Looking for certainties in the environment of uncertainties

Recent poll:

In a recent poll of

  • A sure win of $200
  • 60% of win of triple of $200 and 30% of a loss of double of $200

There were altogether 58 respondents to this poll, of which 37 (representing 63.8%) chose A and 21 chose option B (representing 36.2%).

Mathematically, it is not difficult to calculate that the expectation of option B is higher at $240. Certainly, many of those who polled know the mathematics behind this, but yet the polls showed that almost two-third of them chose Option A, that is, to put the money in the pocket than rather than chasing a possibility of higher return. After all, as the proverb goes, a bird in the hand is worth two in the bush, right?  So, what can we conclude from here?

One conclusion that we can draw from this is that despite the uncertainties of stock investing, we being human being beings, tend to look for certainties within this environment of uncertainties. That’s why investors tend to look for stocks that pay dividend than those that do not. This also means people tend to buy dividend stocks (or high yield stocks) than going for growth stocks (that pay little or no dividends). That could possibly be the reason why there are so much attention on REITs, despite that price change in REIT is not exactly significant over time. In fact, this Covid-19 pandemic, surfaced this. When people realized that their future distribution per unit (DPU) is at risks, everybody rushed out of the exit door resulting in a stampede. Those REITs that tanked 15%-20% were considered to be the better performing ones as some of them dropped as much as 40%-50%.

Even that, Singapore, by itself, is not exactly a good sample to compare growth stocks and dividend stocks because the number of true growth stocks are few and far in between. But over in the US, some growth stocks indeed can outgrow dividend stocks. Just look at companies like Microsoft. Its dividend was $2.04 per year as of FY 2019. The dividend yield based on today share price is merely 1.05%. In FY 2018, the dividend yield was hardly 1.5%, but yet its stock price ran up more than 50% in the last two years from $120 per share to almost $200 now.

Extending this finding further, it is not difficult to see why the penetration rate of Singaporeans investing in stocks is only 8% (can’t remember the source of this statistics). It means that despite knowing that stocks offer better returns in the long run compare to bank deposits and insurance, still people choose to put most of their money in the bank as deposits or buy insurance.

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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Demerger of Sembcrop Industries (SCI) & Sembcorp Marine (SCM)

On 8 June 2020, Sembcorp Industries (SCI) and its subsidiary, Sembcorp Marine (SCM), jointly announced a proposal of $2.1 billion renounceable rights issue for SCM. This involves a 5:1 rights issue to existing SCM shareholders as well as Temasek Holding (TH)’s upfront billion cash injection of $0.6 billion. Following the rights issue, SCM will be demerged from being the subsidiary of SCI to become a separate independent entity. The extra-ordinary meeting to convene the meeting is to be held on August/September period and will involve the two corporate entities as well as three parties, being TH, SCI shareholders and SCM shareholders.

Personally, I do not have any SCI or SCM shares. Therefore, I will not be involved in either of the two meetings. I can only envisage the possible situation and the post-merger impact on the companies if the resolutions are agreed upon.

The operations, post de-merger, will be neater for both Sembcorp Industries and Sembcorp Marine. Each entity can operate independently, focusing on their respective technical strength, and will not be encumbered by the other’s performance. However, this comes at a cost that requires $2.1 billion cash injections via rights issues from existing SCM shareholders and TH. Certainly, this is likely to be a sore point among the minority public shareholders, especially when this rights issue is highly dilutive. However, given the weight of SC’s holding of SCM shares, it is highly likely that this resolution will be successfully passed. The other two resolutions would be interesting to watch as the Security Investor Council (SIC) has ruled that TH and SCI be abstained from voting in the Whitewash Waiver in SCM EGM, and TH be abstained from voting in SCI EGM on the dividend distribution.

Post demerger, even though, the pressure on SCM’s debt obligations is somewhat relieved, the earning visibility is likely to remain very challenging. The oil glut situation leading to the recent crash in oil price is certainly going to weigh on SCM’s profitability and its share price in the near term. For SCI, the unloading of SCM would help boost its performance in its core business focusing on energy as well as urban developments. Lumpy revenues, high project costs and high debts remain the natural characteristics of the entities.

Good luck to shareholders of SCI & SCM.       

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 Keppel Corp, SembCorp Marine, YZ-ENGINEERING, YZ-Offshore & Marine, Z-FINANCIAL EDUCATION, Z-INVESTMENTS | Tagged , , , , | Leave a comment

The lockdown mailers

10th to 14th March 2020:

The market was very bad. The STI tanks around 16% (2960.93 to 2493.95) and was still on the way down. The Dow Jones also had a bad outing. The worst performing stocks on the SGX sank as much as 50%.

15 May 2020:

It’s a period of lull. The STI was range bound between 2500 and 2600 for more than a month. The lockdown for schools and many public places has already taken place for about 1.5 months. People were feeling uncomfortable of the lockdown, especially with the uncertainties lying ahead.

31 May 2020:

While many welcome the lift after the lockdown, the discomfort of the future remains. The way we do our businesses in post covid-19 is not going to be the same as before. There are likely to be job losses. We need to extend our comfort zone to embrace risks.

Interestingly, the market roared. It ascended by about 10% within the last 5 days. It coincided with the level when the 1st mailer was sent. Those who panic sold their stocks in the 1st week of March 2020 would probably regret their action.

Compiled by: Brennen Pak

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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Singapore Airlines (SIA)

On the requests of students concerning the recent SIA rights and MCB R, I have made a video to explain the technicalities of the rights issue. The last time I had SIA shares was more than 10 year ago While I have not been analyzing about SIA stock in particular, I do read about news related to the aviation industry.

As a matter of fact, the airline industry is a difficult sector to invest in. Many factors that can adversely affect an airline’s profitability are not within the control of the management. Recently, even the great investor like Warren Buffet also got rid of the entire stake of airline stocks in Berkshire Hathaway. The oil price and the emergence of low-cost carriers in recent years have sandwiched premium airlines into a relatively thin operating segment. To stand out in that segment, an airline has to have good service and a young fleet. While these traits that SIA has have won the praises of many passengers, they come with a heavy price. Good service is a reproducible trait that other airlines can mimic relatively easily. And, to always maintain a young fleet, it takes the airline to have good cash flow and fund management abilities. Out of the past 5 years, only one year in SIA’s financial reports showed positive free cash flow. Even that, the positive free cash flow in the FY 2016/2017 was not high compared to the negatives in the other years. Despite showing positive net profits for the past 4¾ years, it took just one last quarter in 2019/2020 to bring down the whole year profit into a negative region.

Peculiar to SIA, Singapore without a hinterland, it is almost impossible to operate effectively, let alone profitability. Now, with 96% of the fleet capacity grounded in the desert, it speaks for itself the expected profitability of SIA in the near term. Even with countries gradually lifting up their lockdowns, it would be a miracle for people to fly freely again in the next few months.

Then, there is difficulty in timing the jet fuel hedging and taking aircraft deliveries. With fuel taking up about one-third of its operating cost, it is not surprising that SIA hedges its fuel price to stabilize its operating cost. But with the crude oil slamming all the way from $70/barrel to the negative region within a quarter, it appeared extremely untimely even to hedge jet fuel at all. Like any other transport operators, once taken delivery, the assets have to work tirelessly to generate revenue. And, with the new aircraft like A380 unable to fly, the parking cost and depreciation are certainly going to put a further strain on its profitability at least in the near term.

In all, it takes a confluence of several favourable but largely uncontrollable factors for an airline to be profitable and free cash flow positive. Notwithstanding that, SIA is still the airline of my first choice.

Happy Investing and looking forward to seeing you in the new course (Stock 101)!

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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Investing lessons to learn from the Covid-19 coronavirus pandemic

The past 2 months or so has been quite punitive for stock investors and traders alike. Despite a few early cases of Covid-19, the month of February had been almost a non-event. The STI, despite sinking gradually, continued to stay above the 3,000 mark. Many market players took this gradual drop as an opportunity to load up stocks at a more decent price. The yield based on past dividend distributions was extremely attractive as stock prices fall. Local bank yields were heading towards 6% mark, an unthinkable number for the past 10 years or so. Until recently, despite rising dividends in the past 10 years or so, stock prices of banks have been correspondingly rising, resulting in bank yield falling in the range of about 3.5% to 4.5%. 

That changed altogether in the next two to three weeks when the market slide from the close of 3011.08 on 28 February to 2233.48 at close on 23 March 2020, a retreat of 25% in less than 3 weeks. That had caught many people off guard. Many had been buying in the month of February, in hope, either to get better yield for their stocks or to average down their purchase price after having bought some stocks at high prices. The REITs have it worse. Retail REITs like CapitalandMall Trust sank more than 40% from the high of $2.61 per share to $1.52 before making back to $1.85 level after MAS threw a few lifelines for REITs last week. The drastic change in the last three weeks had caused some distress among many market players. The whole global economic picture changed from a very optimistic state to be very pessimistic one as the world realized that the coronavirus pandemic is not just a passing one, but a much longer one causing many countries to be in a state of a lockdown or near to one.

The next three weeks since the last week of February to mid-March seemed to be better as many governments dipped into their pockets to help save their economies as a result of the lockdown. Since then, stocks have recovered about 50% from the steep fall.

Within a short span of just one quarter, the Covid-19 had already surfaced out several common investing mistakes.

  • The chase for yield can end up quite miserably. The hope to get high dividend can result in steep falls in stock prices during trying times, thus negating several rounds of future dividends. In fact, with the possibility of reducing dividends in future, this could push the ‘break-even’ point further down the road. This is not the only situation and certainly not going to be the last. The oil price crash in 2016 had put many bond-holders realized the heavy price to pay for the capital loss in bond prices. The recent Hyflux saga was the other one. These are the two recent examples that punished investors badly when we focus too much on yields. For a long time, this has been a learning point for me. It can come in many forms. On the whole, I realized that upside is more important than yield when looking for good investments. It gives us the margin of safety as an economic moat to ensure that we are still in the money even if the stock price weakens. Good yields will naturally follow when the fundamentals of our stocks gain traction.    
  •  REITS have been an income instrument for many people. REITs prices have been chased up and then slammed down about 30% in the midst of the crisis. The rebates that have to be doled out to retain tenancies would mean that investors are not going to enjoy the same returns like in the previous years. In fact, SPH REIT has already fired the first salvo to cut the DPU payout by78.7% to 0.3 cents per unit for Q2 in FY2020. Some other REITs are likely to follow suit to avoid cash calls that they need badly at this time. It has been lucky that MAS threw a few lifelines to save the situation last week. The has helped to push up REIT prices somewhat. The short-term effect for retail investors, however, is the reduced DPUs in the coming quarters. This certainly is going to be an extremely difficult time if one were to hold a huge portfolio of REITs.         
  • Let’s face it. We never like to lose. Even when our stocks are declining, we think of ways how to win back. We cannot control the on-going stock prices, so what we try to do is to average down. But averaging down in a down market is bad strategy unless we are very sure of a turnaround. The worst thing is when we are averaging at the beginning phase of the down market. This is a very common problem, especially when an investor believes that he has sufficient fire-power to overcome the price decline. Before we know it, we have parted our liquidity and, certainly, the confidence that goes along with it. Assuming if an investor has a portfolio of worth $200,000 and cash of another $100,000. For simplicity, let’s say the whole portfolio is made up of only DBS shares at an average price of $25. This means that he has a total of 8,000 DBS shares at the start. If he were to buy 1,000 shares for every decline of $1, he would have accumulated 12,000 shares at an average price of $24.17 when he expended nearly all his cash. Unfortunately, the on-going share price is at $21 which is way below his average price. In the recent decline, DBS stock price had actually gone below $17, which is a 30% down from his average price. It is extremely daunting in such a circumstance. That said, it is also unwise not to buy stocks when their value emerged. Remember, during a stock avalanche, good stocks and bad stocks get thrown out as fund managers need to maintain liquidity. So, the best policy is to space out our purchases, buying in small quantities. To stifle my itchy fingers in this circuit breaker period, I embarked on a project that I never had a chance to embark on during other times. This was the result of the project. I believe only a segment of the population knows about this historical monument.

 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.

Posted in YZ-BANKS, YZ-E_commerce, YZ-REIT, Z-FINANCIAL EDUCATION, Z-INVESTMENTS, Z-Personal Finance, Z-STOCK INDICES | Tagged , , | Leave a comment

ComfortDelgro Ltd

Since the video on Covid-19 was made in the week immediately after the Chinese New Year (CNY), signs are now beginning to surface of the near-term situations of transport companies. ComfortDelgro (CDG), which has been facing a dwindling operating taxi fleet from more than 16,000 in the beginning of 2017 to slightly more than 11,000 by end of FY 2019, is likely to be affected further as the effects of Wuhan Coronavirus start to bite.

 Operating model

Sans the onslaught of the Covid-19 epidemic, CDG’s business model has been under pressure in a few fronts. First, the operating taxi fleet has been dwindling for the past 3 years due to the competition from ride-sharing cars. Over the last three years, the operating taxi fleet has been shrinking in size from more than 16,000 in early 2017 to a little more than 11,000 in end 2019. For FY2016, the operating profit against revenue of taxis were $167.5m and $1340.8m, while for FY2019, the corresponding figures were $104.2m and $668.2m respectively.

Although the bus operations in United Kingdom (UK) and Australia remain relatively free from serious disruptions in the recent years, the exchange rate of the British Sterling and Aussie dollars have declined against Singapore dollars. In effect the reported profit from these two fairly large contributors have been affected as well. In Singapore, the Public Transport Services remains relatively shielded due to the need for yearly review on transport fares.

With the spread of Covid-19 gaining momentum by the 1st quarter of FY2020, it is highly likely that the taxi business gets deteriorate further, both in Singapore and China. Taxi operations, in China contributes about 4% of the revenue and 9% of the total profit in FY 2019. Together with the taxi operations in Singapore, they form a very significant contributor to the group’s profit and revenue. So, the 1st quarter and even the 2nd quarter, is likely to turn out to be worse that Q4 2019, especially with the rebates that CDG has to pay to retain drivers.

The drop in earnings of Q4 FY2019, in effect pushed up the historical PE to above 20. Unlike 3 years ago when CDG was in net cash position, it is now in net debt position with less leeway for growth via acquisition. The pressure on the share price is likely to continue in the months ahead based on the calculated PE. With the dividend payout at 80% even after the recent dividend cut, it may be imminent that a further cut in dividend be expected in mid-2020 for cash conservation. The share price to sub-$2 or even sub-$1.90 is all possible, hopefully temporarily and get pass quickly.

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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Wuhan Coronavirus and the STI

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Digital Banks

Digital banks are banking establishments without brick-and-mortar presence. Technically, this would be unimaginable say twenty years ago. How can we be able to make what we called as bank transactions without the need of a physical bank? Thanks to the huge advancement in fintech (financial technology) developments, it has made it so convenient that one almost need not have to go to a bank to do many types of transactions, apart from the compulsory ones like opening or closing of accounts. Almost all our ‘conventional banking transactions’ can now be carried out online.

Naturally, the banking scene in Singapore has to move along with the changing times. Monetary Authority of Singapore (MAS) will be issuing two Digital Full Bank (DFB) and three Digital Wholesale Bank (DWB) licences for operating digital banks in Singapore. To date, 21 participants have submitted their applications in a bid for the 5 licences. The results will only be known by the middle of the year. Except for Sea Group, ByteDance and Art Financial who applied for the respective licence in solo, all the other applicants are newly-formed consortiums backed up by financially deep-pocket corporations. The results of the successful applicants will only be known by 20 June 2020.

But then, what is the impact on us as individual bank customers, business owners and incumbent bank shareholders amidst the dynamic business environment and the restrictions imposed by the regulators? As always, there is no fixed answer to this question. The only way to break down the issue and analyze them accordingly.

  1. Digital Full Bank (DFB) licence

The DFB licence permits the holder to take in deposits and operates like a brick-and-mortar bank. However, this can only happen when everything is in a ‘steady-state’ at least 3-5 years down the road after commencing operation. Before the DFB licence holder can reach this stage, it has to pass a series of ‘litmus tests’ to establish if the DFB can sustain itself as a full-licence digital bank.

While the paid-up capital for the first few years of operations is fairly low at $15 million, the real hurdle is the ceiling or the cap on the aggregate deposit and individual deposits. The imposed aggregate deposit of $50 million certainly pales against the incumbent banks’ deposits of between $290 billion and $380 billion based on their FY 2018 annual report. As it is, the cap on each deposit stands at $75,000, and this can only be come from the shareholders, employees and related parties. Subject to banks’ capital ratio requirements, it also means that there is a limit in which the DFB can lend out.

At the first instant, the conditions may appear to be very draconian. How can the digital banks compete with the existing goliaths? Why does the authority even bother to issue out digital bank licences only to make the DFBs unable to survive?  First and foremost, the idea of having digital banks is not to take away businesses from the existing brick-and-mortar banks. If, by doing so, means using digital banks are able to chip away businesses from existing banks, then it totally missed the whole point of having digital banks. In fact, any simple person would have envisaged that DFBs would raise the deposit rate to attract funds even at the expense of their short-term profitability. Certainly, this will cause huge disruptions to the incumbent banks as there is a huge pool of depositors looking for higher interest rates to park their money. This is not what the authority wants to achieve. Their primary objective is to enable the non-bank corporates to innovatively create products for the unmet, un-serve or the under-serve segments, in particular the SMEs. That explains why the initial deposits have to come from the DFB’s shareholders, their employees and the related parties and not any other depositors looking for higher interest rates. The relatively small aggregate deposit of $50 million also presents a challenge for the DFB to bit-size their loans to mitigate their lending risk, and to make use of their enterprising experience in non-bank businesses to make the DFB work. It is only after these restrictions are lifted, perhaps 3-5 years down the road, before the DFBs can operate as a full-fledge digital banks co-existing with the incumbent brick-and-mortar ones. Only then would the paid-up capital be increased to $1.5 billion. Perhaps, the final paid up capital requirement may not be the real issue as most of the applicants are backed up by deep-pocket corporates. However, to build up the whole eco-system to match that of the incumbent banks remain an uphill task. Thus, in the retail space, at least, the incumbent banks have a 3-5 years lead before they are subject to the real competition from the DFBs. In fact, in the last few years or so, the incumbent banks have already built sufficiently strong ecosystems well-protected by thick firewalls for the DFBs to break through. This should serve as an excellent economic moat against the DFBs for the time being.                 

  • Digital Wholesale Bank (DWB) licence

Unlike the DFB, the DWB capital requirement is lower and so is the foreign ownership restrictions.  Although head-quartered in Singapore, the motivation really is to serve the Asean region, which is generally underserved. The paid-up capital for DWBs is $100 million, which in my opinion, is not high in view that most of the applicants have deep-pocket financial backers. While the DWBs are not allowed to take in Singapore dollar deposits, they can take in current account deposits. So, if they are able to correctly provide the market with the right offers, then they are just as good as the DFBs. In fact, given that the DWBs are not subject to any deposit caps, they may even able to surpass the DFBs in terms of aggregate deposit. More so, is the fact that current account deposits attract less interest, meaning that the DWBs, in effect, have a lower cost of fund.

The battleground

For the start, the battleground for the digital banks, or digibanks in short, can be lumpy, fill with potholes and can be quite piecemeal. Given the incumbent banks’ long existence in the local scene, the juicy parts of the whole traditional banking business have already been sapped out. In the local deposit space, the incumbent brick-and-mortar banks made up of the three local banks, foreign full-licence banks and finance companies have already laid their hands in it. In fact, it was said that 98% of Singaporeans above the age of 15 years old have already have a bank account. However, that cannot be said of the region at the moment. More than two-third of the population in Myanmar, Vietnam, Indonesia and Philippines do not have a bank account. So, in the long-term when the DFBs become full-fledged digibanks, they could possibly slice out a piece of the pie of these un-served individuals, just like what the local brick-and-mortar banks have been doing in the recent years.

Then there are changes in consumer behavior and the rise in the use of apps. All these have a part to play in levelling the playing field between the digibanks and the traditional ones. Paper cheques are now push into near-obsolescence. Many, if not all, C2B payments can be made via credit cards, bank-apps, ecommerce platforms and e-wallets rendering all these transactions to become cashless, and blurring the functions between a bank or a recipient company. This is where the strengths of ecommerce companies strength are. Shopee, whose parent company SEA is one of the several ecommerce applicants for a DFB licence, has 100 million mobile users under its belt. This could easily dwarf the 10 million DBS bank customers by 10:1. In fact, all the participants vying for the digibank licences have huge data bases many times the population of Singapore. While the incumbent banks have a lead in terms of their digitization investments, the digital banks have parents, who possess a huge network of consumer data.

Finally, there is the SME segment. Whether B2B, C2B or B2C transactions, they have been made so seamless that we almost do not need, or at least, to perceive not to require a bank intermediary for these transactions. While the physical banks have entrenched deeply in this space, I think it is only a matter of time that the deep-pocket digibanks could close up the gap. In fact, I think this space could be the first cross-fire between the brick-and-mortar banks and the digibanks when they commence operations.

Effect on the brick-and-mortar banks

Certainly, it would be too naive to pretend that digibanks have no effect on the profitability of the brick-and-mortar banks in the long run. There will certainly be some impact if everything remains static. A lot depends on how the development of the digibanks is going to pan out and what the incumbent banks are doing to maintain their lead. If the incumbent banks are able to continue to successfully penetrate into the foreign markets while maintaining the stronghold position in the local scene, then the impact of the digibanks on the incumbent banks may not be so great or even negligible. That said, we should not forget that our neighbouring countries, are also planning to issue out digital bank licence pretty soon. That again could hamper the market development of both the brick-and-mortar banks and the digibanks going forward.                          

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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Taking stock of stocks portfolio

Like many other years, last year had been spiced with a few surprises causing some stocks to swing significantly even though the STI index had been relatively stagnant. First and foremost, at the beginning of the year, many of us were of the view that interest rate is likely to move up given the strong US economy. The likelihood that the FED would follow through with at least 3 more interest rate increase had been on the minds of many investors after a bout of 4 hikes in 2018 to 2.5% by December 2018. It appeared that the FED’s the unwritten long-term interest rate target of 3% to 3.5% was due to materialize by 2019.

Banks

Banks in anticipation of the further interest rate hikes were seen increasing their FD rates in hope to attract more fresh funds from depositors in the first half of the year. But all these evaporated and reversed after the FED made a U-turn to reduce the interest rates three times in the following six months from July to December 2019, almost cancelling out all the interest rate hikes in 2018. The U-turn is likely to put margin compression on the local banks’ net interest between lending and deposit rates. On the whole, their share price did not change very much from the beginning of last year to the end of last year. So, if one were to hold bank stocks, it is unlikely that he could make significant capital gains. The only saving grace is that banks have been paying out good dividends.  With the current dividend yield of between 4% and 5%, it is still a good rate compared to bank’s deposit rates. And if one had bought the bank stocks say more than 5 years ago, the yearly dividend yield could be as high as 8% to 10% without any significant change in the banks’ share price. Going forward, it is unlikely that we see a significant increase in the banks stock prices at least in the short term unless there are favourable game-changing happenings like sudden ceasefire of the trade war. For the moment, let us be conservative and hang on the belief that the trade war will continue.

REITs and Properties  

Conversely, the REITs had a good run in the 3rd quarter following a series of interest rate reduction although it appeared that the stock price of most REITs had tapered off somewhat. It had been a pleasant surprise for the REIT shareholders as many had been braving through the series of interest rate hikes in 2018. REITs prices have been elevated by 10-20% since June 2019. The series of interest rate reduction also presented windows of opportunities for merger and acquisition (M&A) activities, but probably at the expense REITs shareholders who have to fork out additional funds to support the rights issues. So far, quite a number of REITs have issued rights for M&A activities. Perhaps, there could be one or two more M&A activities going into the new year as it would be deemed more difficult to justify for FED to lower the interest rate further going forward. Correspondingly, the share price of developers also moved up in response to the interest movement, but it appeared that effect is less impactful compared to the REITs.

Shipyards and Offshores

Then, came the news that Yangzijiang chairman, Mr Ren Yuan-Lin, who was reportedly missing since June 2019 implicating him to be involved in the government’s anti-corruption investigations into the former party secretary of JinJiang City, Mr Liu Jianguo. JinJiang City is where the YZJ shipyards are located. The news, that happened during our national day holiday, wiped out about 20% of YZJ share price from $1.29 to $1.04 when the market opened after the holiday. In the next few days that followed, the share price tanked further to below $0.90. Even the aggressive buying by the company did not help. It managed to elevate the share price by a few percent each time it made open market purchases, but only to see the share price dropped back when it stopped the market purchase activity. With some luck, having sold some stocks in April 2019 before the news broke, it was a good time to replenish this stock at the on-going beaten-down price at that time. More recently, Temasek injected another adrenaline shot in this sector to acquire 30.55% of Keppel Corporation from the float at $7.35 per share to become a majority shareholder of Keppel Corporation. The details have not been fully announced, but that was good enough to push up the share price of Keppel Corp from below $6.00 per share to close to $7.00. In the absence of further news, the share price appeared to have been weakened a little bit since the announcement. But still, such a news is exactly what this limping sector needs at the moment.  

Manufacturing

Despite the flagging economy in 2019 and the numerous negative reporting in the manufacturing sector during the year, some stocks in this sector were doing not too badly. On the whole, it is a mixed bag. Semiconductors and contract manufacturing appeared to be moving up ranging from 15% to more than 100% from start of 2019, but plastic parts and injection moulding segments were in the negative territories. If you have held the right stocks, it was indeed not a bad sector to be in even though the real sector, as a whole, appeared to be relatively bleak.

Plantations

The next sector that sprang a surprise was the plantation sector. Despite the EU‘s announcement of relying less on palm oil for its biofuel since Q2 and India’s restriction of palm oil in October, the share prices of plantation stocks appeared to be on uptrend closely tracking the higher Crude Palm Oil (CPO) price. Apart from Golden Agri, which appeared not to be able to take advantage of the higher CPO price, most stock prices in this sector elevated about 20%-30% in Q4, moving out of the price doldrums in Q3. The last boat to catch this uptrend was probably early to mid-October 2019.

Concluding remarks

Despite that the uninspiring movement of the STI, which is a relatively bank-heavy index, there were actually several windows of opportunities in the year 2019. Indeed, the STI did not move very much, at most 3% to 4% from 3102.8 to 3222.83, from the 2 January 2019 to 31 December 2019, but on the whole, it is still not too bad a year to be in stocks.        

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.

Posted in YZ-BANKS, YZ-COMMODITIES, YZ-MANUFACTURING, YZ-PROPERTIES, Z-FINANCIAL EDUCATION, Z-INVESTMENTS, Z-Personal Finance | Tagged , , , , , , , | Leave a comment

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.

Posted in Keppel Corp, SembCorp Marine, Z-FINANCIAL EDUCATION, Z-INVESTMENTS, Z-Personal Finance | Tagged , , , | Leave a comment