[Building Blocks]: The “More-Than-5%” Dividend Yield Strategy

Imagine having cash passively deposited into your account every half a year. Nope not from your usual day job or work that pays you for your service.

Most companies in the stock market gives out dividends to their shareholders (people who bought their stocks), as a form of reward or to retain shareholders. The company distributes a portion of their cash they earned from their products/services to shareholders. Not all companies give out dividends as some management may feel that the company can use the cash to further grow their company and decide not to give out dividends.

Usually, for any particular company their dividend yield do not extend beyond 5%, let’s not talk about REITs as its an another investment vehicle altogether. So today I want to talk about how to achieve more than 5% dividend yield.

1) What is dividend yield?

Basically, dividend yield is the amount of dividend given per share divided by its share price.

So for instance lets take a look at ST Engineering,

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They give out 2 times of dividends in 2017, $0.10 and $0.05 respectively. So dividend yield on the current share price amounts to be about 4.32%.

$0.15/$3.47 x 100 = 4.32%

So if you are vested in ST Engineering for the entire 2017, you would have received 4.32% return just on the dividends alone (not inclusive of capital appreciation if any). In that sense, this is “free money” given to you if are invested in a company stocks.

2) Why would anyone prefer a dividend strategy?

In any dividend strategy, we are looking towards a long term investment horizon of a few years of holding that particular stock ( I mean no point buying for just 1 year of dividends as the return is minuscule of 3-5% only). So normally people who uses a dividend strategy are people who do not want to actively manage their investment, or do not want to take too much risks in their investment (since they can just live off the “free money” given by the company).

Building a portfolio of stocks for people of this profile means that the stocks chosen have to be sustainable in their dividends (you would not want a company to give you 10% this year and decides not to give anymore dividends next year). By sustainable I mean that the company must not be over-stretching themselves just to give out dividends. Imagine a company having to borrow money from the bank just to give you dividends, sooner or later they would have to find ways to finance those debts which is not good. A good dividend company would be one where giving out dividends does not affect their core operations.

That’s why most people who employ a dividend strategy prefers buying blue chips as they are big enough and have a history of giving dividends.

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But if you realise most blue chips dividends yield are in the range of 3-5%, very little actually surpass the 5% threshold.

3) Breaking the 5% threshold

Breaking the 5% threshold would require you to pick company in the middle of their growth phase and hold it for years. Before any company become a blue chip they all have to start somewhere small.

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So where we should look for are middle size companies that are only starting to give out their first or second year of dividends. When a company decides to instate a dividend policy this is usually only after the company feel that they are large enough and are able to now consistently give out dividends to their shareholders.

Using this concept above, we shall look at some examples.

In the example of ST Engineering above, the very first time that they gave out dividend was in 1998, when they just got listed. In 1998, they gave out $0.18 worth of dividends, that amounted to about 5.19% that year.

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Imagine that you now decided that you will buy ST Engineering in 1999 after you have studied their fundamentals and feel that its a growing company with the ability to sustain their dividends into the future. In Jan 1999, you bought ST Engineering at $1.50 per share. Fast forward to today, in 2017, your dividend yield for this year alone is 10%.

$0.15/$1.50 x 100 = 10%

And if you realise, you also benefit from the rise in share price. At $3.47 in 2017, you would have gain 231% just based on share price appreciation since you first bought back in 1999 (not counting the amount of dividends you collected from 1999 all the way up to 2017).

So if ST Engineering can keep up with giving $0.15 per share of dividends or even increase their dividends for the next 10 years, you are looking at a 10% return every year. (Sooo much more than the bank!)

We take a look at another example, Sheng Siong.

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Sheng Siong started paying dividends in 2012 at 2.89% dividend yield.

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Imagine now that you have decided that Sheng Siong is fundamentally sound and will be able to sustain their dividend payout. You decided to buy in 2013 at $0.539 per share. Fast forward to 2017, your dividend yield would be 6.3%.

$0.034/$0.539 x 100 = 6.3%

Share price appreciation would have been 178% just based on share price alone. If Sheng Siong can continue to sustain or even grow their dividend payout, your dividend yield will grow beyond 6.3%!

4) Is this too good to be true?

Yes! Employing this strategy requires more research than just dumping your money into existing blue chips. What you are doing here is buying the blue chips of tomorrow. Not every company that gives out dividends for the first time can sustain them throughout the next 10 years. They KEY here lies in choosing the ones that will.

So checking out their fundamentals, the management and future prospects are all equally essential to the success of this strategy.

In conclusion,

breaking the 5% threshold is easy if you are patient enough to hold a stock for years and choosing the right company at the right stage before it becomes a blue chip kind of status.

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[Eye Candy]: What has happen to Tiong Seng so far?

It’s been about 6 months since my last post on Tiong Seng. What has happen so far? In this post I will share some catalysts that have happen and whether there are any more upcoming catalysts we can look forward to.

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1) Share buyback continues…

As we can see share buybacks have dominated most of the company announcements. The last time the company bought back their own shares was at 23 Oct 2017, at $0.37 – $0.375 per share.

2) Interesting acquisitions

Tiong Seng have made 3 acquisitions to increase their land bank way before the recent enbloc fever. The 3 acquisitions are:

  1. Sloane Court Hotel at 17 Balmoral Road at $80 million
  2. Two freehold sites in Jervois Road at $21 million

All 3 sites are to be redeveloped into residential properties.

Sloane Court Hotel 14380663.jpg

With the recent positive developments in the private residential market, it seems like Tiong Seng’s move to acquire these sites came at the right time. Give it another 2-3 years of development, property prices may have recovered and Tiong Seng could market the buildings at a profitable price.

Also all 3 of these sites are situated in District 10 area which is highly attractive. Their current property development project Goodwood Grand also had rather good response in the District 10 area.

3) Risks

– Dwindling order book –

After their recent Q2 financial results, it seems that their order book have dwindled to about $700 million. Each quarter recognises about $100-300 million so if Tiong Seng is unable to win anymore construction tenders, it will affect its revenue going forward.

Of course with the government pushing forward with more construction projects, hopefully it will only be a matter of time that Tiong Seng will grab some of these projects given their strong record in using technology for construction.

4) Catalysts ahead

– TOP of Goodwood Grand –

One of Tiong Seng’s property development project have achieved TOP in June 2017. With only 7 units left in the 73 units for sale, these seems to be a rather popular project. Tiong Seng owns 30% of the project. So far there have not been any revenue recognition from these project.

Maiden contributions from this project should give a boost to the upcoming Q3 and Q4 results.

– Expect fantastic results this FY-

This FY will be the best results that Tiong Seng have posted for the past 5 years!

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Its 1H2017 results are already very close to that of their FY2016’s results. With 2 quarters left to go, Tiong Seng is on track to crush their previous FY’s results.

– Positive industry outlook –

The construction sector is deem to pick up with the government introducing more projects to save this dying industry. Also, recent rebound of private property prices, coupled with the enbloc fever could see more private construction demands in the years ahead. This should benefit Tiong Seng positively given their strong record as I mentioned above.

In conclusion,

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some may be wondering if there is still value in entering Tiong Seng now after the recent run up in their prices. Like I mentioned in my previous post on the construction sector, the pick up in construction demand is almost certain, what is not certain is whether Tiong Seng can clinch any of these projects.

In my opinion, Tiong Seng’s ability to achieve such magnificent financial results in Q2 is partially because it was able to clinch a slew of contracts back in the earlier years. They have been able to keep their order book at around $1 billion dollars almost every year. Whether Tiong Seng can be a justifiable buy at this price really depends on whether they can ride the positive industry wind going forward in the form of more contract wins.

Tiong Seng have always been a share buyback play. Their aggressive buybacks have cause some investors to buy and ride on the buybacks. As of now, one thing for sure is that the management still feel that the current share price is undervalued, as they have bought back their shares on the date of this post, at $0.37 – $0.375 per share. Before the most recent buyback, there have been a massive buy up with more than usual volume, could this be a signal that smart money has entered and today’s buyback acts as a support for the current price? If that’s the case, it seems that more upside is likely. Thank you and always dyodd! 🙂

 

[Eye Candy]: Signs of possible recovery in the construction sector?

Some posts ago, I remember talking about how I was fishing for stocks that are out of favour and one place I looked into was the construction sector. This is because construction have been contracting QoQ due to a slow down in construction demand  especially in the private property segment. Hence, many construction stocks were trading below valuation and I thought that might be a good place to look for some gems if any. You can read about my post here. So after doing some research I decided to put money into Tiong Seng as a share buyback and undervalued play as company have be aggressively buying back shares and top management pretty much owned about 50% of the entire company.

Recently, due to a slew of positive developments like the enbloc fever, first upturn in private property prices, government’s pledge to bring forward construction projects etc. Property developers and construction stocks have seem to be quietly on the move. Even Tiong Seng a construction company stock that do not usually have much liquidity other than their own management buying back their own shares on certain occasions have started to move.

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Tiong Seng’s chart

Especially in the month of October, most company that engage in property development and construction have been quietly creeping up.
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Could this be a signal that smart money is coming into this sector in light of an improved outlook on this sector? Do bear in mind that in 2017, the main sector that led the way was the semiconductor industry and this is what happened to them.

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Many companies in the semiconductor industry reported great earnings which led to an upward surge in their stock prices. Could this be an indication that the same is about to come for the property development and construction sector? After all, they say that the stock market cycle is always ahead of the economic cycle. Some of these companies have been announcing more tender wins from the government and some of them are snapping up land sites for development.

In conclusion,

I think we will have to take a closer look in the months ahead to see if these companies start to garner even more contract wins and property development projects which should boost earnings. At the end of the day, it is strong and improved earnings that usually sustain the upward surge in their stock price. A lousy company that cannot translate positive industry sentiments into improved earnings will not benefit much anyway. This is just my own humble observations. 🙂

[My Story]: Confessions of a 20 years old thousandaire…

Hi everyone, this is my first post since I got back from being deployed overseas for a month in Australia. Happy to finally be able to have some time on hand to do things I like. Recently, I read this article on Medium called “Confessions of a 23-Year-old thousandaire”. In the article, he wrote about his financial journey as a 20 odd years old individual in the US. I was inspired by it and thought I should do a Singaporean edition based off my own experiences. I hope teenagers or even those in their 20s will glean something off my CONFESSIONS. Haha so here goes…


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Chapter 1: Who says you got no money?

There is always this common misconception that teenagers like us have no money. True enough we don’t draw a constant salary unlike our parents. But we do draw a steady stream of pocket money from them. One thing I regretted when I was drawing pocket money from my parents was to draw it daily instead of weekly or monthly.

Drawing your money weekly or monthly is a better arrangement as it forces you to learn BUDGETING. You will need to learn how to allocate your money wisely throughout the week or month in order to have sufficient for each day.

Budgeting is a critical first step in learning how to plan your money wisely.  It was only until NS when I stop taking pocket money from my parents and start living off my own NS salary that I realise the importance of budgeting. On some days, you can very well spend a few times more than you are supposed to, so remember to always BUDGET!

Like they say:

“Failing to plan is planning to fail.”

 


Chapter 2: Save yourself by saving…

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To tell you honestly, I didn’t even realise the importance of saving until I was 18.  I regret not saving up left overs of my pocket money into my savings account. Usually my leftover cash will stay in my wallet and mysteriously “disappear”.  Haha it probably went into my stomach with all the snacks or occasional Starbucks that I bought.

The lesson here is by not saving and leaving cash in the wallet, it exposes us to several dangers lurking out there. By dangers I mean temptations to buy things that you probably won’t need.

With the advent of cashless payment, it becomes even more important to be discipline in your budgeting and saving habits. You will not feel the pain when you just click a few buttons to purchase whatever things you see online. The pain only comes when you check your bank account at the end of the month.

Don’t belittle the small amount you save each day, be it from your pocket money or your monthly salary. It is these small amounts that will pave your way to financial freedom.

 

“The habit of saving is itself an education; it fosters every virtue, teaches self denial, cultivates the sense of order, trains to forethought, and so broaden the mind.” — T.T Munger


Chapter 3: Make your money work for you…

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Sadly, in our times, it is no longer enough to just save for retirement. Inflation is continuously eroding the value of our savings 10, 20 years down the road. Inflation is the reason why our $2.50 chicken rice is now $3.50. Here’s a chart showing the price of property for the past few decades.

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The one clear trend here is UP. Of course, wages have also been growing but the paramount question will be if wage growth can always outpace the rate of inflation. And even so, all those money you save up in the bank are only going to depreciate in value as inflation rate outstrips the interest rate gained on your savings.

Hence, we need to have some ways to make our money work for us. And that is through investing. Whenever I tell others about investing, many tend to look at me with fearful eyes. Even my mum advised me against investing, because to her its akin to gambling. What many don’t know is that investing can be a safe and fuss free way to grow your money.

Average inflation rate is about 2-4% per annum. Banks currently give you about 0.05% on normal savings account. To win the game of investing, all you need to do is to ensure your money grow at a higher rate than inflation. Sounds tough? It’s actually quite easy.

For those who don’t intend to actively manage their investments which usually yield higher returns albeit at a higher risks, index ETFs are safe and fuss free way to win the game of investing.

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The above are 2 of the indices that track a group of stocks. S&P 500 tracks the best 500 US stocks and FTSE tracks the best UK stocks. As you can see as long as you are able to hold it for a long time, the trend is only UP. S&P 500 annualised return since its inception is about 10% per annum which is much higher than the inflation rate. The FTSE return about 5% per annum for the past 20 years also higher than inflation rate. Hence putting your money in the best stocks in the world through index ETFs are definitely an easy way to make your money work for you.

There are also many other methods to invest for beginners which I shared in this article 

“An investment in knowledge pays the most interest.” — Benjamin Franklin


Chapter 4: Compounding is the key to financial freedom…

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The key to a fruitful retirement in the future is through compounding. Imagine someone were to give you 10% every year on the $1000 you put with them.

Screen Shot 2017-10-05 at 9.20.21 AM.png You will realise that you do not just get $100 every year. The amount earned increases exponentially with time!

Now imagine 2 individuals, Adam and Smith. Adam starts investing with his $5000 savings at the age of 20 by buying into the index ETF that return 10% per annum. On the other hand Smith started slightly later at 30 buying into the same investment product as Adam.

Assuming they both aim to retire by 65, how much retirement sum would they have?

For Adam:

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Wow a sum of $364,452.

As for Smith:

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The difference is HUGEEEE. A 10 year difference means your results are reduced to about HALFFFF!!

So who says you can’t start investing with a few thousand dollars? The magic of compounding usually sets in the longer you hold onto your position.

The lesson here is start picking up investing EARLY and have PATIENCE to let your money do the work for you.

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” — Albert Einstein 


 

Chapter 5: Enjoy the process…

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The most important thing of it all is to enjoy the process. There’s no point to save up such a huge amount of money but lead a miserable life of cooping yourself at home in order to save up a few penny. At the end of the day, you can’t lug your bag of cash with you to the grave. I ever once tried to save 90% of my NS salary and only spend 10% of it. It was tough and I found that I wasn’t happy. That is not to say that you abandon saving altogether, but rather plan your budget around your lifestyle and find a healthy amount to save and invest.  This is so that you can both enjoy the PRESENT and the FUTURE!

“Enjoy the process. You will get there, you might as well enjoy the journey!” 


 

In conclusion,

the whole idea of me setting up this blog is to educate young people to take charge of their financial journey early. You don’t need a lot to start From Ground Zero, I started out with $300 in the stock market. You just need to be patient and disciplined in budgeting, saving, investing and the rest will take care of itself. Hopefully this will encourage more young people to take charge of their finances! 🙂

[Eye Candy]: Raffles Medical Group’s growth story continues…

There’s only one word to describe Raffles Medical Group (RMG)’s share price in 2017 which is DOWN.

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Which is what interests me. One man’s trash is another man’s treasure. The continued decline of the share price prompted me to look deeper into RMG. RMG was once the star of the healthcare scene in Singapore and my analysis today will highlight that it will continue to be in the years to come.

RMG logo

RMG have a long listing history since 1997, it has since grown from strength to strength from a network of clinics in Singapore to owning a hospital, network of clinics overseas and even a mall in Holland V. It owns many clinics in Singapore and abroad, 1 hospital in Singapore and 1 mall in Holland V. In recent years, growth have been slowly tapered down compared to its high growth days in the past. RMG’s growth throughout the years hinged on opening of new clinics, hospital either in Singapore or abroad.

1) Fundamentals

— Balance Sheet —

RMG always have kept a very strong balance sheet over the past few years.

balance sheet

Assets easily covers all the liabilities they have and cash in RMG is around $100 million which easily covers its debt obligations.

— Cash Flow —

RMG’s cash flow have also been very healthy throughout the years.

cash flow

It has managed to record positive cash flow from ops for the past 5 years. In certain years, cash flow from investing is high as they spent quite a bit on building new hospitals in China and the Holland V mall which I will go into more details later. But overall this seems to be a rather good set of cash flow with their current operations bringing in a healthy amount of cash every year.

— Income Statement —

RMG’s income statement have also been rather impressive. I have taken figures from their Annual Report from 2008 to 2016.

income statement 2008 to 2012

Revenue and EPS steadily increasing from 2008 to 2012

income statement 2012 to 2016

From 2012 to 2016, revenue continues to increase while you can see there is growth rate for EPS have been slowing down and in 2016 fell marginally below 2015. These shows that RMG’s growth have been slowing down and the group requires further growth catalysts in place to continue growing the top line.

2) Prospects

Management in RMG understood the slowing growth rate and did put in place plans for expansion as early as 2014. Below are some prospects which I feel will drive growth for the group in the future.

— Two new hospitals in China —

RMG have announced that it is venturing into China by setting up 2 hospitals, 1 in Shanghai and the other in ChongQing. These 2 hospitals are modeled closely to the one in Singapore which was open in 2001. Raffles Hospital in Singapore have been a strong growth driver for RMG since its inception.

Hospital Services segment of RMG growth rate:

  • 2003: 10%
  • 2004: 23.5%
  • 2005: 50%
  • 2006: 22.4%
  • 2014: 8.4%
  • 2015: 7.0%
  • 2016: 6.3%

So we can see that RMG have been rather strong in managing the hospital in Singapore which saw it to grow continuously for 15 years despite the slower rate of growth recently. Thus, these 2 hospitals will be the one to watch which should play a significant role in propelling RMG’s next phase of growth.

— Raffles Hospital Extension to open in Q4 2017 —

Locally, plans to expand the current Raffles Hospital was drafted as early in 2014. The completion of it should see an increase in capacity that Raffles Hospital can take in. This should also play a role in driving growth as Raffles Hospital’s growth rate have tapered down since its inception.

— Raffles Holland V —

RMG’s first ever investment property open just last year in 2016. It houses a Raffles Medical clinic on top level and the other places are rented out to different companies. The investment property have already broke even within 7 months and looks set to provide a steady stream of rental income in the future.

With ageing population an emerging trend throughout the world, the need for healthcare is definitely a necessity. Capacity expansion for RMG will definitely drive RMG’s next phase of growth.

3) Risks

— Higher cost —

When RMG started the Raffles Hospital project in 2001, it recorded a loss for that year because of higher staffing cost and operating expenses incurred in getting the hospital up to shape. This time round with 2 hospitals and 1 extension to be fulfilled in 2019, 2018 and 2017 respectively, a surge in operating costs is a given. However, its worthy to note that RMG’s cashflow from ops have been rather healthy from its current operations. $70 to $90 million of cash flow is generated from its existing operations which should help it to pay off some of these costs.

— Execution risk —

Having 2 new hospitals in China at around the same time will be a challenge for the management in attracting talents and ensure quality service at the same time. However the management have also had many years of experience under their belt in running healthcare services in Singapore which should be valuable.

In conclusion,

RMG’s growth story hinges on the upcoming hospitals to be opened. However, RMG’s financial performance could stagnate or even drop during this period when the hospitals are getting prepared due to higher costs needed to start the hospital. With RMG’s strong ability shown by their execution of the Raffles Hospital in Singapore, the other 2 hospital projects should similarly fuel RMG’s next phase of growth.

RMG chart

The drop in RMG’s share price this year could have priced in the coming tougher years ahead in managing costs of these new projects and could provide a good opportunity to enter for long term investors. Executive Chairman and Co-Founder Dr Loo owns 51% of RMG which have his interests aligned with shareholders. Aberdeen Asset Management Fund also bought shares of RMG at $1.21. Hence, there should be some value if the share price are below those levels. Regardless, like I always say please DYODD! 🙂

[Building Blocks]: The ‘Catalyst’ in catalyst investing

Hi everyone, first and foremost a Happy National Day to all of my readers! Today I am going further in depth into catalyst investing. I have mentioned quite heavily about how I like to look for catalysts in the company that will boost the share price. Generally, a stock catalyst is an event that will cause the price of the security to move and sometimes quite significantly. This can come in the form of a superb earnings release, a potential takeover offer, special dividend release etc.

The simple rule of thumb is that all catalysts should lead to an increase in either:

1. Revenue and profits

2. Shareholders’ value

It is purely because of events that lead to higher revenues/profits or enhanced shareholders’ value that will eventually cause investors to bid a higher price for a stock. Hence leading to an increase in share price. And depending on the impact of this catalyst, the magnitude of the share price movement varies.

1) Types of catalysts

When I look at catalysts, I tend to divide them into 2 types of catalysts, “Company-specific” and “Sector-specific”.

A company-specific catalyst is one that tend to be applied only to the company and is independent of other companies in the same sector or not. Examples of this includes, a potential takeover offer by another company, disposal of an asset of the company for a sum of money, spinning off of a subsidiary of the company, a new product that is disrupting an industry etc. All these catalysts are specific to the company and tend to either increase revenue for the company or enhance the value of the shareholders.

A sector-specific catalyst is one that tend to apply to an entire industry. This could come in the form of an increase demand of a particular industry like how the semiconductor boom this year have provided a favourable tailwind for many semiconductor companies. Those in this sector experience higher earnings QoQ which led to higher stock prices. Also events like lifting of regulations on a certain industry can also lead to higher stock prices as earnings is speculated to improve.

2) Real life examples

I will give you some real life examples of what catalysts can do to a stock price.

— Company specific —

1) Takeover offer

Some of you may know that Global Logistics Properties one of the largest logistics provider in Asia recently received a buy out offer of $3.38 per share from a Chinese consortium. However, this catalyst was not new. GLP had announced that it is undergoing strategic review early this year which eventually culminated in a buyout offer. If you had bought in when the strategic review was announced at $2.60, you are already sitting on a 30% return due to the buyout offer of $3.38.

GLP chart

2) Disposal of asset + special dividend

Neratel announced that they are in talks to dispose off their payment solutions subsidiary on April 29 2016 and are intending to pay out the divestment gains to investors.

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This led to a gain of 18.4% if you had bought when the announcement is released in April at $0.49 to a peak of $0.58. Neratel eventually did dispose off the subsidiary and gave out a special dividend of $0.15 per share.

3) Earnings accretive business venture and acquisitions

Acquisitions that are earnings accretive or entering into a new business with huge upside to earnings are also potential catalysts.

I did a post on GSS before here, which talks about their foray into the oil and gas industry (new venture) which many thought was an earnings accretive venture. This caused the stock price to rocket up. Buying at the top of the green circle at $0.28 also gave you about 30% return at the peak of $0.375.

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Another example would be MM2 Asia, an entertainment company in Singapore. They produce films like Ah Boys to Men. Since 2016, they have been on several acquisitions, they include buying over cinemas, buying over a concert production company Unusual Entertainment and subsequently spinning off Unusual Entertainment. All these acquisitions have improved MM2’s results tremendously and by spinning off Unusual, it also unlocks value for existing shareholders.

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If you had held from the first catalyst announcement in Jan 2016 at $0.20 to the peak at $0.630, this would have been a 315% returns!!

— Industry specific —

Industry specific catalysts generally come in the form of improved sentiments in the industry. Some of yall may know how badly hit the O&G sector was hit due to the drastic drop in oil prices. On the contrary, an improved in sentiments can also bring up the entire industry. For instance, earlier this year MAS announced the relaxation of a regulation governing the financing of SMEs.

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This led to all 3 smaller banks listed in Singapore, Hong Leong Finance, Sing Inv & Finance, Singapura Finance to all rise in tandem as investors believe that it will benefit from the new regulations.

 

If you are following up till now, you will realise that industry specific catalysts are usually more unpredictable compared to a company specific catalysts. However, its also good to choose a company with a good mixture of both. Depending on industry-specific catalysts alone is too risky.

3) Some tell-tale signs to improve accuracy

As you can see from all the examples given above, catalysts are definitely a great booster to a stock’s price. However, one must understand that buying on catalysts is like betting on the future which as investors we should avoid. This is because catalysts depend on many factors to allow it to come to fruition. Just like a company announcement signalling their intention to acquire a new business, it will not become a good investment if the new business do not lead to higher revenue and profits for the company. In this case, it is definitely a catalyst but it has not led to the ultimate end goal.

Thus, it is important to understand how to improve our accuracy when picking catalysts stocks.

— Management —

The management must be capable in order to successfully allow the catalysts to manifest. Thus it is important that the management have a large enough stake in the company (Insider Ownership), so that their interests is aligned with the shareholders. Have the management live up to their promises? A quick run through their Annual Reports should shed some light on the managements’ aspirations for the company. Comparing that with actual results, should shed light to their capability.

 

Always look out for:

  1. Insider buying more shares
  2. Share buyback by the company

These moves are usually an indication of better things coming that will positively benefit the company.

— Timing your entry —

To maximise your returns, one should always look to enter before the catalysts are made known to the general public. This will give you sufficient margin of safety and allow you to lock in the gains when the public come to hear of the catalysts. Doing that is hard because you will not know when it will happen.

Usually, you will hear of news that this certain catalyst is going to happen to this company but there’s no confirmed date. The best thing you can do is to look for a consolidation phase in the chart and buy on the first breakout.

GLP chart

As you can see from the GLP chart. The first breakout in the first week of Jan 2017 is a good time to enter. This is in conjunction with the news released on 5 Jan 2017.

Hence, buying on a strong breakout with high volume is also another way to enter at a better timing as strong volume usually indicates a strong uptrend as buyers are usually funds and big buyers.

In conclusion,

I hope you have learnt a bit more about my own experience on catalyst investing. Buying on catalysts alone is not recommended and this should be mixed with fundamentals analysis of the company including its PE, debts level etc etc. A good stock with strong fundamentals plus good catalysts and a perfect entry timing will be a much safer way to invest on catalysts!

[AGM]: 6 things I learnt from Addvalue Tech’s 2017 AGM

Hello all! Just got back from Addvalue Tech’s AGM which was held on 28/7/2017 at their office in Tai Seng. Today I will be sharing some of the things I learnt from their AGM.

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General Atmosphere

The meeting was held in their board room. From the looks of it only about 10-15 shareholders turn up for the meeting. Chairman, COO and 1 independent director were present with the other 2 directors being unable to attend as they were overseas. Only about 4-5 shareholders including myself asked the management questions on their business. Management was quite detailed in explaining their rationale for certain decisions.

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1) On the supposed disposal of AVC

AT have announced several times on the supposed disposal of AVC to a China buyer. It has been going on since 2014 with no clear conclusion on the deal. With regards to that, the Chairman’s reply was that the ball is in the court of the buyer. They have fulfilled their end of the deal and are now waiting for the buyer to fulfill their end of the deal.

The Chairman also shared that they are not pressured by the time taken to dispose AVC. They are taking a passive approach in this, and they are in no hurry to close the deal with the buyer.  They rather work on building up AT’s brand and image which will eventually pay off if other buyers become interested in buying AVC. As for now, the deal is still fluid.

2) Amortization of AVC

If you were to look closely at their Annual Report, they did mention that most of their losses were contributed due to the amortization of AVC, the subsidiary to be sold. According to the management, FY 2017 results consisted of a 3.5 million dollar loss of which 2.4 million dollars were attributed to the amortization of AVC.

One shareholder asked when the amortization will eventually stop as the amortization has been ongoing for 2 years. The management reply was that there are still a 3.5 million dollar left to be amortized which in my opinion should accounted for in the next FY. The shareholder also asked why does the management not amortized it at one shot rather than do it over a few years. With regards to that, the management reply was that this is basically a number issue and is like a ‘paper loss’.

I eventually asked whether AVC is still functioning as per usual. Their response to that is that most business in AVC are transferred to their main subsidiary and hence AVC is dormant and pending the disposal deal.

3) On the IDRS business

The management are very upbeat about the prospects of the IDRS business. They shared that when they started out building the IDRS several years back they did not expect it to be such a huge thing.

— Potential competitors —

One shareholder asked about the EDRS (supposedly the European Data Relay Satellite) one that can carry out almost the same function as the IDRS. The management response to that is that the EDRS uses the laser function to transmit data which is much more expensive and needs to be very precise. Also, the EDRS is very bulky and big in nature. The EDRS can also transmit more data as it as a wider bandwidth.

Whereas, the IDRS competitive advantage is that it is small and compact which is more suitable for use by LEO satellites as satellite makers are constantly downsizing their satellite. The management also said that IDRS data bandwidth is sufficient as they understood from various LEO satellite makers that they do not require such a high data bandwidth.

Also on the IDRS, they said that it is ready to be commercialise whereby the EDRS is still not ready.

— IP protection —

Management says that the IDRS invention are all copyrighted. One shareholder then ask if it should be patented. With regards to that, the Chairman said that by taking on patent, they would need to disclose their methods in the application and what they do that are so different that requires to be patented. The Chairman says that this will divulge their trade secrets in coming out with the IDRS. On this matter, the Chairman prefers to use copyrights so that none of these techniques are disclosed.

Management also said that they take a serious view in backing up their data weekly and employees have an official log book to write down which part of the invention they are working on so that they have a safeguard if any of these were to leak out.

4) On new business model

Ever since 2015, Addvalue have redefine their business model by coming out with 2 focus, the “Emerging Market” and the “Commercial”. This is because the downturn of the shipping industry and the O&G sector have hit them hard.

With regards to the Emerging Market focus, management have been taking active steps in penetrating emerging markets as shown from the recent announcement on their entry into the Thailand market. They are seeing potential in these markets as their fishing vessels are old and government are stepping up to prevent overfishing by mandating that their vessels be upgraded with tracking abilities. The management’s plan in China is to latch on bigger players to promote their products there.

On the Commercial focus, the management have pursue a change in direction from one whereby they are only focused on selling their hardware to one that provide whole solutions. The management are embracing that by packaging certain services like weather tracking app, emergency hotline app etc together during the sale. This will help them to earn recurring income from subscriptions.

On the airtime revenue agreement with Inmarsat, the Chairman hinted that it is coming “soon”. After I further questioned the COO after the AGM, he said that the airtime revenue agreement will not be a 50-50 as “Inmarsat have a higher upfront costs and investment due to their satellite” etc but it will be “quite a good margin”.

5) On possible spin off of subsidiary

Management guided that they have applied for approval from SGX, but will not be in a hurry to spin it off. They would want to see the IDRS gain some traction first and if spinning it off can attract better investors to further propel the business they would do it.

6) On management

Through the entire AGM, the management have said that they are very prudent in their expenses and the Chairman said that the directors have taken pay cuts over the past few years. (To that we can’t really tell since the exact figures are not disclosed in the AR) Chairman also highlighted the hardship and suffering that they went through these years to get the IDRS business going but eventually persevered to see it through till today.

He also mentioned that they are aware and do not want to dilute shareholder’s value hence they did not always go for a placement to raise cash but rather borrow money at a higher rates to fund their operations. However, when they stumbled upon the huge potential of the IDRS, that’s when they decided they have to do a rights issue and eventually raise more money to expand this. He said that for such a small company like them to take on such a huge undertaking of building the world first IDRS is indeed a no easy feat.

In conclusion,

this is most of the main points that I manage to capture from the AGM. Hopefully, its useful information for you! 🙂

For my other posts on Addvalue Tech:

1. Addvalue Tech, a turnaround play? 

2. Addvalue Tech’s 3Q results 

3. An update on Addvalue Tech

 

[Building Blocks]: 3 ways to tell if a company’s debt is good or bad

In today’s blog post, I would like to talk more about debt. Many a times, debts are always cast with a negative light as we are used to the narratives told to us like how one can go bankrupt due to mounting debt. There are definitely some truth to that but debts can be good as well. Generally if debts are used to purchase income generating assets that can yield more than the interest rate of the debt then it is good debt. On the other hand, many people tend to get into debt spiral because their purchase are often liabilities than an asset. For instance, swiping your credit card for a new bag or a new gadget etc.

The general rule of thumb is that:

Total assets’ yield  > Interest rate of debt

for it to be a good debt.

Likewise for a company, the understanding of debt is the same. For whatever reason that the company decides to take on debt, the things that the debt is use for should generate a yield that is more than the interest rate of the debt. I will show you 3 ways to tell if the company’s debt is good or bad in a company.

Debt pic

1) Look at the revenue and profit

For a company to take up debt, it’s foremost objective is to grow the business. If taking on the debt does not lead to higher revenue and profit growth, then there is reason to believe that the debt the company take on is not really good.

2) Is there cash flow into the business?

Another important way to tell if the company’s debt is good or not is based on whether the business can generate cash flow to pay off the debt. If the business can bring in monthly cash that are more than the debt payment then the debt is good. Likewise if the company is consistently registering negative cash flow it is likely that the company may take on more debt to pay off current debt which is not good.

3) Is there cash to pay off interests?

Having back up cash is important for emergency uses. In order for the company to be able to operate smoothly it should be able to pay off its interests with some of the back up cash it have. This ensures that the company don’t run into a situation whereby they are unable to meet debt obligation because there are some bad months in the business.


Case Study

We shall take a look at two different company and their use of debt to try to understand good and bad debts.

Company A:

Noble Debt.png

Total Debt for Company A = USD $ 4,042,853,000

Company B:

Geo Debt.png

Company B total debt = USD $ 68,678,591

 

— Revenue and Profit —

Company A:

Noble revenue.png

Declining revenue and loss making company.

Company B:

Geo Rev.png

High revenue growth and profit making.

 

— Cash Flow —

Company A:

Noble cash from ops.png

Cash not coming into the company from their existing business.

Company B:

Cash flow frm Ops geo.png

Cash into company from existing business is positive.

 

— Sufficiency of cash to meet debt obligations —

Company A:

noble cash.png

Noble finance cost.png

Interest expense is about USD $ 200 million every year, but Company A have only USD$ 300 million left in 2016. Will they be able to tide through another year?

Company B:

geo cash.png

Geo debt payment.png

Company B’s yearly payment is about US$ 6 million which is easily covered by the amount of cash and cash equivalents they have.


In conclusion,

hopefully the above case study is able to show you in real life the difference between good and bad debt in a company. For those who are curious, Company A is Noble Group and Company B is Geo Energy Resources. All the 3 ways describe above should be look in totality with a company’s business model to understand if the debt are sustainable. For instance, in a cyclical industry, company’s earnings can be very high in a bullish up cycle, this can mask out some of the red flags of their debts. Hence it’s good to use these 3 ways and compare it across a few years to understand if they have been able to manage their debts well.

[Eye Candy]: What’s in store for Sapphire?

Sapphire Corporation Limited is one of the few companies listed in the SGX that have railway business in China hence exposing it to the potential opportunities in the One Belt One Road initiative (OBOR).

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It’s 100% owned subsidiary Ranken is the company that are in the railway infrastructure business in China.

ranken

Sapphire is a turnaround story after the new management turned it from a mining company into a railway infrastructure company.

There have been some good analysis on Sapphire online (you can read one of them here ) hence I shall not delve deeper into them. But today I want to focus more on the future for Sapphire and postulating what could be in store for Sapphire.

What actually caught my eyes was this:

Strategic partnership

This was announced in May 2017, where Ranken have entered into a strategic partnership with BeiJing Enterprises Water Group and China Railway Investment Group. After doing some research, there are some reasons to believe that this partnership may morph into projects in China Sponge Cities programme.

 

1) What is the China Sponge Cities programme?

As China becomes more urbanised, the problem of flooding has become a major issue in China. Also, China is also one of  few countries with the least water per capita. Water conservation and management have become a pressing issue.

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The Sponge Cities programme was rolled out in 2015 where a few cities in China were pilot tested for the programme, which will eventually be rolled out to all cities. For instance, China hopes to have 80% of the cities constructed to be of Sponge Cities standard by 2030.

In the 13th Five Year Plan, the Chinese Government also set out some important objectives for water conservation.

13th FYP

13th FYP 2

These all show the urgency and importance that the Chinese government places on water conservation and management hence the importance of the Sponge Cities programme.

So how will this development benefit Sapphire?

2) Potential benefits for Sapphire

To understand the potential benefits to Sapphire, we first need to take a look at what the management of Sapphire are looking to do in 2017.

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Yup the management is trying to partner up with bigger companies in China to secure projects together under the Public-Private Partnership (PPP). That was found in the 1Q17 report released on 12 May 2017.

And in 16 May 2017, they announced the strategic partnership with Beijing Enterprise Water Group (BEWG) and China Railway Investment Group (CRIG).

PPP policy in China have been quite problematic. Due to the fact that many state owned enterprises are better positioned to win the PPP contracts as they are better financed by China banks compared to private firms.

China SOE in PPP

Hence Sapphire partnership with SOE will definitely positioned it well to grab a piece of the pie although in PPP profits margin are usually much lesser compared to going at it alone.

Furthermore, this partnership pushes Ranken out of their usual railway infrastructure business by allowing them to build expertise in new areas of infrastructure.

In my opinion, this partnership could be a signal for them to take on projects under the Sponge City programme. Just like how in May 23, 2017 , an Australian Consortium announced their participation in China Sponge City programme.

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They could be doing the same with the partnership between the three. BEWG have expertise in building water treatment plants and systems, and Ranken have expertise in tunneling which could be of help to creating a good drainage system for the Sponge Cities. Quite frankly, I can’t find much information on CRIG as their website is really hard to interpret haha!

Taking a deeper look into BEWG, which has a much better investor relations website. In an announcement dated 27 June 2017

BEWG projects.png

Hmmm could Ranken be part of any of these 10 projects? Out of 10 projects, 7 projects are PPP of nature! And some projects requires works like ecological restoration which Ranken have some form of experience with.

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This will be an exciting development to watch!

In conclusion,

Sapphire lack of contracts wins have led to many investors pushing down the stock price. But upon digging further it seems that there might be a silver lining. However, all these are just possible developments in my opinion which could be beneficial to the company. Please always dyodd! 🙂

 

[Building Blocks]: 5 good to know investment ratios for better investment analysis

Looking at a company financial statements and not knowing what to look out for can be a headache for investors, which is why certain investment ratios have been widely used to explain certain important aspects of a company’s financial statement in a more simplified manner. For those who have some investment knowledge would have heard of terms like PE ratio, Debt to Equity ratio etc. These ratios make use of certain elements of the financial statement to give investors an easy understanding of certain strengths or weaknesses of the company. In this post, I shall try to explain some of the key ratios that investors normally use and what it means.

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These are the 5 common investment ratios that I will explain below:

  1. Price to Earnings (PE) ratio
  2. Price to Book (PB) ratio
  3. Return on Equity (ROE) ratio
  4. Quick Ratio
  5. Debt to Equity Ratio

1) Price to Earnings ratio

Just as the name suggests, PE ratio simply means:

 

PE Ratio

PE ratio is widely use by a lot of value investor to see if the stock is undervalued or not. Generally a low PE ratio of less than 10 is considered to be undervalued. Whereas a high PE stock usually are found in high growth stock. For instance the FANGs stocks, Facebook, Amazon, Netflix, and Google, most of their PE are above average PE ratio in the US. This is because investors believe that these tech stocks will continue to grow their Earnings per share (EPS) rapidly hence at present times they are willing to bid up its present stock price to a high level ==> Thus a high PE ratio.

In other words, it represents the amount one is willing to pay for each dollar worth of earnings of the company.

2) Price to Book ratio

Price to Book ratio (PB) is also another widely used indicator by value investors to determine if the stock is overpriced or not.

 

PB Ratio.png

In this case the book value of a company is the value of the assets of the company on the balance sheet =>  since Total Asset – Total Liabilities = Total Equity 

Thus, PB ratio is simply at what price are you paying for the value of the underlying assets in the company. A low PB ratio means that you are paying a low price for the value of assets in the company, the opposite is true for high PB stocks.

However one have to understand that PB ratio has it own shortcomings, for instance, it is more accurate for company that are capital intensive or company with a lot of assets.

3) Return on Equity (ROE)

ROE is a measure of how many dollars can a company generate on every dollar of equity.

 

ROE

Many termed the ROE as a measure of efficiency as it measures how well the management deploy the shareholder’s capital. Being able to get more dollars of profit out of lesser dollar of equity is a good thing to look out for (High ROE). Thus, usually company with high ROE is preferred over one with low ROE.

However also note that ROE can be artificially affected if the total equity portion is changed. For instance share buyback decreases total equity and hence boost the ROE.

4) Quick ratio **

Although not used by many, I feel quick ratio is a rather important measure of the company ability to manage their debt obligations.

 

Quick Ratio.png

Quick ratio provides an understanding of whether a company can meet its short term debt obligations. In this case, the short term investment refers to any securities the company hold that can be liquidated in a year.

A high quick ratio of more than 1 would mean that the company are able to pay off their debt in a year and hence the company would not run into any issues with the debtor within the financial year.

A low quick ratio of less than 1 would show that the company may have troubles meeting the near term debt obligations and could run into financing issues which as investors we would not want. This can prompt management to take on more long term debt to finance their short term obligations or raise funds through rights issues which we usually try to avoid.

5) Debt to Equity ratio **

Debt to Equity ratio is another way to understand about the company’s debt status.

 

Debt to Equity Ratio.png

Debt to Equity calculates the amount of financial leverage the company has.

High debt to equity ratio (usually more than 1.5x, in my opinion) mean that the company is highly leverage and can be rather risky. If the company cannot generate enough cash to pay off the debt that could spell trouble for the company.

Whereas an extremely low debt to equity ratio can mean that the company are too conservative and may be missing out on the extra growth benefits that taking on some debt can bring.

 

** For both of the ratios used to determine the debt status of a company. It is important to distinguish the nature of the debt. Is it being use to expand operations, or is it used to pay off loans that are going to expire? Choosing a company that uses debt well to expand operations that lead to higher profits and growth is good. Whereas a company that consistently borrow to pay off bad debts is definitely bad.

Another indicator would be to examine their cash flow to see if they are earning enough from their operations to cover the amount of debt they incur. Hence, one should never fear away from company that takes on debt, but instead study them closely.

 

In conclusion,

no one ratio can tell you the full story of any company. You would need to actively look at a few ratios, compare across the industry, look at their growth prospects before you can derive at a fuller picture. Hopefully, you have learnt more about certain ratios that are widely used by investors. If you are looking to learn more about how to read annual reports you can click here (for part 1) & here (for part 2) which should greatly aid in helping you make better use of the ratios you have learnt here!