Sunday 27 May 2012

Animal Farm

An interesting quote from the movie, Wall street: Money Never Sleeps (2010):

Bulls make money. Bears make money. Pigs? They get slaughtered. 

If you had some knowledge about the financial market, it is not difficult to guess who are the bulls and bears. But who are the pigs waiting to be slaughtered in the market? According investopedia, "pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due diligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles."

Just like those pigs that we domesticated, pigs in the financial market is a great source of food for bulls and bears who are always hungry for returns, as the pigs loses are equivalent to the bulls and bears profit. So, to all aspiring investors out there, don't take short cut and do your homework. Otherwise, you might find yourself on the wrong side of the food chain.

Crying

Sunday 20 May 2012

First REIT

First REIT is the first Singapore-based real estate investment trust listed on SGX which provides REIT investors an exposure to the healthcare industry in Indonesia. Over time, First REIT diversified its portfolio to include hospitals and nursing homes in Singapore and South Korea. With the fast growing middle class in Indonesia and the aging population in Singapore, First REIT is well positioned to tap on the increasing demand for healthcare services in this 2 countries.

Indonesia


2008 2009 2010 2011*
Unemployment 8.40% 7.90% 7.10% 6.70%
Inflation 9.80% 4.80% 5.10% 7.10%
Real GDP growth 6.00% 4.60% 4.10% 4.20%
*estimated
GDP per Capita (PPP) - $4,657 International Dollars
Exports as % of GDP - 16.5%
Median Age (2006) - 27.0 year old
Life Expectancy - 70 years
Inequality of wealth distribution - 36.8 (0: Perfect equality, 100: Absolute inequality)

With export and FDI(Foreign direct investment) inflow only contributing 16.5% and 0.0015% of GDP respectively, Indonesia's strong domestic demand will help cushion against the European debt crisis. The strong domestic demand is probably also the reason why Indonesia managed to sustained its real GDP growth during the 2008-2009 economic crisis. This is in stark contrast with the export-orientated Singapore's real GDP growth during the same period. Furthermore, at the beginning of this year, rating agency, Moody had upgraded Indonesia to 'investment grade' by increasing its sovereign credit rating from Ba1 to Baa3. This is likely to attract more foreign investment to Indonesia as money flow from the financially trouble nations in the west to the developing economies in the east.

Singapore


2008 2009 2010 2011*
Unemployment 2.20% 3.00% 2.20% 2.20%
Inflation 6.60% 0.60% 2.80% 3.30%
Real GDP growth 1.80% -0.80% 14.50% 5.20%
*estimated
GDP per Capita (PPP) - $59,124 International Dollars
Exports as % of GDP (2008) - 220.5%
Median Age (2006) - 38.0 year old
Life Expectancy (2009) - 81.3 years
Inequality of wealth distribution - 42.5 (0: Perfect equality, 100: Absolute inequality)

Aging population continue to be a concern for Singapore. In 2007, approximately 1 in 10 is above the age of 60. By 2050, the proportion of those aged 60 and above will be doubled to approximately 2 in 10. Together with the increasing life expectancy of Singaporean, it will continue to fuel the demand for healthcare facilities.


First REIT financial information


2007 (S$'000) 2008 (S$'000) 2009 (S$'000) 2010 (S$'000) 2011 (S$'000)
Price(year end) (S$) 0.5594 0.2942 0.5921 0.705 0.760
Revenue 28,290 30,178 30,162 30,274 54,006
NPI 28,053 29,964 29,850 29,875 53,436
Distribution 19,277 20,831 20,964 21,346 48,311
Current Assets 15,272 14,647 13,742 41,771 42,163
Current Liabilities 11,866 61,357 10,245 81,273 75,731
Non-current Assets 325,600 324,900 340,910 612,800 618,453
Non-current Liabilities 77,664 23,092 73,380 94,206 79,586
Retained earnings 69,620 74,342 91,394 132,742 159,492
Net Cash 13,605 12,417 7,497 27,593 32,725
Borrowing 50,633 50,773 52,800 57,700 98,700
EPU (cents) 10.91 8.41 13.09 18.04 8.15
DPU (cents) 7.09 7.62 7.62 6.63 7.01
Current Ratio 1.29x 0.24x 1.34x 0.51x 0.554x
NAV/unit (cents) 92.38 93.21 98.39 77 80.5
PE ratio 5.13x 3.5x 4.52x 3.91x 9.33x
Dividend yield 12.70% 30.60% 12.87% 9.40% 9.22%
Gearing 15.50% 15.60% 15.50% 9.40% 16.00%
Interest Cover 15x 14.2x 13.5x 11.6x 12.3x

  • First REIT has one of the lowest Gearing ratio compared to other REIT listed on SGX, leaving it with ample headroom for acquisition through debt financing before it reach its gearing limit of 35%.
  • Consistent growth of DPU since 2007, after taking into consideration of the right issue (Ratio: 5 for 4) conducted near end of 2010. Expected DPU of 7.76c for FY2012.
  • Extraordinary high dividend yield for 2008 was due to sharp decline in stock price towards the end of 2008, following the collapse of Lehman Brothers. Revenue and NPI remain intact despite the economic crisis during 2008-2009, suggesting resilience and in-elasticity of demand for the healthcare industry.     

Properties Performance


Indonesia

Siloam Hospital Lippo Village Siloma Hosptial Kebon Jeruk Siloam Hospital Surabaya Siloam Hospital Lippo Cikarang MACCC Imperial Argaduta
Property Value S$153.8m S$85.8m S$30.9m S$41.3m S$217.5m S$35.5m
Revenue (2011) S$13.388m S$7.587m S$3.001m S$3.778n S$18.739m S$3.680m
ROA 8.70% 8.83% 9.71% 9.15% 8.62% 10.37%

 

Singapore South Korea

Pacific Healthcare (Bukit Merah) Pacific Healthcare (Bukit Panjang) Lentor Residence Sarang Hospital
Property Value S$11m S$11m S$14m US$13.2m
Revenue (2011) S$0.991m S$0.966m S$1.071m US$0.636m
ROA 9.01% 8.78% 7.65% 4.83%


Technical Analysis





1-year daily chart. Click to enlarge.

  • Tested the resistance level at $0.885 for about a week before breaking through and is now testing the next Fibonacci resistance at $0.855 level. Long lower shadow indicates strong selling pressure, but managed to close at the resistance level. 
  • Next resistance levels: $0.830-$0.835 and $0.810-$0.815
  • $0.81-$0.815 Resistance level coincide with 200 SMA, the trendline drawn across the 1 year chart and is approximately it NAV level, indicating a very strong support level.
  • RSI and Stochastic showing signs of oversold

Personal opinion
Strong fundamentals with positive economic outlook. Highly attractive dividend yield. Looking forward to enter this counter if the price fell to the range of $0.81-$0.82.





Thursday 17 May 2012

Risk of Perpetual Bonds

Perpetual bonds had recently been attracting a lot of attention not only from retail investors but also from regulators. A year after Hyflux offered the first perpetual bond to the public raising S$200m, Genting Singapore follow suit and had recently raised S$500m. Both perpetual bonds had offered attractive coupon rate of 6% and 5.125% respectively with a possible step up to even higher yield, if it is not called after certain year. However, disturbingly, following the public offer by Genting Singapore, MAS had voiced out its concern and subsequently issued a word of warning over the excessive risk taking by retail investors who may not fully understand the risk associated with this class of investment product.

To understand the risk of perpetual bond, we first need to know what are they. Perpetual bonds are essentially bonds without maturity date. But unlike vanilla bonds, it is possible for the issuer of perpetual bonds to defer payment for a prolonged period without defaulting, but deferred coupon is generally cumulative, so as long as the company does not fold, you will still be entitled to your coupon eventually. Another feature of perpetual bond is the option for issuer to NOT redeem (call) the outstanding perpetual bonds indefinitely. Any investors who wish to close their position can only do so by selling them in the secondary market, subjecting them to price fluctuation risk.

To determine the value of a perpetual bond, we need to find out the par value, discount rate and coupon. Suppose, initially a perpetual bond was issued at a par value of $100 with a coupon rate of 5%. The coupon is given by 0.05*100 = 5 and the discount rate is given by (coupon/par)*100% = 5%. We can then determine the value of bond  based on the following formula:

Bond value = Coupon/Discount Rate
 
Suppose again, there is a rise in interest rate by 100bps, the discount rate (for simplicity purpose) would rise by the same amount to 6%. Based on the formula above, the new value of bond will be given by 5/0.06 = $83.33, a 16.7% fall in value of the bond. Thus, the value of bond is highly sensitive to interest rate. But surely, if interest rate fall by 100bps, then the bond price would rise by 25% isn't it? Unfortunately, this might not be the case for perpetual bonds. Firstly, interest rate is at an all time low now, the only way interest rate would move is up, hence investors may sit on their loses for an extended period of time if (and very likely) the issuer does not call back the bonds. Secondly, even if interest rate do fall, the callable option by issuer will limit the rise in value of the perpetual bond. When interest rate fall, the value of bond will increase, however, with a lower interest environment, issuer may call back the perpetual bonds at par value and issue new bonds at lower discount rate. Taking into account of such possible scenario, this rise in perpetual bond price is usually discounted by certain amount. 

Local bankers said the risks have been escalated because private bankers, the main takers of the recent perps, were buying on the margin - sometimes using leverage granted by the lead managers themselves. Some purchases were done on 100 per cent margins, said one foreign banker.  - Strait Times, 15 May 2012.

What the quote is essentially saying is that, when interest rate rises quickly, the perpetual bond loses its value rapidly. Those private bankers who are invested using leverage will receive a margin call where he may be forced to sell off the bonds, adding to the selling pressure and further depressing the bond value, leaving retail investors strangled on a pile of losses.


In summary, perpetual bonds has all the potential downside but very limited upside. Personally, I find some REITs and blue chips offer much better yield to risk ratio. However, I'm not saying that perpetual bonds are to be avoided at all cost. Different people with different investment objective might find perpetual bonds fit into their portfolio nicely, but if you are investing in perpetual bonds, try to buy from companies with strong brand name and high credit rating and preferably one with a history of consistent dividend payment. Lastly, do read their prospectus and evaluate all the possible risk before putting your hard earned money into any investment.

Wednesday 16 May 2012

Singtel, Starhub, M1

Singapore telcos are among the favorite local stocks for many passive income investors. Not only did the 3 major telcos, namely Singtel, Starhub and M1, offer reasonable dividend yield , they are also relatively low-risk in nature which make them particularly attractive in times of uncertainty such as now. In this post, I will compare, very briefly, the fundamentals of the 3 telcos and highlight some of the economic outlook and challenges faced by the 3 telcos.

Financial Highlights


Singtel ($m) Starhub ($m) M1 ($m)
Price S$3.17 S$3.27 S$2.48
Revenue 18,071 2,312 1064.9
Net Profit 3,825 316 164.1
Profit Margin 21.17% 13.67% 15.40%
Dividends
343 161.32
Dividend per Share 15.8c 20c 14.5c
Dividend Yield 4.98% 6.12% 5.85%
Current Assets 6,555.2 534.8 260.63
Current liabilities 8540.8 903.3 310.69
Current Ratio 0.77x 0.59x 0.84x
Non-Current Assets 32,727.1 1,188.30 717.94
Non-Current liabilities 6391.2 797.2 322.55
Total Equity 24,350.3 22.6 345.33
Capital Expenditure 2,005 246.5 102.5
Capex/Revenue 11.10% 10.66% 9.63%
Free Cash Flow 4,038 449.7 161.3
EPS 24.02c 18.4c 18.1c
ROE 16.00% 281.85% 52.50%
ROA 9.90% 18.34% 16.77%
ROI 17.60% 43.90%
PE Ratio 13.2x 17.77x 13.7x
Market Cap 49,200 5,610 2,260
Gearing Ratio 19.80% 95.53% 45.77%
Interest Cover 21.8x 21.3x 52.1x

The financial information above is obtained from the latest annual financial report of each respective telco.
As seen from the table, Starhub still offers the highest dividend yield despite the recent surge in its price (11.99% YTD), however, it also adds considerably to the already high PE ratio of Starhub, trading at a significant premium, or in another word, more expensive compared to Singtel and M1. 

Singtel
Revenue Compositions


EBITDA Compositions

  • Diversified earnings with strong global presence.
  • Regional markets such as Thailand, Banglades, India, Africa, Indonesia and Philippines have large population, low mobile penetration rate and rising affluence. Strong growth potential.
  • Subjected to foreign exchange and geopolitical risks.

Starhub
Revenue Compositions
 





















  • Low churn rate (Mobile: 1.1%, Broadband: 1.2%, Pay TV: 1.1%)
  • Continuous growth in consumer base over the last 5 years
  • falling Average Revenue Per User (ARPU) in Pay TV, Broadband and Fixed Network.


M1
Revenue Compositions


  •  comparatively less diversified. 
  • Falling ARPU for data plan and Prepaid

Outlook
As Singapore continue to develop itself as a financial and business hub, the demand for high quality telecommunication services will most likely remain high. In addition, with the current labor policy by the government, Singapore population continue to rise, giving a boost to domestic demand for mobile devices and services. However, with the increasing usage of VOIP such as skype or Viber and instant messaging such as WhatsApp, it post a threat particularly for M1, to the sustainability of national/international calls as a significant source of revenue with evident from the falling ARPU.

Singtel on the other hand is well positioned to tap onto the growth story of many developing countries with its strong presence in the regional market. With increasing affluence, not only will the mobile penetration rate continue to grow, Singtel can also potentially capture the broadband growth in these developing nations. However, Singtel's presence in the regional market also exposes itself to political instability and natural disasters which may materially disrupt business and damage infrastructural in the affected area.

Capital Expenditure (Capex) remains as a key operating cost for the telecommunication industry as infrastructure and technology are rapidly improving in the sector. Major capital expenditure included the expansion and enhancement of mobile networks to support customer and data growth and core infrastructure.