of a downtrend interest rate cycle, at least not for now. The FED has been working hard for the past 10 years to remove excessive liquidities, such as tapering off bond purchases and followed by a series of interest rate hikes, without causing too much turbulences in the financial market. As of today, the interest rate still falls short of their long-term target of about 3% to 3.5%. Certainly, it is not going to give up that battle that easily. So, in this respect, the REITs maybe at their peak by now.           

At the first glance, shipping stocks like Yangzjiang (YZJ) appeared to be holding up well. In the month of May, it lost 20 cents. This, however, translates to a loss of more than 12%. In fact, in percentage terms, it lost more than Venture Corporation whose loss was about 8% for the same period. But still, it had gained 6% in the last two weeks. While the recovery from a loss territory is expected, the speed of price recovery appeared extremely sharp especially given the weakening US dollars due to the widely expected interest drop going forward.

Sector rotation is now at play.

 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.

I want to have a free ebook on “Ten golden rules of stock investment” NOW!

 

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

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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