Keppel Corp & SembCorp Marine

The share price of Keppel Corp ended today at $6.42. It has lost about 35%-40% its steady state value of about $10 per share 3-4 years ago.  Everyone knows that the reason for this was due to the collapse of the oil price from more than $100 at around mid-2014 to less than $30 per barrel by January 2016. In fact, traditionally, Keppel share price is closely tied to the price of crude oil. Its arch rival, Sembcorp Marine, another public-listed company on the Singapore Stock Exchange (SGX) also exhibited the same behaviour. When the oil price hit close to $150 per barrel just before the global financial crisis, Keppel share price and Sembcorp Marine went above $14 and $6 respectively. When the oil price crashed during the global financial crisis, the share price of Keppel Corp and Sembcorp Maine went south hitting below $4 and $1.50 respectively. When the oil price went up again to US$90-$100 per barrel between mid-2012 to mid-2014, their share price again swung up. This time, Keppel Corp share price held steadier at around $10, while Sembcorp Marine share price exhibited more volatility as it has other marine related segments that were also going through a very trying period. But when the oil price crashed once again from more than $100 in mid-2014 to less than $30 in January 2016, we again witnessed the crash in the share price of Keppel Corp from above $10 to less than $5 and that of Sembcorp Marine from more than $4 to less than $1.50 per share. At the moment, the oil price is about $45 per barrel and share price of Keppel Corp and Sembcorp Marine have since advanced respectively to above $6 and $1.60 per share. To sum up it up, the stock prices of these two companies bear very close co-relation with the crude oil price even to this very day.

Unfortunately, for Keppel Corp, Sembcorp Marine together with about 20 or so offshore marine related companies, they have no control over the oil price. In other words, these companies are price takers. Their businesses are tied to the price of oil, but they have no influence over it. Then, of course, this begs the next question – when can we expect the oil price to go back to its glory days of more than $100 per barrel? Frankly, I do not know as I do not have a crystal ball to tell the future. It also means that many others out there do not know the answer as well. As I had mentioned in my recent talk organized by InvestingNote recently, in order to be a big winner in stocks we need to be ahead of the others on the winning side of the curve.  This means that we have to look beyond the present situation and make a calculated guess of the future using the present data.  We may be right, we may be wrong but a calculated guess substantiated with some critical metrics and data would help us reduce the risk of being at the wrong side of the curve than not to do any homework at all.

 

As we know, oil prices, just like prices of any other commodities, depends on its demand and supply.  On the demand side, it takes a huge global demand to push up the price of oil. It can be a long-drawn war or a huge industrialization leap. All these did not take place in the last ten years. Huge oil hoarding can complicate the demand scenario as well, but ultimately there is still a need for real demand in order to push up oil prices over a longer period. Even with the Chinese economy normalizing after the global financial crisis, the oil price did not seem to show any significant change. Right now, we have gone past the industrial age in the last century and entered into the information age. So, it also means that advancement in economies is not driven so much by oil demand.  That said, it does not mean that the total global demand for oil has dropped compared to that of 20-30 years ago. On the contrary, I think global demand could have increased during all these years as more economies with huge population size opened up. What created a ceiling in the oil price lies more likely on the supply side. Over the past 30 years or so, a lot of progress has been made in harnessing alternative energies. That takes a chunk off the demand for fossil fuel.  And unlike 20-30 years ago, when crude oil is extracted either via oil wells onshore or via oil rigs offshore, a new extraction technique has begun to muscle its way into the oil extraction scene. Shale oil extraction, which we have not heard about 20 years ago, is slowly elbowing out the more expensive offshore extraction using oil rigs. In fact, the technological advancement in shale oil extraction has made it gradually cheaper. Just 10 years ago, the break even cost was between $65 and $70 per barrel, and, by now, if the oil price reaches $60 per barrel or even lower, it would have made shale oil a flourishing trade. Franking speaking, oil shale technology is not really a modern technique. The exploration was as early as in the 1980s, but the environmental issues and the low oil price during the 1990s made it temporarily shelved. It was then re-harnessed when the oil price started to climb more than 10 years ago. In fact, this oil extraction technique has made US, the world largest crude oil user, to reverse from a net oil importer to a net oil exporter. This could also be the explanation for the glut situation recently. As such, super oil tankers have to be used to store the crude oil and park offshore in hope of better oil price in the future.

 

Perhaps, the share prices of Keppel Corp and Sembcorp Marine as well as the peripheral companies may have met their lows recently, it cannot be said that their share price would drastically go up anytime soon. Unless the demand or supply situation changes so drastically beyond our imagination in the foreseeable future, it is difficult to envisage a huge demand for oil rigs. Their share prices may continue oscillate according to the oil price, but big leaps in their share price still depend on the how convincing is the demand is for oil rigs. As a matter of opinion, it may not happen in the next few months or even the next 1-2 years down the road. Hopefully, I am wrong coming from an investor’s point or view, but right from a consumer’s point of view.

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

 

Singapore Airlines

It has been known in the investing world that Singapore Airlines suffered a significant operating loss of $138m in the last quarter of its financial year 2016/2017. The overall profit fell to $360m, a drop of 55.2% compared to the last financial year. In fact, the current fate of SIA’s loss was already imminent some years ago.

 

Let us start by looking at the aviation scene 20 to 30 years ago in the 80s and 90s. During those days, there were no Chinese airlines or gulf airlines vying for almost the same international routes across continents. As a result, airlines like SIA, Cathay Pacific and Swiss Air were able to make their names in the aviation world. Now with airlines from the gulf such as Qatar Airways and Emirates Airlines, the routes that SIA used to fly to Europe or plying between Europe and Australia/New Zealand are immensely under threat. We all know that the fuel cost is the biggest cost driver for airlines. It takes up easily about 30%-40% of the total operating cost. With their cost of fuel almost the same as that of drinking water (maybe exaggerating!) in those oil producing countries, SIA is definitely in a disadvantaged position.  Every single drop of aircraft fuel used by SIA has to be either hedged or buy via the spot market.  Hedging, by itself, is a double edge sword. It can help make or break the bottom-line of the airline.

 

Next is the competition from the Chinese airlines. With a deep hinterland, an extremely huge population and a leaping economic progress, we can be very sure that the domestic airline industry will advance by leaps and bounds. After all, what will stop them from extending their tentacles into international routes? The experience gained from plying international routes would help improve their services for the domestic routes. In fact, even their compatriot, Cathay Pacific, has not been spared.  For last financial year, Cathay Pacific suffered a loss of HK3billion. And, only just a few days ago, Cathay Pacific divulged plans to let go about 600 staff.

 

The developments in these two parts of the world have indeed put SIA in a ‘sandwich’ position, eking out SIA’s previous dominance. The profitable stretch from Europe to Australia/New Zealand has to be shared by these competing airlines. In fact, they are not the only ones eyeing these routes. Several airlines in Asean region such as Thai Airways, Malaysian Airlines and the Australian Airlines such Qantas have their interest this profitable stretch as well. That sums up the competitive environment in the premium airline segment.

 

Then there is also a huge competition from the budget airlines. About 10 to 15 years ago, we did not hear much about budget airlines. But by now, we can almost find one budget airline for every one national carrier. The no-frill segment is indeed another dog-eat-dog sector. During times when there was no budget airline, premium airlines were able to profit significantly when oil prices were at their lows. However, it is no longer the case now. When the oil price is low, we see more budget airline in operation, thus eking out the profits once enjoyed by premium airlines.               

Frankly, if we follow Michael Porter’s theory on competitive advantage, we should realize that SIA’s competitive advantage may be slowly ebbing. Relying on intangible factors, such as services and branding, may not be exactly useful because, given time, good services can be trained and branding can be developed. In other words, the economic moat developed by SIA in the past 20-30 years is in effect weakening.  

On the cost structure, the operating leverage on airline industry is very high. It is tantamount to operating an oil refinery or in exploration/mining industries. Before the company can start to produce the first unit of the product, it has to invest significantly in the fixed cost. Similarly for an airline operation, before it can start to carry the first passenger, there is a need for heavy investments in the upfront. A decent passenger liner would easily cost US$200m. We are not even talking about the B777-300ERs or A380s class, which are north of US$300m. While the high operating leverage forms a barrier for new entries, it also means a huge challenge for an airline to be profitable. To operate a decent fleet, we are pretty sure that the airline cannot escape from not getting into debts even with a huge war-chest. Furthermore, passenger and cargo load factors have to be consistently maintained at  high levels and close to their full capacity to ensure sustainable profitability.

 

Then we have the changing lifestyles among travelers. Air travel is no longer considered as luxury lifestyles whereby travelers are willing to pay a premium for it. It may be seen as a means of getting from point A to point B on different parts of the world. In fact, there may be people willing to spend more for longer stays or paying more for a more luxurious experience on land than probably on air. When the global economy gets worse, business travel budget gets the cut straight away and travelers downgrade abruptly. When a region is hit by epidemics such as SARS or avian flu, or natural disasters such as earth-quakes or political turmoil, air travels to the affected regions are curtailed immediately.       

Certainly, there are just too many unknowns facing airline industries. It is not an area that we could understand fully as a simple investor. Frankly, as an individual, I like to travel on SIA. At least, I am confident that I will reach my destination safely and on time based on its past travelling records. After all, it is our national carrier. If we do not support it, then who will, right? However, to invest in the stock as an investor is another consideration.

Since the last sale of my final 1000 shares at $12.62 in June 2009, I have yet to make any purchase of SIA shares till now. In fact that sale was a loss for me even though I had profited from earlier trades such as selling at prices between $17.50 and $19.00 per share in 2007. In hindsight, it was a blessing in disguise to have sold the last board lot (previously one board lot was 1,000 shares) considering that the price has fallen below $10 per share today. That said, I am not ready to buy them back considering its dicey future.

Disclaimer – The author is no expert in market research for airlines. The above information is based on his opinion and information that he gather through literatures as an investor. It is also not buy or sell recommendation on the stock.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

Further Readings:

http://www.straitstimes.com/singapore/sia-has-lost-market-share-and-needs-new-strategy

http://www.straitstimes.com/business/companies-markets/sia-to-re-integrate-sia-cargo-within-group-some-staff-to-move-to-other

OUE, Capitaland, City Development

During times when there are impending interest rate hikes, the property counters almost always respond with a downward trend. We all know that it is a no-brainer response. In the last few months, we have also been bombarded with pockets of news that there will be three interest rate hikes in the year alone. Certainly, the local interest rates, Swap offer Rate (SOR) and Singapore Interbank Offered Rate (SIBOR) that track the US interest rates will also follow suit. Given that they are the benchmark rates for housing and business loans, it is only a matter of time that the local interest rates will rise as well. Of course, a rising interest rate would not be good for property related companies. But recently, it appeared that the stock prices of many developer property counters were making at least their 12-months high.

Just look at the chart of the several developers.  City development share price closed at $9.48 today, but for the whole of 2016, the share price had been less than $9 per share. As its worst, it was even below $7.00 per share. Similarly, the share price of Capitaland ended today at $3.65, but for the whole of 2016 and even into the last quarter of 2015, the share price did not even pass $3.20. Only on some isolated occasions, the share price went above $3.20 momentarily, but only to drop back below $3.20. In fact, during this period of 15 months or so, it had been so range-bound that one could have made some trading gains by buying below $3.00 and selling at $3.20 earning about 8% to 10% in the process. Same story goes to OUE, it had been staying below $1.80 for the whole of 2016. Today, it ended at $1.96 per share.

 

Now the question is why are share prices of these counters defying gravity in spite of the fact that there would be likely three interest rate hikes. First, of course, the market tends to react very quickly, often without rationality, to market news – Sell first, then talk later. The news about interest rate hikes is not new. It was conceived as early as in May 2013 when the previous FED chair, Mr Ben Bernanke, first spoken about it although there wasn’t much conviction at that time. For nearly four years, there were a few scares, but in reality, there were only two hikes. But that was good enough to suppress the property stock prices as it was always uncertain when the next interest rate hike would come. While the downward trend remains relatively orderly, nobody wants to buy them for fear of being caught on the wrong side of the curve. Perhaps, it is a matter of undershoot, as mentioned in my book. The general pessimism was further depressed with the local long-drawn property curbs.

However, the recent financial results of these companies seemed to change all that. The generally good results suggested that the situation was probably not as bad as anticipated. Well, as we know, aircraft do not crash on ground. The market started to realize that their 2016 performance justify a higher valuation after all. It is one of the situations that the market can sometimes be very wrong for a long time. But does that mean that share price will continue to be at this level? Well, not quite. As the days draw nearer to a hike, there is a good chance that there will again be a fall in the stock price in anticipation of the hike. That’s why stock prices movement can never be in a straight line. Today’s slight fall may be the beginning of that as there are no more uncertainties from now till the nearest interest rate hike. Meanwhile, enjoy the rising tide.         

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

DBS, OCBC & UOB

The local banks have just released their financial results for the financial year 2016. All the three banks suffered a decrease in profit for FY 2016 compare with FY 2015. OCBC seemed to have it worst, while UOB did comparatively well. Before the results were released, it was widely expected that the banks would suffer a decrease in profit in view of the flagging economy, and most importantly their exposure to the offshore and marine industries that had turned sharply for the worst following the sharp decline in the crude oil price last year. For almost whole of last year 2016, we have seen several major defaults and major loan re-structuring exercises in this sector. Surely, in such a scenario, it would be a miracle if the banks can go through the year unscathed.

One interesting thing to note, however, is the impairment charges that the banks set aside in FY 2016. OCBC and DBS increased the impairment charges by 48.8% and 93.0% respectively, while UOB decreased it by 11.6%. One deduction, I can make is that UOB felt that it had already accounted for all the problem loans, and there was no longer a need to make further provisions. Meanwhile, OCBC and DBS were still making provisions for loans that might deteriorate in time to come. One possibility is that they are pre-empting the possibility of Ezra that can go in the path of Swiber or Swissco. Due to this significant impairment charge, the EPS of OCBC and DBS were marked down by 13.7% and 3.0%. The drop in the EPS of UOB is mainly due to the higher operating costs for the year, and is a different nature from the other two.

For the net interest margin (NIM), the fate is entirely different for all the three banks. OCBC’s NIM remains unchanged at 1.67%, UOB decreased from 1.77% to 1.71%, while DBS increased from 1.77% to an uninspiring 1.80%.

On the whole, the business risk for the banking sector has increased. Asset qualities were decreasing, and decreasing at a very fast rate. In the meantime, the share price for the banks has been on the uptrend for several months. All this translate to the fact that the ‘margin of safety’ continues to get thinner as the days passed.          

 To know more, register at on bpwlc.usefedora.com. Registration is free. Paid students who are attending the stocks review master program on 11th March 2017 are entitled free access for the online courses.  Passwords will be sent to your emails to enable your access to the modules.  Courses are other sectors are also available.      

 Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

SPH

The SPH’s FY2016 financial results came as no surprise. As expected, the media segment continued to disappoint and I do not expect to see improvements in the foreseeable future. In the restructuring effort, it appeared evident that there will be some lay-offs, and SPH confirmed that the plan to downsize about 10% of the workforce from the current workforce of 4,185 through attritions and retirements. That means about 418 will not replaced in the course over the next 2 years.

What appeared to be the bolder move is the plan to merge The New Paper (TNP) and My Paper (MP) and the merged newspaper will be provided free. According to The Straits Times and MP, the circulation for TNP and MP is 60,000 and 300,000 respectively. With the price of 70 cents per copy TNP and free for MP, this translates to a loss in daily sales of $42,000 or about $12.6 million annually. Can this loss in sales be covered by the cost savings through the lay-offs. Perhaps, although I personally believe it is insignificant. After all, perhaps only a portion of the 10% affected workforce is directly linked to the merger between the new newspaper products. By merging the two newspaper products, it may even reduce the revenue from the advertisers because advertisers need to advertise in the new combined newspaper instead of in two newspapers currently. The overall end results would be the readers are happy. However, it may not help boost the overall profitability of the company.

Perhaps, one may argue that the $12.6million in sales from TNP is insignificant compare to the overall sales revenue of $834 million and $902 million in 2016 and 2015 respectively, but still, unless the management had done their sums that the reduced workforce can more than off-set the loss in the sales.

Another possibility of the decision to merge the two newspapers is that the sales of TNP is dwindling so significantly that the management felt that the cost is eating too much into the profit attributable to TNP such that it is no longer viable to sell as a product. By merging the two newspapers, perhaps, the management hoped to increase the MP content/quality with higher circulation, thereby increasing the advertising revenue. However, this cannot be simply calculated given that changing reader taste to the internet. Given that the management is sacrificing the TNP sales in hope to increase the advertisement revenue, perhaps this also indirectly points to the fact that the revenue from advertisements is much higher than newspapers sales. In fact, the way it is, they are even willing to give away newspaper free to the advantage of the readers. Whatever it is, this is a business decision that the management decides to take after working out the sums. However, I believe these are ‘mickey-mouse’ changes to cause any significant overall results. What SPH needs is a game-changer product that may not even be related to media and printing business. Otherwise, it is quite difficult to offset the fast dwindling media business segment. In the meantime, I look forward to a thicker and hopefully, more packed contents, in the new merged MP.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

DBS, OCBC & UOB

For those who may not know, buy and hold strategy is a proven strategy and is used by long-term investors in hope to benefit from the capital appreciation of the component stocks in a portfolio. It is often associated with Warren Buffet (WB)’s style of investing, especially when he mentioned that the holding period for the Berkshire Hathaway portfolio is FOREVER. It is probably a sweeping statement, but many people had taken it to the extreme that when we buy a stock, we should not sell it. Of course, if we look at the ST index from its all-time high and compare it with today closing of 2869.74 as of 30 September 2016, one would have thought that by adopting the buy and hold strategy, one would have lost more than 25%. But does it really mean that buy-and hold strategy does not work anymore? Not quite. Otherwise, why would fund houses and insurance companies still continue to adopt such a strategy? Remember, these are big fund managers and when they hold a stock, they do not just own 2,000 shares. They probably own 200,000 shares or even 2,000,000 shares even if it means $20 per share. For the fact that they continue to use this strategy means that it is still relevant even with the advent of high-frequency trading computers. In my opinion, if it works for big funds, it should also work for individuals as well. And because big fund managers hold large quantity of stocks, we simply cannot expect them to empty their portfolio of, say 200,000 of OCBC in one day, and then buying it all back on another day on a short-term basis. In fact, most of the time, their portfolios do not change at all. In the way, they are practicing buy-and hold strategies. These fund managers have to think long-term in order to pay the clients and retirees, who are long-term stake-holders. The key here is to think long-term. (Sometimes, I am quite bemused by people who mentioned “Aiyo, must think long-term ah!”. Thinking long term does not mean that we do not sell a stock at all!)

 

Given the relevance of buy and hold strategies for large funds, can small retails players like us mimic the actions of these fund managers to make money? Certainly yes. The fact that we do not hold too many lots per stock, it is sometime easier for us to manoeuvre better than the fund managers.

 

Allow me to go back into my history. After falling and recovering from the bad experience in the Asian Financial Crisis (AFC). (Click here for the detailed history), my aim was to hold this great stock called DBS. On my record, I purchased 1000 shares at $14.80 in February 2004. (In fact, it was less than 10% below yesterday’s closing at $15.39 considering that they are more than 12 years apart.) My long term plan was to have at least 10,000 shares in 10 years. Based on this objective, my shortfall was 14,000 shares. The period between 2004 and 2007 was a fantastic time for stocks because the ST Index advanced all the way from below 2000 to its all-time high of 3,875.55 in October 2007. The global economy was doing so well that one very significant local political personnel was said to be saying “All the pistons are working at full force”, pointing to the perfect functioning of US, Europe and China. (Of course, we know in hindsight that Global Financial Crisis (GFC) came one year later and everything got imploded.) Needless to say, in between 2004 and 2007, if one were on the buy side and sold 1-2 months down the road, or simply buy and hold all the way, he should be able to make money. This is especially true for DBS, which is a good proxy to the stock market. Even though I have a long-term plan to continue to accumulate DBS in the long run, the speed of price advancement was so rapid that each time when I bought it, it became attractive to sell it off some months down the road. In fact, it was prudent to take money off the table because rapid advancements are very often met by rapid pull-backs. In such a situation, I could even say that I was trading, though not exactly short-term trading because each time my holding period was a few months. The share price of DBS in the period between 2004 and 2007 advanced from $14.80 when I bought it to a peak of $25.00. By the end of 2007, however, my shareholding in DBS did not increase at all because I had sold just as much as I had bought it. It was probably with some luck that the Global Financial Crisis (GFC) came along that I was able to pick up a lot more shares and subscribe more rights at $5.42. While I did lost some money on paper on the 1000 shares that I kept, it had been more than offset by the capital gains in the ‘trading’ that I made off from the DBS shares that I had bought and sold along the way. Furthermore, the GFC was probably a once in a lifetime chance to accumulate DBS. It came glistening right in front of my eyes. Such opportunities should not be missed at all cost. This was even truer for someone who had been bashed badly during the Asian Financial Crisis (AFC), and only to see opportunities slipped through the fingers from a low of 805 on the ST Index to more than 2000 within a matter of 15 months or so. (Click here to view my background).

 

Of course, one may argue why I did not even sell off my 1000 shares that I had been holding. The reason is simply that I am not GOD. (There is a Cantonese saying – 早知就没黑衣) I can’t predict the future. If I could predict the future, I would have even sold my 1000 shares and bought it back at the peak of the crisis. My long term plan, however, was clear that I needed to accumulate DBS shares in the long run, and the GFC provided me an opportunity to do so.

 

Then another opportunity came knocking again. After the GFC, DBS advanced again past $20 by late December 2014. Having come up from a relatively low base during the GFC, I managed to sell some shares at $18.50 in October 2014. At this share price, it would have translated to more than the market capitalisation of DBS before the GFC when it was at $25.00. (The reason was that DBS raised rights of 1-for-2 shares during the GFC.) I would have thought that the share price would not go beyond that point, but the general optimism pushed the share price further up to past $20. I sold again at $20.20 in December 2014. It finally reached $20.60 in early 2015. Of course, the crash in the oil price and a series of ‘scares’ in the last 18 months or so, made the share price of DBS came tumbling down again to less than $16, which now becomes a super strong resistance level. When it reached a level of around $13/$14, it allowed me to buy back those quantities and even more than I had sold.    

 

In a similar way, I have been reducing my SPH shares for the past 1-2 years because I felt that the fundamentals of SPH are weakening. It is not because of bad management or SPH was making wrong investments. In fact, I believe that the management has been quite good, peppering shareholders with good dividends. That was why the share price has been quite well-cushioned enabling me to sell a bulk of my stocks off at above $4.00, except for the last 2,000 shares which I sold recently.  The fact is that media and publishing business is under a huge threat from the internet, which is highly accessible locally. The threat is beyond their control and that is why the profit from the print business is dwindling. The only thing that probably helped them along is the SPH REIT, which probably had already hit a plateau. Of course, SPH is not sleeping and is on a look out for fantastic investments that may pop out along the way, but until today, it is still not there yet. Of course, when the price becomes attractive again, Perhaps, I may be back in again.  

So in summary, buy-and-hold does not mean buy and don’t sell. Sometime, it is prudent to sell and take money off the table even if the stock has not reached its full potential. Very often, there is a need for stocks to digest a bit before they can climb further. In fact, as it is DBS is now hovering for the past six months or so below $16. If I had not sold anything and stood only on the buy side from 2004 till now, I probably would have made only from my dividends and not too much from the capital gains. It is the long-term strategy and, of course, some luck that counts. It does not mean buy and don’t sell.

Good Luck!

 

Disclaimer – This post is not a recommendation or an advice to buy or sell the stocks mentioned here-in. These are past performances. They do not reflect future performances. 

 

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Perpetual Bonds

It is not uncommon to see companies dishing out bonds that are sliced into very small denominations to attract retail investors. During the past three months or so, we see at least 2-3 per month. These bonds are certainly not short of subscribers. With a bond rate of 5%-6%, it is certainly very attractive given that the fixed deposit (FD) rate of about 2.0% at the very most. The expectation of impending interest rate hikes certainly push companies, especially those that are in need of funds, to dangle out bonds as quickly as possible to beef up their war chests. In particular, perpetual bonds are special type of bonds that do not have maturity date, and that is where the term perpetual is derived.

While a lot of focus has often been placed on the expected returns, investors often forgot about the terms, especially, the risks that come along with it. First and foremost, when there is no maturity date, theoretically it means that it is up to the company to decide when to redeem back the bond, or not at all. It is unlike a conventional bond that a company has to take pain to ensure that the exact capital is paid back to bondholders at maturity. In other words, a bond holder is in no position to get back his capital unless he sells the bond in the open market, which is very often very illiquid and may have to sell at a discount if one needs the money urgently. Of course, if a bondholder is prepared mentally that that could be the situation in future, then at least the first part of the hurdle is solved.

Given that bondholders do not have much control over the maturity, we should assume that we would not get back our capital at all to be very conservative. That means that we have to rely on coupons distributed by the company quarterly, semi-annually or annually, whatever declared, to generate the returns that we need. This also put the issue of irrevocability a point of contention here. If the bond is irrevocable, it also means that the company is not obligated to make good the coupons that were missed out. While this may affect the company’s credit-worthiness, it also means that retail investors have no recourse on the missed out coupons should such as situations occur. This literally means that the pay-back against the initial investment is stretched even further. Of course, I do not mean that companies would purposely want to do that as they definitely would want to continue to be in the good books of the banks and the investing public, but that term gives them a huge protection should such a crunch occurs. Personally, I would believe that companies would time and again review their account books to assess if they could redeem back those bonds given that interest premium over the prevailing bank interest rate is not a trivial amount in terms of the quantum that they need to pay the bondholders.

That brings me to the last point on why, in the first place, the companies want to raise bonds at a higher interest rate instead of borrowing from the banks. In all likelihood, before the companies carry out such an exercise, they have already had discussions with their banks. Generally, banks lend to companies via secured lending, which means that companies have to present some collaterals as a form of guarantee against the borrowing. That enables the banks to lend at a lower interest rate. However, it may be a situation that most of the company assets have already been pledged to banks, and the banks find the risks too high to swallow, and the company has to turn to the investing public for funds. This means that retail investors are taking on a higher risk as such lending are generally unsecured, and, of course, in the event of liquidation, it is almost certain that bondholders would lose at least part of their capital. Needless to say, this would also affect the common stockholders as well. And that is why share price usually falls whenever a bond, be it a conventional or perpetual bond, is issued.

Perhaps, when we enter a perpetual bond, our mind is never to have it redeemed. In other words, our intention is to continue to have a passive income, hopefully forever. Before you do that, maybe you may wish to review the table in the link to really know your breakeven point of your investment. For investing public like us, the best way to measure it is to assess in terms of number of years required for us to re-cope our initial investments.. This table applies to perpetual bonds, REITs or any investment that you wish to keep till perpetuity. Think about it, if the bond is irrevocable, then the payback gets even longer. Further, with the impending interest rate hikes, it is almost certain that bond prices (or even REIT prices) will fall. That will further discourage us from selling the bonds and shift us into holding the bonds longer. The point is does it worth to keep our investment till perpetuity?

Breakeven table at various coupon and discount rates

So, look at the risks as well, not simply just the expected returns.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Comfort Delgro

I remember I had informed students in the Facebook closed group in mid-2015 that Comfort-Delgro (CD) has probably plateau after pricing all the good news. Recently, I repeated once more on 13 April 2015 when the share price hit $2.91. On the very day, the STI moved up 75 points and following an announcement on additional requirements for rental cars, such as Uber and Grab-taxi. In the long run, rental car services can pose a direct threat to CD’s taxi business.

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In retrospect, crossing $3.00 per share had been a great feat in view that it was an essential service stock. The share price was only around $1.50 per share 4 years ago. Up until 2015, it had been increasing year after year for 4 years running. Prior to that, the share price had been quite sluggish, for it was an ‘old-economy’ unexciting stock. The SMRT, on the other hand, seemed to be enjoying a greater fanfare as new lines were built. (However, that cannot be said of SMRT share price during that time.) Fundamentally, Comfort-Delgro is rock-solid compared to the SMRT. I like the stock very much. Just based purely on its cash hoard in 2014/2015, it could have paid out all its long- & short-term loans fully without incurring a cent of debt, making it a debt-free company, and yet maintaining a status of one of the largest (if not the largest) transport company by asset in the world. On the other hand, SMRT was struggling even to this very day to make profit out of its core business, ie rail operations. SMRT managed to keep itself in the black were through advertising and rental businesses, which are not their core business.

As the business grew quarters after quarters due to its increasing presence overseas such as China, Australia and UK, so was the share price of CD. Along with this growth story were a spat of good news in the past 2-3 years such falling oil price and the land transport sector under-going complete overhaul into a asset-light regime. This has led many analysts to become more optimistic in their approach. Some even set their target price to as high as $3.46. By the mid-2015, there were at least three analysts with target prices above $3.40, and quite a number of them projected it to be at least $3.00 per share. In the best of my memory, I was not sure if any analyst offered a ‘sell’ call as the general outlook looked rosy. Perhaps, all these analyses were based on the assumption that the existing assets will be sold to the government, and the ‘windfall’ from the sale of the assets is to be returned to the shareholders in the form of special dividends.

Taking a leaf from the lesson learnt in OSIM’s case that too much good news that feed into ever-increasing share price can make a sad ending to even a fairy tale story, I decide that I should go against the tide to sell at least some shareholding of my CD stocks. Having doubled my investments over the years, I should have a more than 50% buffer, even if the stock price kept coming down gradually. In other words, I need not sell them hurriedly. After all, it is a fairly liquid stock and good news was still feeding into the share price. It was even touted to be the best performing stock at that time. I started scaling down my CD shares in mid-2015, each time taking advantage of its short-term high. By today, it is 11 months since I made the first sell of my CD shares.

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In the meantime, the oil price continued to sink and it did not bottom until February of 2016. However this had already been reflected in the share price. Perhaps, the decreasing oil price had helped CD share price to bleep slightly above $3.00 per share. Meanwhile, the news of rental cars, like Uber and Grab-taxi, was probably beginning to bite even though the CD management seemed to brush it off initially. Taxi operation in Singapore is the most lucrative business for Comfort-Delgro, and if Comfort-Delgro were to lose its market-share, its bottom line is likely get hit. That probably explained why Comfort Delgro share price hardly crossed $3.00 per share in the last two months.

Given the additional threat, even the share price of companies that provide essential services can still come under pressure, albeit a bit slower compare to high-growth stocks. That said, Comfort-Delgro is still a great company in view of its deep pockets and the management’s ability to generate multiple sources of income. When the time is right, and of course when the price is right, perhaps, it is time to take comfort again. I will not catch a falling knife for the moment.

Disclaimer:

  1. This article is not a recommendation or an advice to buy/sell the mentioned stocks. It is just a pure sharing with the readers of this blog.
  2. Note that the share price of the mentioned stock could change abruptly upwards or downwards if there are sudden changes, especially in asset-light arrangements with the transport authority. The author does not have any privy information on these developments. For that matter, the author does not have any privy information of the company or its related matters other than those released by the company publicly.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.