Accompanying a king is just like accompanying a tiger- 伴君如伴虎

As part of the life of a working employee, one must always serve the call of his or her CEO at all times. Sometimes, when the CEO is in good mood, the boss will throw in a bone or two along with compliments on how value adding you are to him. At other times, when the CEO is in a bad mood, he will grill you with questions to make you feel speechless and look stupid. Not that one likes to be made speechless but those who have been working long enough will know that in Asian context, talking back too often and making the boss looks silly will most likely result in being blacklisted as well as to suffer a miserable future fate. Or worse still, your CEO then begin making plans to remove you immediately. The prospect of losing your job and losing your means to service your housing loan for a decent shelter is not a joke. 

But I guess sometimes, life does throw up unavoidable shit at you. Most people have their own bottom line and dignity- same for me. If you believe something is bullshit, you have to speak up despite knowing the possible consequences. The last time I did that, I was blacklisted for almost 2 months until a team building event. I was sort of forgiven over a team lunch when the boss cut half of his fish & chip and suddenly shared it with me. But not before hearing an analogy about "Being smart is good but don't try becoming a Smart Alec".

Recently, I got blacklisted again. Sometimes, being an accountant has its own occupational hazard. You have to call a spade a spade which always irks the boss. No two ways about it. The only good thing this time round is that I do not feel as stressful as before probably because I have managed to built up some passive income from investment. I had once attended an ethics training course ran by a former chief financial officer of major international banks in Singapore. He told me that an employee must always either invest in property or stocks in order to achieve financial independence. Only with financial independence can one truly adhere to his or her own principles without undue pressure and stress at work. His words resonates with me till this day. To hear a menacing "ROOAAAR"" roar or a mild "Meow" like a kitten thus all resides in one's state of mind.

"ROOAAAR" or "Meow"

Investment Portfolio Updates- 13 Sep 2019 (Creation of New Margin Account Portfolio)

1. Creation of new portfolio using margin financing

About 3 months ago, I went down to Maybank Kim Eng ("MKE") to apply for my first margin trading account. It was quite a daunting experience as I had given a CDP account number with typo and it took very long to resolve the administrative complications. Later on, I opened up another margin trading account with my usual trading broker, UOB Kay Hian as my trade representative mentioned  that her brokerage firm can match the lower financing rate of MKE. 

After trying out MKE platform, I was very impressed with their newest trading platform which allows one to customize the views to make it more intuitive with what you want to see. You can even divide up a single screen into multiple screens and add in the Widgets/Apps to choose what information to display. Personally, I thought that this was way better than UOB Kay Hian and hence decided to use MKE instead.

The use of margin financing is a double edged sword. Most essential part I think is not to get caught into forced liquidation of your holdings during times of recession whereby your portfolio may fall by 50% to 60% and you get a margin call from the brokerage. I have crafted out a separate investment portfolio "number 2" for this purpose. 

2. Some quick highlights of the changes made to my portfolios:

(i) Frasers Centrepoint Trust

My intention is to hold on to Frasers Centrepoint Trust for a longer term as the growth story is still intact with many M&A opportunities from its sponsor. However, the prices went up to a ridiculously high of S$2.87 per unit at one time and I decided to sell off 10,000 units (around half of my current holdings) at an average price of S$2.85 per unit. One week later, managed to buy back the 10,000 units at S$2.71 per unit. Decided to use part of the realised proceeds to buy a good dinner treat for my family at Swensen. 

(ii) Sing Medical Group

I have lost S$10K plus on Sing Medical Group ("SMG") albeit being unrealised losses. Prices dropped from S$0.400 per share recently to a low of S$0.275 per share before stabilising at around S$0.300. I have since made some additional purchases during this all time low period to boost my holdings in SMG. Results have improved but as usual, whenever there are capital raising exercises (be it rights issue or granting of convertible loans to shareholder), the market will slap SMG hard-left right and center- to punish it despite the better financial performance.

Please refer to to the enigmatic case of SMG write-ups.

I am still holding on to SMG despite the heavy opportunity costs suffered as I believe in the black and white quarterly reporting numbers until I am proven otherwise. Upcoming end Sep'19 report card will determine whether to cut losses. Also, the proposal mentioned by the Managing Director to consider implementing a dividend policy in FY2019 has not been executed. An announcement of new M&A or dividend policy implementation may act as a catalyst to boost up the much undervalued share price.

(iii) Frasers Commercial Trust

I have sold off all my units in Frasers Commercial Trust under my CDP account at prices of S$1.63 per unit  (half-10,000 units) and S$1.68 (remaining half-10,000 units).  However, under my margin account, I have bought back half (10,000 units) of my previous units held when its price dropped recently. 

Overall, reduced holdings due to concern over whether it can maintain its current distribution. 

Please see "Frasers Commercial Trust DPU May Not Be Sustainable Even With New Tenant Google Coming On Board".

(iv) Netlink Trust

This is no longer in my direct cash purchase portfolio as I have sold them off for a slight profit. The sustainable dividend yield is actually only around 4.023%. The current 5.5% distribution means that part of it is being financed through bank borrowings.  Nevertheless, I think that Netlink Trust can still maintain the current financial results and distribution for the next 1-2 years. For the short term, the pay out will still be sustainable but for the longer term, surprises may spring out from the risk of upcoming 5G technology rollout which may adversely affect the business of Netlink Trust. Vigilance will be the key strategy to hold on to this counter.

Please see "Netlink Trust- Stable Cash Cow Or Just Another Time Bomb Waiting To Explode?".

(v) Mapletree Industrial Trust and Mapletree NAC

Both have risen too fast in valuation which depresses the rate of return. 

For an industrial Trust, my required rate of returns need to be higher than what is being offered. 

As for Mapletree NAC, HK riot and weakening RMB in trade war with US all weighted on my mind. 

Have thus decided to recycle the capital from these 2 holdings into other stocks.

(vi) Starhill Global REIT

Took profit and sold off Starhill Global at S$0.78 per unit. The properties under Starhill Global are too overly dependent on foreign tourists at Orchard Road. Starhill Global is also unable to get positive rental reversion from its key master tenant Toshin which occupies most of the retail areas of Ngee Ann City. 

Last but not least, I have increased my holdings in SPH REIT via my margin account as I believe that the upcoming potential M&A being announced will be the acquisition of the much long awaited Seletar Mall from SPH. 

Netlink Trust- Stable Cash Cow Or Just Another Time Bomb Waiting To Explode?

In my previous free cashflow analysis post using Frasers Commercial Trust, I have briefly sidetracked to touch on the problematic nature of Business Trust and that Netlink Trust is another business that actually borrows from the bank to finance its current high dividend distribution of 5.42% (based on 9 Sep 2019 closing price of S$0.90) and that it will most likely not be sustainable in the long run due to a deficit of <S$33Mil>. I will illustrate this using a shortcut methodology below and discuss some of the main technical points:

1. Is interest paid for loans an operating activity or financing activity?

The good thing about Netlink Trust financial statements is that unlike many companies which deemed interest paid as “Net cash used in financing activities”, financing cost paid by Netlink Trust is included under “Net cash from operating activities”. Many of the partners of Big 4 accounting firms argue that interest paid is not an operating activity and chuck it under financing activity. Hence if one based the free cashflow computation using such approach, one will end up with a bias and impractical modelling as REITS and Business Trusts made use of leverage as an essential tool in acquiring yield accretive assets. If one exclude it, then you will end up with a higher operating cashflow that throws you off track.

Screenshot 1:Extract of Q1 FY2020 Cashflow Statement

Screenshot 2:Free Cashflow Stress Testing

2. Apparent deficit of <S$33Mil> in terms of distribution based on free cashflow computation

Using the most recent quarterly results (Q1) of Netlink Trust to extrapolate the numbers for Free Cashflow modelling, the expected annualized operating cashflow is S$226Mil and yearly recurring CAPEX will be <69.2Mil>. Free cashflow is thus S$156.8Mil per annum. Please refer to screenshot 2 above.

To see whether the recurring CAPEX number of S$69.2Mil is reasonable estimate, I did a further deep dive back into the previous financial year whereby Netlink Trust spent <S$71.1Mil> in FY2019 (pls refer to screenshot 3 below). Hence the current estimation of CAPEX using Q1 extrapolation of <S$17.3Mil> to arrive at <S$69.2Mil> appears to be a reasonable and consistent run rate.

Screenshot 3: Extracted from FY2019 Annual Report

This means that we are staring at a gap of <S$33Mil> in annual cashflow deficit for the senior management team of Netlink Trust to resolve, if they wanted to maintain the high dividend distribution rate to shareholders.

3. Where is the money coming from then to pay out dividends? Parallelism to Asian Pay TV Trust- Another creature of the business trust structure in Singapore

Obviously, the money for the distribution thus came from bank borrowings by Netlink Trust. This is similar to Asian Pay TV Trust which used to finance dividends using bank borrowings until a point whereby the dividends is no longer sustainable and a massive cut had to be declared by their senior management which led to the famous collapse in its unit price by half last November.

Of course, from the perspective of Netlink Trust senior management, they are not using bank borrowings to finance the distributions. Rather, they are only using bank borrowings to finance the CAPEX in order to be more efficient in capital management. Hence the dividend distributions are financed from operating cashflow using this argument. 

Again, this rationale seems ostensibly purely due to optimizing the use of debt in terms of actively managing the capital structure of Netlink Trust. But problem starts arising when one keeps repeating this year after year in order to keep investors happy.

4. Problems with the Business Trust Structure

The problem with most business trusts is that they are extremely CAPEX intensive in nature. Look at Netlink Trust and Asian Pay TV Trust. Put it this way, the net asset that investors are holding on to will decline due to depreciation of CAPEX.

Some of them such as Keppel Infrastructure Trust (“KIT”) appeared to have very high dividend yield but actually derives most of its earnings from concessionary service agreements which means that net assets value (“NAV”) as aforesaid mentioned will definitely decline over time. My thoughts are that the complex accounting treatment on capitalizing concessionary service agreements makes it hard to understand for many retail investors and that their effective return overtime is actually a lot lesser than what has been received due to the issue of confirmed declining NAV. In KIT’s case, the Axiom acquisition was a much needed M&A to acquire a different form of more sustainable business relative to the current form of concessionary holdings.

The idea that business trusts are less risky investments as they produce very stable and predictable future cashflows is thus fraught with multiple flaws. Hutchison Port Holdings Trust is a perfect analogy. Its prices languished from USD1.01 per unit at IPO in March 2011 to the current USD0.152 per unit- a whopping 85% price plunge.

Hence as a matter of fact, my thoughts are that holding on to Business Trusts are very risky contrary to popular folklore.

5. So is Netlink Trust a stable cash cow or just another time bomb waiting to explode?

With regard to this question, investors should ask themselves and consider the following 4 pertinent points based on their own outlook:

5.1        Whether one thinks that the annual CAPEX run rate will halve itself eventually such that the dividends payout will be sustainable;

5.2        Whether the 5G implementation will lead to a surge in volume from connection fees earnings as per mentioned by Netlink Trust Senior Management;

5.3        As alluded to pt 5.2, 5G technology can also be an imminent threat to the business of Netlink Trust and there are various downside risks and 

5.4     Whether the government in 2022 will maintain or raise the controlled fees due to the 5G implementation. Or the government can change the whole game totally and reduce connecting fees prices.

IMDA regulated pricing for Netlink Trust Services

For the short-term, I believe that there should not be any major issue. Debt level is only at approximately S$635Mil out of S$2,952Mil of equity and at a very healthy debt equity ratio of only 21.50%. I guess it is more of a musical chair scenario right now, enjoy the dividends paid out using bank borrowings for as long as possible. Just don’t be the last one standing or holding on to Netlink Trust when the music stops.

Investment Linked Products- High Returns of 6% to 9% per annum by Fund Managers So No Worries On Your Retirement

I had another strange encounter with an insurance agent at a roadshow held at a suburban shopping mall yesterday evening. While shopping around,  a persistent lady kept asking me whether I can help her do a survey and offered a packet of "Himalaya Salt" to me as souvenir. She also assured me that her colleagues and herself are not pushing any products and just wanted to do a quick financial survey. Knowing full well the pattern of the marketing tricks employed to make prospective preys less guarded by offering the free gift, I still decided to sit down with her to do the financial survey as I was curious to see what latest sales pitch and gimmicks they have up their sleeves these days. I also rejected the packet of "Himalaya Salt" being offered to me. 

Which financial products have you heard before? Investment Linked Products, Endowment, Insurance, Unit Trusts?

Wow, the insurance agent wasted no time to educate me. She told me I must already have insurance coverage such as critical illnesses and hospitalization plan. Then she started to ask the next question of which product do I think has the highest return and to guess the annual return rate before moving on to Investment Linked Product that she is marketing. So long for "this is not a sales talk" claim. She told me that investment linked products with her company offered 6% to 9% annual return based on historical performance of the different funds. In addition, her insurance company will give 65% return on the initial investment. 

Investment linked products are good- It actually invested 100% of your premiums directly into the funds contrary to popular belief that not 100% are invested.

I could not believe the insurance agent said that and so I asked her to repeat herself. I then asked her if 100% are invested, then how do you earn a commission and also cover for the insurance expense portion, no matter how little or immaterial that she is asserting. 

"Are you sure this is not the case of 100% conversion upfront of your investment and then selling off the units to pay for maintenance expenses of the policy?"

The agent just smile and repeat 100% are invested to side step around the point.

Actually in a way, 100% of your capital are indeed used to ïnvest" into the units in the fund but the fun fact that the insurance companies will deduct your units to pay for expenses are strangely left out at this point if one does not ask for clarification.

Annual return of 6% to 9% and additional 65% bonus return on initial capital offered by the insurance company

I went on to challenge her that 6% to 9% annual return and a 65% return on initial capital would most likely means that her insurance company is a charity organisation and making huge losses.

The annual return then suddenly went down to 3.5% to 6.5% as she has conveniently omitted the annual expenses of around 2.5% for the product. The agent went on to clarify that 6% to 9% are the "gross return".

Also the 65% bonus comes with some caveats and lock in and does not apply to the entire capital invested. 

Damn it, I was getting bored. The usual masquerading and dressing up of the returns by giving half truth is still part of the bag of tricks employed these days. Sell based on the half truths. Not wrong to tell prospective customers that the fund generated 6% to 9% per annum. The mindset is if I never tell you got expenses deduction, it does not mean that there is no expenses deduction. Just that I never tell you at this juncture. *Clap*Clap*.

Are investment of the asserted 6% to 9% guaranteed?

The agent replied that investments are never guaranteed. But not to worry, if the investment returns dropped below the 6%, she will help you switch to a better performing fund. The insurance company that she is working for has lots of good funds for your investments and offered free switching services.

After hearing the sales talk for 15 mins, I decided that I need to go back for dinner and said bye bye to the insurance agent. I was glad I did not take the "Himalaya Salt" from the agent. She can thus use the saved packet to get another prospective customer to do the survey.

Stock Markets Rallied On Withdrawal of Extradition Bill In Hong Kong- Selling off Frasers Centrepoint Trust

The SGX suddenly soared yesterday mirroring the best month ever for Hong Kong Stock Exchange. I can only attribute this to the formal withdrawal of the extradition bill announced by Carrie Lam, the Chief Executive of Hong Kong. But the key question is whether this move is sufficient to quell the current unrest and whether it really mean the end of the Hong Kong protests? With this major concession, it seems to have given even more strength to the young extremist group that their grand objective of having universal suffrage (one of the key 5 demands) is coming close and that their violent actions have successfully brought about change. 

I have sold off around half (10,000 units) of my Frasers Centrepoint Trust ("FCT") holdings, as the price raged to an all time high of S$2.87 per unit yesterday, at an average price of S$2.85. I was very reluctant to have sold off the Frasers retail REIT units, which I have acquired 6 years ago in 2013 at around S$1.85 per unit, as it still has very good growth prospect. However, the dividend yield has hit a lowly 4% range at such a high valuation hence I intend to redeploy the capital after the current euphoria wears down. I am also considering divesting my remaining FCT stake if the price continues to rise so dramatically this week.

In addition, I really hope that Donald Trump can reach a truce on the current trade war with China. The damages done to international trade and growth have been considerable and evident throughout the economies of many countries including US itself. Singapore's 2019 growth forecast has been slashed to just a mere 0.6% by leading economists and analysts as compared to previous estimate of 1.6% growth for this year. Personally, I thought that even 0.6% growth maybe too optimistic at this juncture given the low volume challenging climate that I am witnessing daily on the supply chain side. 

Frasers Commercial Trust DPU May Not Be Sustainable Even With New Tenant Google Coming On Board

Frasers Commercial Trust (“FCT”) recently announced the signing of a major tenant, Google, at Alexander Technopark. Of course, with this being a done deal, many folks including myself were thus expecting the DPU to increase upon commencement of the lease next year. Upon perusal of the financial announcements of FCT in the third quarter ending 30 June 2019 and examining it in details, I decided to reduce my shareholdings by half to mitigate any downside risk at the current high valuation of S$1.60-S$1.65 range. The free cashflow available to pay out quarterly distribution turns out to be unsustainable even if you add in the upcoming contribution from Google to replace the capital component in current distribution.

1. Free cashflow assessment

Screenshot 1: Cashflow Statement Extract

FCT financial year is from 1st October 2018 to 30th September 2019. Hence we need to annualise the cashflow from 1/10/2018 to 30/6/2019. To work out free cashflow available for distribution, use S$49.81Mil (cashflow from Ops activities subtotal), add net income from joint venture of S$4.5Mil and less off the CAPEX line item <S$21,39Mil>.  

Note that in the workings in screenshot 2 Free Cashflow template below, I have decided to exclude CAPEX of <S$21.39Mil> as I presume that they are relating to part of the asset enhancement work for China Square Retail Podium of S$38Mil and non-recurring in nature hence it will not be fair to include one-off items in the computation of available free cashflow for distribution.

1.1- Current free cashflow concept is inadequate- Need to take into account financing cost to complete the picture.

I will go on further to subtract the line item “financing cost paid” of <S$11.63Mil> from the aforesaid mentioned to assess whether sustainability stress test will hold out. The funny thing about the current “Free Cashflow” definition is that it only talks about “Cashflow from Operating Activities” less off “capital expenditure” as essential cash left for distribution activities but it has omitted the all very important financing cost to service debt. Bank loan and other perpetual securities makes up a substantial portion of the capital structure setup of every REITS and Business Trusts in order to get yield accretive assets for their shareholders. So how can Free Cashflow be free when this critical and substantial part of REITS and Business Trusts is missing from the consideration?

Hence taking into account the financing cost paid, the revised Free Cashfllow is S$56.96Mil as illustrated in screenshot 2 below.

1.2- Dividends paid and lack of cashflow generated from the business even if add back expected rental from Google

Based on annualized dividends payout of <S$86.67Mil> against Free Cashflow of S$56.96Mil, we are now staring at a colossal gap of <S$29.7Mil> per annum even when I have taken the liberty to assume zero CAPEX. 

For Google, it took up 344,100sqft of space at Alexandra Technopark. It is widely believe that the average price achieved is around S$4psf which translates to a forecasted annual contribution of S$16.5Mil Adding this S$16.5Mil into the free cashflow deficit <S$29.7Mil>, one will still need to plug the remaining deficit of <S$13.2Mil> per annum. 

Screenshot 2: Free Cashflow Computation

1.3- AEI completion at China Square retail podium

The lettable area post Asset Enhancement Initiative is expected to increase to 78,000sqft. Based on Commercial Guru, the asking psf is S$20. Hence monthly rental income contribution if fully leased out will be S$1.56Mil and annual income contribution will be S$18.72Mil. Therefore, the key assumption will be that FCT must ensure that they can lease out all retail space of 78,000sqft at the targeted rate of S$20psf per mth in order to maintain the distribution and plug the deficit of <S$13.2Mil> as alluded to Pt 1.2 aforesaid mentioned above.

1.4- How about other REITS and Business Trusts? Are they also in the same deficit state?

Nope, look at SPH REIT, even if one includes in financing cost repayment, its distributions are in a very healthy and sustainable range relative to FCT. 

For Business Trust, Netlink Trust is another problematic business that actually borrows from the bank to finance its current high dividend distribution of 5.7% and it will not be sustainable in the long run. The sustainable dividend yield is actually only around 4.02%. I will probably write another post on Netlink Trust which many folks are viewing as an extremely safe haven to park their cash. My personal thought is that this is another potential Asian Pay TV Trust waiting to self-implode. Short term holding on to this should be alright due to the current non-stable macro-economic environment against the perceived safe government regulated business activities but for the long term, one should re-look at whether the current yield is high enough to compensate for future downside risks. There is a big hole of <S$33Mil> per annum to plug for this one.

Conclusion

FCT pays out high distributions to its unitholders, ostensibly from its current businesses. On further evaluation and in actual fact, FCT seems to be paying the high quarterly distribution via the previous cash reserves built up from the (i) gain on disposal of S$144 Mil of 55 Market Street in August 2018 and (ii) Distribution Reinvestment Plan whereby investors opt to receive dividends in equivalent units instead of cash. 

The crucial points for investors are thus whether FCT management can continue to backfill the remaining unoccupied Alexander Technopark as well as finding tenants for the China Square retail podium post asset enhancement work in order to maintain the current distribution rate. Given the circumstances as it is, this can be quite challenging.

Should Retail Investors Continue To Invest In This Uncertain Macro-Economic Environment? Or Time For Exit and Wait Strategy?

Should retail investors continue to invest in this uncertain macro-economic environment? Or time for exit and wait strategy? During my last post, I have briefly mentioned that there are some groups of investor who have sold off most if not all their REIT portfolio as they believed that REITs are overvalued and have rallied too much against their fundamentals. Also, such groups believe that economic recession is imminent and have switched to bonds and gold. On the other hand, I have another group of obstinate friends who believed in the buy and hold forever camp who asked me why I started selling off my Mapletree Industrial REIT and Starhill Global a few weeks back. Long term always beat timing the market is the core belief of this group of folks.

1. State of the current marco economic situation

I think that the first question to ask is which part of the economic cycle are we in right now? For those who think that we are still at the peak, you will need to start catching up on the recent news. There is no doubt that we are in the downtrend with Singapore GDP falling. There are also various gloomy re-forecast of future GDP numbers by other countries. We also have various bad news from the big boys such as Deutsche bank and automaker Nissan laying off workers. Donald Trump trade war with China is ongoing. For those who thinks that Donald Trump has blinked and pulled back additional tariffs against China, note that this is only a temporary measure to postpone the event to the end of the year to appease the US electorate. Upcoming Brexit and Hong Kong never ending riots add further uncertainties to the regional economic situation. The inversion on short term and long term bond yield curve also created massive panic. Probability of further sells off are high based on the recent news.

2. Exit now and wait for lowest point of the next upcoming recession?

With regard to selling off everything right now to take advantage of market timing, there is a high risk of missed opportunity cost. Also, I have seen many expert economists and analysts declaring recessions after recessions every year and I have serious doubt over their crystal ball being able to pin-point the exact lowest point of the next upcoming recession. According to the Bloomberg Businessweek, economists are terribly bad at forecasting recession. They also tend to underestimate the magnitude of the slump until one year later before they can give such conclusion. 

3. Continue holding and investing?

For the buy and hold camp, this can filter down to even more sub-groups of strategies. I shall not delve into the details here. The only point I want to add here is make sure one does not get caught in forced liquidation of your stock portfolio during the worst trough of the crisis. If you suddenly need to come up with money for down payment of a new home or renovation, or if one is forced into margin call, then this is the worst nightmare that will destroy the opportunity of upsides when the market recover.

Just to sidetrack a bit, REITs are definitely not super defensive assets. The 2008/2009 Global Financial Crisis period saw a huge plunge in many of their value by more than 50%. Also, among REITs, the level of fluctuation also depends on which class of assets they belong to and also their leverage level.

There is also a misconception that during huge plunge in value of REITs, their dividend yield will also dropped by the same proportion. This is not true. The dividend yield at the lowest point could be in the double digit percentage yield due to the extreme low price. But many investors stayed away due to the high leverage employed by REITs and the fear of REITs going into liquidation if they cannot secure new bank loans. I guess the problem at this point in time is whether retail investors practice what they always advocate as common sense, that is, "buy low and sell high".  The irrational fear of losing one's hard earn money will be very real at that juncture where everyone is afraid that the great recession will worsen and evolve into a great depression similar to the 1930s during the most pessimistic period.

4. Summary
For myself, I have taken a hybrid approach. I sold off around 20% of my previous portfolio-mostly Industrial  REIT, office REIT and also Retail REIT (Starhill Global). My current holdings is now make up mainly of only Retail REITs, Healthcare REIT & stock and also business trust (Netlink). I hope that in the upcoming months, I will have an opportunity to accumulate some DBS, OCBC or UOB blue chips.