Friday, September 26, 2008

SPH updates

SPH will be reporting its FY 08 results on 10 Oct Friday. I do hope they will declare a decent amount of dividends to i) support its declining share price for the next 2 months; ii) earn myself a nice bonus when it is paid out in December. Currently, I have 49 lots of SPH in my portfolio.

It will not be true to say that there will be lesser dividend this year (FY 08) as SPH would need to conserve more cash for building the Next Generation Network (NGN). This is because SPH was only awarded the project yesterday and it is unlikely to hold back dividends to anticipate the award of this project.

SPH’s SGX announcement was as follows:

The project will be funded by a combination of shareholders’ equity, government grant, operating cashflow and external funding. OpenNet forecasts its shareholder investment requirements to be in the range of S$120 million to S$160 million, which will be required during the construction and commissioning phase. SPH’s share will range from S$30 million to S$40 million.

According to the press release, it will cost at least $2B to build the network.

Assuming government grant’s of $700M, SPH’s 25% stake will require it to come out with at least $325M over 4 years.

A last check on SPH’s 3Q 08 financial statements, there is about $216M of free cash sitting in the bank accounts. The current liabilities are only $333M VS the current assets of $1B.

The quick ratio stands at a healthy 3.07.

I do not foresee SPH issuing rights to fund the NGN. There might be a lower dividend payout from 2010 onwards as SKY ELEVEN will stop contributing profits when it is completed in end-2009 and management conserve cash to fund NGN. The prospects of bumper dividends in 2009 will also be dimmer upon the final completion of SKY ELEVEN.

However, I do see that SPH’s share in broadband business is a good strategy to tap on the expertise of Singtel networks and earn itself a perpetual cash cow. Do not forget, the profit margins of broadband business hovers between 25%-35%. With SPH’s stake of 13.97% in M1, it can be assured a steady income from the communications sector, almost a recession proof business.

Starhub’s position as the highest speed provider in broadband will be challenged. It might have to end up leasing the networks from Open Net.

The NGN will also aid SPH aggressive marketing efforts into virtual advertising and information network to compliment its newspapers and magazines.

Back to its dividend payout this year, I do hope to receive at least 16 cents per share or $7840 tax exempt dividend from SPH in Dec. Anything lesser than that will likely to cause its share price to plummet below $3.60 when it goes XD in Dec.

Good luck to all vested!

Sunday, September 21, 2008

Have you bought Lehman Mini Bonds and DBS High Notes?

Today’s Sunday Times ran a feature on the credit crisis, summarizing the events that had unfolded over the year, particularly the market crash and spectacular recovery this week.

I was particularly interested on a small column that reported the loss by many investors who were market DBS High Notes as an alternative fixed deposit (FD) by personal bankers and relationship managers.

Many, enticed by the high coupon payout structure of the investment have invested between $50,000 to $125,000.

It was the same case for Lehman Mini Bonds, marketed by foreign banks.

These structured deposits are likely to pay nothing to investors even if they were to be held till maturity.

Many blamed the bankers for marketing such “high risk” products to low risk threshold investors when many wanted just plain vanilla FDs in the first place!

Yesterday, I met up with a few bankers and enquired the status of the structured deposits. I confidently told them that Lehman mini bonds investors should get back some money as bondholders have priority claim on assets as compared to ordinary and preference shareholders when a company goes belly up.

Below are their replies:

Banker A: Huh, is it? Bondsholders have higher priority to claim debts?

Me: Yup, if not a bond is not a bond when it carries a higher risk exposure to ordinary shareholders and receiving lesser dividend (coupon) payout.

Banker A: Oh I see.

Banker B: Actually I do not think those who invested in mini bonds will get anything back afterall.

Me: How come? Lehman has sold its assets and surely it can receive something back to pay back bondholders right?

Banker B: Mini bonds are not bonds lah. It is just a marketing name for the structured product. We can call it super bonds, high yield saver, or golden bonds. But the underlying product is very complex one. I also don’t know what it is. We just market it when conservative people who want to put FDs walk in and don’t want to invest in unit trusts or equity link notes.

Me: What?! You mean the banks sell bonds that are not bonds and fooling people it is as safe as bonds?

Banker C: Their bank not that bad, sell until mini bond series 2 only. Mine sell till series 8!

Me: So are your sales affected?

Banker A, B, C: Actually it is business as usual. We just concentrate on insurance now. Long term investment mah. But we do not sell UTs or structured products anymore. Currencies market are more welcome by investors also. We have got many products to market.

From the above conversation, I feel that the local bankers have really poor knowledge of simple finance. They do not even know the difference between bonds and shares to begin with. How do you expect them to sell complex products in the first place? And mind you, these banker friends have been in the industry for 2-3 years!

If I am not wrong, DBS High Notes and mini bonds have invested in different underlying assets through options. Derivatives are highly volatile investment instruments and always leveraged to create higher returns (and risk).

Such sophisticated instruments are definitely not suitable for a retiree or a housewife who might not even know how to open a securities account. Derivatives are zero sum games, where one gain’s is due to another’s loss.

Sometimes, these structured deposits are marketed with shopping vouchers and labeled as capital protection products.

However, capital protection does not share the same status as capital guaranteed products. Only the latter has an insurance bought by the bank from a third party to insure the investors’ invested amount.

Should the bankers be blamed?

In a way the bankers are doing their jobs to market aggressively the banks’ products, bringing revenue for their company. Regardless whether they are paid a handsome commission, they are obligated to market the products by the bank. If they are not paid a single cent of commission, but just a salaried worker, should they still be blamed?

There are accusations that the bankers are not doing their jobs and are guilty of mis-selling.

Actually, I feel the banks are the one that should be fully responsible. They should have a system to educate the bankers. Sales should not be commission based as it would lead to unethical selling. Bankers have heavy responsibility. Pay them well so that they can have a high level of integrity. There should be other KPIs to assess them instead of sales figures. They should really be well versed in finance and not just salesmen trying to exceed sales quota.

However, the investors should also share the blame, in my opinion. How can they invest in something that they do not understand?

A coupon rate of 5% is rather high and there should be a fair amount of risk that comes along.

Investors should seek to understand the kind of risks involved before buying any investment products. There are always risks involved. Even FDs have risk. If the banks in Singapore collapse, only the first $20,000 is insured. You can lose the rest.

We can summarise several lessons for the low risk investor:

Do not believe what the banker says at face value. Question him thoroughly. Ask him questions like: What is the risk involved? If he says there is no risk, only gain, leave. All financial products and investment comes with risk.

Ask the banker to explain how the products work exactly. Ask him if there are derivatives or options involved in the product. If there is, leave. Derivatives are only for sophisticated investors.

Do not be enticed by high coupon payout products. The higher the payout, the higher the risk involved. The high coupon payout is commonly known as the risk premium. As the term suggest, you will have to take a lot of risk to earn higher (risk) premium (interest).

Do not buy a structured product because it is the bank’s flavour/theme of the month.

Do not buy a product because there are free gifts. You are actually the one paying for the free gifts from the sales charge.

Do not buy anything you do not understand! Will you buy a washing machine that is so complex that neither you nor the salesman knows how to operate?

Financial literacy is everyone’s responsibility. Pointing fingers at people when things turn sour will not change things. After a few years, you will still make the same mistake. Take charge of your own finances and be accountable for your own investments. If there is anyone to blame, we can only blame ourselves to be too gullible!

Thursday, September 18, 2008

Preparing the worst outcome for my portfolio

I have invested almost all my available cash into the Singapore stock market. As regular readers know, my investment strategy is mainly income investing, with preference to low volatility stocks as main components of my portfolio.

When I purchase stocks, I try to ensure that the dividend yield is at least 6%.

How much risk threshold am I looking at? Is my current portfolio aligned to my risk tolerance?

If I were to say that I feel absolutely nothing to the current market and whistling everywhere I go, I am lying!

The market is indeed worrying!

However, I am prepared to reduce my expectations of dividend yield from my entire portfolio to 3% PA.

This means that from my $300,000 portfolio, I expect my total yearly cashflow to go as low as $9,000 or $750 monthly.

The initial target was $18,000 or $1,500 monthly.

After reducing my expectations, I heave a sigh of relief. I am sure $9,000 a year is still decent dividend payout, compared to leaving money in the bank.

If the market does recover, I will be looking at 10% gains or more.

Meanwhile, I will continue to invest my dividends and free cash back into the market whenever possible.

It is time to avoid timing the market!

I will only subscribe to one belief now: 手中有股心中无股! (Stocks at hand but stockless at heart!)

Monday, September 15, 2008

Quick updates

I have bought Keppel Corp @ $9.28 a fortnight ago (cash) and 4 lots of STI ETF (CPF) @ $2.58 today.

Will the market go further breaching the 2400 mark and go all the way down to 1800 points?

Possibly so.

But I will continue to invest whenever I have cash to dollar cost average and will hold my stocks dearly till the next Bull Run comes.

I do hope SPH will fall below $3.96 for me to pick up more! I intend to sell all my holdings for a modest profit in Dec and cherry pick battered blue chips then! If not I will be happy to receive a decent dividend payout which would enable me to have an added year end bonus too.

Friday, September 12, 2008

SMRT: Over Priced!

SMRT has gone up roughly 10% for the past month due to the transport fare hike revision. This is exceptional performance considering the STI has retreated about 10% for the same period. If we were in the midst of a bull market, SMRT will likely to rise at least 20%.

However, is SMRT’s share price rise sustainable and justified?

I do not think so. Hence I will be plucking some exaggerated numbers to show that its share price command an unhealthy premium over other stocks.

Today’s papers showed that SMRT and SBS will likely to gain an additional $10.1M in fares from the hike.

How does it affect shareholders and how much net profit will SMRT be able to extract from the increase in fares?

SMRT’s turnover last year was $802M, with a net profit of $150M or a profit margin of 18.9%.

EPS was $0.099 and at Friday’s closing price of $2, PE is at 20.2

If SMRT and SBS were to share the $10.1M on a 70-30 basis (biased towards SMRT), SMRT will be able to gain $7M in fares.

I am assuming that the $7M is additional free money and that SMRT does not need to incur cost to earn it (which is unlikely and exaggerated).

SMRT reported a rise in ridership and retail income. This is likely to translate higher profit levels. I am assuming a (exaggerated) 20% increase in net profit with reference from FY 07.

SMRT net profits for FY 08: $150M+ 20%($150M)+$7M= $187M

The actual amount will be lesser as SMRT has already reported 1 quarter of earnings and the fare revisions will only kick in on 1 Oct.

EPS will be $0.124, PE will be 16 even with the above biased favouring towards SMRT.

Though SMRT is a recession proof business, at current bear market, its forward PE ratio of 16 is far too high and demanding. The paltry dividend yield of 4% does not make this stock attractive in anyone’s portfolio too. This is despite the fact that the dividend payout ratio is 80%.

In actual fact, I think SMRT has a forward PE of at least 18.

I believe the current price of SMRT is too high. I would prefer to invest in SMRT if it falls to $1.40 and below, rising its dividend yield to 6% and above.

It is afterall a good business to own. Your colleagues will be contributing to your semi-annual dividends everyday when they pay to be squeezed like sardines on their way to work daily.

Thursday, September 11, 2008

Stop Worrying, and Learn to Love the Bear By Jason Zweig

WallStreet Journal

When you bought into the gospel of "stocks for the long run," did you have any idea how long the long run can turn out to be? Exactly 10 years ago, the Standard & Poor's 500-stock Index was at 1164; it closed Friday at 1239. That's an annualized average return of 0.63%. At that rate, it will take you 111 more years to double your money in the stock market.

Meanwhile, this newspaper, and most of Wall Street, has declared that stocks have officially entered a bear market now that the Dow Jones Industrial Average is 20% below its record high of last October. I think that's poppycock. We've been in a bear market for years; the Dow was almost 600 points higher in early 2000 than it is today. What about that 10% yearly return that U.S. stocks supposedly provide with near-certainty? To earn a 10% long-term return, according to Morningstar, you need to have bought at least 19 years ago and held on ever since.

Could things possibly get worse? I don't know, but I am an optimist -- so I certainly hope things do get worse. Nothing else should satisfy an intelligent investor.

This May, at the annual meeting, boiled down what it means to be an intelligent investor into two startling sentences: "If a stock [I own] goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month." Knowing he owns good businesses, Mr. Buffett wants prices to go down, not up, so he can buy even more shares more cheaply before the bounce back.

In the last long bear market, 1969 to 1982, stocks returned just 5.6% annually; after inflation, investors lost more than 2% a year. That mauling by the bear made stocks so inexpensive that over the ensuing 18 years they went up 18.5% a year, enough to turn $10,000 into more than $200,000.

The people who so far this year have yanked $39 billion out of U.S. stock funds, and $6 billion out of exchange-traded stock funds, do not understand this. But if you are still in your saving and investing years, a bear market is a gift from the financial gods -- and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him.

This new column takes its name from the classic book by Benjamin Graham, who wrote that "the investor's chief problem -- and even his worst enemy -- is likely to be himself." I hope to help you understand the chaotic markets around you, and the even more treacherous enemy within. For, as Mr. Buffett has also pointed out, investing is much like dieting: It is simple, but not easy. Everyone knows what it takes to lose weight. (Eat less, exercise more.) Nothing could be simpler, but few things are harder in a world full of chocolate cake and Cheetos.

Likewise, investing is simple: Diversify, buy and hold, keep costs low. But simple isn't easy in a market seething with "free" online trades, funds that promise to transform losses into gains, and TV pundits who shriek out trading advice as if their underpants were on fire. The real secret to being, or becoming, an intelligent investor is bolstering your self-control.

So, in these columns, I will seek to combine the wisdom we can glean from Graham with the latest insights from psychology, neuroscience and behavioral economics. The result, I hope, will be practical advice that can increase your odds of reaching your financial goals.

For now, bear this in mind: That which does not kill investors makes them stronger. Physiologists have shown that minuscule doses of poison may actually make organisms (including humans) healthier, a phenomenon called hormesis. I do not recommend seasoning your food with cyanide.

But the findings on hormesis do remind us that painstaking investors -- literally, those who can take the pain of a bear market that seems to drop another 1% every day -- will ultimately triumph, by patiently amassing greater and greater equity positions at better and better prices. The ancient King Mithridates of Pontus is said to have made himself immune to poison in constant gradual doses, a tale retold by the poet A.E. Housman:

They put arsenic in his meat And stared aghast to watch him eat; They poured strychnine in his cup And shook to see him drink it up.... I tell the tale that I heard told. Mithridates, he died old.
Sgbluechip says: I think the worst thing to do now is to sell away your holdings. The lower it goes, the nearer we are to the bottom.


My observation on people around me is that people are no longer talking about stocks. In fact, I seldom see my colleagues checking the stock market anymore!

Usually these are the first signs of market bottoming.

Many people are anticipating the market to come down even further. When it does, people will think that they are lucky to have avoided the market.

When there is a mini rally, people will think that it is a bear rally.

“It will fall further.”

And usually, it really does fall further.

Again, it makes people feel that they are right not to buy.

It will go up and down until a point where even the most bullish person turns bearish.

“Bear rally again.”

Finally, it will start a real rally.

Some corrections will occur to consolidate the market once in a while.

Many people will feel it is still the bear rally and avoid the market.

Then, when the market approaches to higher levels, new investors start to come in, pushing the market to an even higher level.

Before we know it, the market reaches a new high.

“It will go up further.”

And it really went up further.

Then, people started to sell and lock in profits.

The market corrects a little and goes up higher, reaching new highs.

The same people who sold start to buy again, fuelling the bubble.

Finally, the bubble bursts and we are back to the bear market, like now.

Tuesday, September 2, 2008

Some thoughts on Oil prices

Since the beginning of the decline of oil prices, commodity prices have been on the downtrend as well. Even the “commodity currencies” NZ dollars and Aussie wasn’t spared. It now seems apparent now that there was no real demand for oil afterall. Those “experts” who have predicted that oil prices will reach US$200 by year end are probably the same people who have speculated on oil futures, at the expense of world economy.

The worst hits were probably airline stocks, many even incurring real losses, compliments from the oil speculators.

I remember discussing with some investors (colleagues) that the oil bubble will not last, last year. I was saying that there are plenty of alternative energy available as substitutes. For instance, solar energy, hydro energy, palm oil, coal, nuclear fusion and fission, wind energy, natural gas etc, just to name a few. If oil prices were to really run up to an unsustainable point, all countries will cut back on energy consumption and rely on alternative energies instead.

I also pointed out that if US (world largest consumption of oil) were to enter a recession (quite likely last year), it will cut back on energy consumption and thus reducing real oil demand. In fact, Warren Buffet has remarked that US was already in recession at that point of time but it was not reflected in GDP because of an increased in US population. Americans are actually worse off by the day.

Also, it does not seem logical that with global economy slowing down, oil prices are doubling at the same time. It is making a mockery out of the basic supply and demand theory.

Even MM Lee came forward and attempted to prick the oil bubble by “predicting” that oil will never exceed US$120. Before we know it, oil went past the US$120 mark and peaked at $148 before its descent. He also did not gain much market support when he wrote on the Asia decoupling theory in Business Times few months back.

Of course I was proved wrong again and again for months, until it seems that oil prices will never come down. Demand seems real. Even I begin questioning my contrasting perspective of steep and speculative uptrend of oil prices.

The oil experts argued that there have been no major oil fields discovered for the past 50 years and the cost of extracting alternative energy will take more time to curb the current energy demand. Besides, India and China accelerated growth will only increase oil demand and prices.

Suddenly, many papers were written by experts to “explain” why oil can only go up.

“Experts” wrote with great zeal on investment strategies to ride the oil boom. SPC went up to $9 (last traded at $5.30); Wilmar went up to $5.70 (last traded $3.68); Golden Agriculture went up to $1.15 (last traded $0.595), while SIA plunged from $20 to $13.80. Not many (myself included) ever dared to buy for its hefty $0.80 dividends when it was trading at $14.

Now, the “experts” are predicting that oil will drop below $80. Have they sold put options this time to ride the oil decline?

I believe oil will resume its uptrend for sure. There is no doubt about it if we look at the 50 year chart. With limited supply and unlimited demand, we should be prepared for high oil prices. However, for oil to double its price within 1 year can only be due to speculation. A more reasonable uptrend of oil price will be 10% per annum, in my opinion.

I do hope the experts are right this time as the stock markets will probably soar if oil prices fall below US$100.

It may be a good time to pick up some gold if it really falls below US$80 as well.