Saturday 28 September 2019

Malaysia To Ask Singapore For Revised Water Deal Again- The Beanstalks Were Burnt Under The Cauldron And The Beans In The Cauldron Wailed

This is really bad for Singapore. The Malaysian government is coming after Singapore again. Mahathir is saying that as the economy of Singapore is well developed, we should pay more. A fresh proposal on revised water rates is being tabled again. But Mahathir has conveniently missed out the main essence again, that is, contractual terms needs to be respected and has nothing to do with being rich or poor. The hustling continues.

The 1962 water agreement (1961 there was another one which had expired) is not just about water. It is more than that. It involves the sovereignty of Singapore. The water agreements were guaranteed by the Government of Malaysia in the Separation Agreement signed in 1965 that established Singapore as an independent and sovereign state. The guarantee was also enacted into the Malaysian Constitution by an Act of Parliament. The Separation Agreement was also registered with the United Nations. Any breach of the Water Agreements would thus call into question the sanctity of the Water Agreements and the Separation Agreement, and undermines Singapore’s very existence.

Singapore has also paid more than S$300Mil for the construction and maintenance costs as well as compensation for land used for the Linggiu dam project to increase the yield of the Johor River.

Whom are we dealing with for this long dragging issue and will there be a future Malaysian Prime Minister?
The next confusing question comes in as to who will be the new Prime Minister in Malaysia that follows up on the above water agreement dispute with Singapore. PKR President Anwar Ibrahim has mentioned in an interview with Bloomberg Television on 18 September 2019 that he will be taking over as Malaysian Prime Minister by the middle of next year (2020)- 2 years after the prior general election (“GE”) in May 2018. It was widely reported that Mahathir has mentioned handling over of power to Anwar in 2 years.

However, over the past few months, it has emerged that it may be in 2021 or even worse, no fixed agreement as per some comments made by senior figures in the Malaysian government. PKR deputy president Mohamed Azmin Ali said he agreed with Mukhriz Mahathir (son of Mahathir) that no official agreement was made to hand over the prime minister’s post to Anwar Ibrahim within two years.

Murkier than mud
To compound the confusion, on 26 September 2019, while at a dialogue at the Council on Foreign Relations (a think tank in New York), Mahathir “promised that he would step down before the next election and give way to another candidate and hence he may have at the most three years perhaps”. This effectively means that Mahathir is hinting that he may be holding on to the Prime Minister post up to moments before the next general election. This is really a brilliantly executed move as Mahathir will be keeping his word to let another candidate become the Prime Minister before the next GE. One or two days as a Prime Minister for this “other candidate” is thus also a Prime Minister. 

The promise will indeed be perceived to have been honoured if crafted out as such. Also, I find it strange that Mahathir used the term “another candidate” and not Anwar. Am I thinking too much into the quote?

There were also speculation among coffee shop chats that Azmin or Mukhriz Mahathir maybe a challenger to Anwar for the top job in Malaysia.

Poignant conclusion
The only thing for sure is that regardless of who is the new Malaysian Prime Minister, Singapore will always remain the bad poster boy to bash up for political points back in Malaysia. I do hope that the relationship will improve between our two countries and reached an amiable settlement on the Water Agreement.


Saturday 21 September 2019

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"

Saturday 14 September 2019

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. 

(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.

(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. 

Wednesday 11 September 2019

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.

Tuesday 10 September 2019

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.

Thursday 5 September 2019

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.