Sunday 27 June 2021

Is There Any Hidden Danger From Using Cheap Commission Online Brokers Like Interactive Brokers, Saxo or Tiger Brokers?

Have you ever wonder how safe is your investments held by these online brokers? Recently, I got questioned by a long time friend on whether it is wise to trade through such brokers as the stocks purchased were all held under the online brokers' nominee account. Most of these new age trading platforms have very little physical presence and assets in Singapore unlike the traditional brokerages which are affiliated with DBS Vickers), UOB (Kay Hian), OCBC and Maybank (Kim Eng) etc. With the exception of Saxo, which has an investment banking license in Singapore while the rest of them, in particularly, Tiger Brokers which just started operating in Singapore in March 2020. I had opened an account with Tiger Brokers earlier this year. Tiger Brokers is backed by US-based brokerage Interactive Brokers, Xiaomi and Wall Street investment guru Jim Rogers. So will be using Tiger Brokers for discussion. 

What happens if say Tiger Brokers gets into financial distress and has to close down?
All money, approved securities or other property received by the online broker from you or from any shall be held in the form of trustee or custodian, segregated from the online brokers own assets and paid into a segregated bank account or a segregated debt securities account, and all such monies, and securities or other property so held may be commingled with other client’s funds and shall not form part of the online brokers' assets for the purpose of insolvency or winding-up.

Generally, US Securities purchased are kept by Interactive Brokers while SGX securities are being held by a DBS Custodian.

Sounds great here. However, in the event of financial insolvency, the real and bigger issue comes up. Can another broker just takeover immediately or if the beneficial owner asked for transfer out to other brokers, is it allowed? The original broker may not want to lose their client database and raise a dispute in court that drags on for a year or two. During this period, one would arguably faced changes fundamentally affecting their holdings and suffer a loss.

What if there is fraud in such online broker in future?
There maybe fraudulent transactions being executed and planned for by collaboration between different personnel in different departments. My personal opinion on this is that chance of this happening is extremely low but it may happen and securities of actual owners maybe sold, encashed and used to pay themselves or debts of the brokerage. In US, there is a protection of US$500K by the Securities Investor Protection Corporation ("SPIC"). The SPIC is a non-profit corporation that has been protecting US investors for decades. SPIC work to restore investors’ cash and securities when their brokerage firm fails. According to its website, SIPC has recovered billions of dollars for investors.

However, this seems to be more applicable to US shares. Local Singapore securities do not seemed to be covered. In Singapore, the deposit insurance scheme protects up to S$75K of cash deposited with banks and finance companies only. It also does not include securities or cash held in custody. 

Food for thoughts:
What are your thoughts? Has anyone switched out entirely from their CDP account to these online brokerage to take advantage of super cheap brokerage fees? Do you think it is safe to leave a significant portion of your portfolio in such custodian accounts of the online broker?

[P.S: Updated on 28 June 21. Henry has brought up (please see below comments) the case of MF Global which was a major global financial derivatives broker that went bankrupt in 2011. Even though it was marketed as "safe", apparently, the company took money out from segregated nominee accounts of its clients to en-cash to meet margin calls by lenders. 

A local Singaporean Mr Khoo almost lost S$270K even thought his funds were not touched and properly segregated- it took him almost 5 years for the Singapore receiver KPMG to clear all legal obstacles in different jurisdictions to get back all his original money.

"If the largest brokerage in the world can close overnight, it is quite scary," he said. "Overall, my open positions closed in the money. I started getting paid in 2012, and have been getting payments over the past few years."-- Extracted from comment by Mr Khoo (retail investor) on ST March 8, 2016.] 

Thursday 24 June 2021

Undervalued Gem- Global Investment Limited Huge Discount Gap to Fair Valuation Narrowing

It is interesting to note that despite the almost daily share buy-back by management, Global Investment Limited ("GIL") remains at a huge discount to its fair valuation. The good news here is that the prior to the commencement of the share buyback exercise in early January 2019, the Company's shares were trading at a discount of 39% relative to its NAV per share as at 31 December 2018. Following the implementation of share-buyback, the fair valuation gap has narrowed slightly. Based on current market price of S$0.151 as at 23 June 2021 relative to Q1FY2021 announced NAV of S$0.1977, this represented a discount of 30.9% to fair valuation (since investible assets marked up to fair value, NAV here will approximate fair valuation). 

1. Recap of Addition Asset Purchased During 2020 COVID Induced Economic Downturn
One of the key investment by GIL was to exploit the opportunity to invest in more bank contingent convertibles (CoCo) when markets fell drastically due to COVID-19 in 2020. Hence CoCo percentage concentration increased to 58% in 2020 relative to 43.4% in 2019. This turned out to be a brilliant move as the risk of holding CoCo reduces with various European markets gradually recovering from COVID due to higher vaccination rate.    

2. Key Management lead by Mr Boon Swan Foo and team still going strong
Mr Boon Swan Foo who has extensive experience continued to be on the board of directors of GIL. 

Mr Ronald Seah, Lead Independent Director, who has served for over 10 years will be stepping down at the end of the 2021.

Mr Tan Wee Peng, has also stepped down at the AGM to make way for election of new directors as part of the board renewal process. 

Mr Lay Charlie Nhuc Hiang has joined the BOD in June 2020. He is an economist of an International Investment Bank (Commerzbank) who understands the investment business well. 

Rest of the BOD remains intact. Mr Boon Swan Foo and Mr Ronald Seah also continue to increase their shareholdings in GIL through the Scrip Dividend Scheme. Interest with shareholders are thus aligned.

3. Parting Thoughts
Despite the rally in share prices of GIL, the Company is still very much undervalued. At a discounted price of 30.9% to NAV, it offers a fair buffer margin of safety. The annualized dividend yield is currently at 5.29% (based on S$0.008 per share to market traded price of S$0.151 per share). I reckon that the cash dividend paid out has been conservative due to COVID as well as encountering good opportunity to invest into marketable securities. If it goes back to pre-COVID period, dividends payout has the potential to increase by another 20%. which will mean a 6.6% dividend yield.

Monday 21 June 2021

Oceanus Group Rise From The Ash- From Abalone King to High Tech Food Farming

Oceanus Group has applied for exit from the SGX watchlist on 13th April 2021 after finally swinging back into the black in FY2020.  The revenue actually grew within 1 year from S$9.6Mil in FY2019 to S$91.7Mil. Revenue is expected to grow exponentially further due to its recent investments into prawns and shrimp farming in Singapore and also Hainan, China. The Singapore farm is expected to produce 150 kilograms of prawns daily from June'21 onwards and this will grow to 1,000 kilogram of fresh prawns being produced daily by 3rd quarter of FY2022. For Hainan, Oceanus will produce 200 tonnes of shrimps initially and by next year, this is expected to grow to 1,000 tonnes. Share price of Oceanus rose to an all time high of 7.6 cents per share on 22 Feb 2021. Currently it is trading at around 3.8- 4.0 cents per share.

1. The Oceanus Group troubled history and death of abalones
In 2013 under its old management, a substantial number of its abalone in China farm suddenly experienced unnatural deaths. This happened within a very short time span after the 2013 AGM whereby its Executive Director, Mr Wu Yong Shou was booted out of the Board of Directors. He lost the re-election and his executive director position- he was overwhelmingly defeated by a resounding 95.51% majority of the shareholders. This episode eventually led to the suspension of trading in its shares and a filing by its banker to wind up the Group.

After much restructuring amidst the drama, Oceanus Group finally managed to turn profitable and seems to be on its way out of SGX watchlist and to retain its listing on SGX.

2. Oceanus new strategy under CEO Peter Koh- 4 pillar of growth strategic vision
(i) Food Production
Since inception, aquaculture has been a cornerstone pillar of Oceanus’ business.

From 2021 onwards, Oceanus have diversified beyond seafood. The group is also expanding its food products to include vegetables and meat. Oceanus remain committed to continue delivering the gold standard in fresh and frozen food produce to all their partners.

Oceanus’ strategies to leverage sustainable practices and adoption of cutting-edge aquaculture technologies have positioned us at the forefront of addressing global food security issues.

(ii) Distribution
Oceanus Group oversees the distribution of products from the first to final mile to guarantee punctuality in delivery and impeccable quality. Oceanus Group leverages upon its existing corporate presence and trading network globally to strengthen its position across the value chain–from raw materials to consumer goods.

(iii) Services
Oceanus Group expands beyond product distribution to offer services ranging from consultation, business strategies, media solutions to corporate branding. Oceanus Group’s in-house capabilities in aquaculture consulting, asset management, marketing and branding are also offered to third parties. By serving as profit centres wherever possible, these services boost the overall productivity and profitability of Oceanus Group.

(iv) Innovation
Oceanus Group stays ahead of the curve by continually pursuing cutting-edge aquaculture research & development (R&D) alongside their industry partners and institutions. For example, Oceanus has set up the Oceanus Oceanic Institute in Zhangpu China and Oceanus Innovation Centre @ Temasek Polytechnic Singapore. The group also have ongoing research collaboration with Temasek Polytechnic and Republic Polytechnic on juvenile abalone growth.

3. Financial Evaluation and Future Expectation
As depicted in the attached P&L screenshot, revenue grew aggressively by +S$82Mil (+855%) from FY2019 to FY2020. This is mainly due to expansion of the Group's distribution segment (Fast Moving Consumer Goods) which contributed a solid S$84.7Mil in FY2020 relative to S$6.5Mil in FY2019.

In addition, the business strategy of increasing contract farming business model to external aquaculture farmers allows Oceanus to maintain a fixed monthly income and forgo direct operating costs associated with full scale juvenile farming. This has the additional advantage of allowing Oceanus to hedge against the risks of mortality and volatile abalone juveniles prices.

Operating expenses also dropped by +S$1.6Mil due to successful implementation of cost optimizing strategies which  means that the savings from this point onwards is not one-off and actually recurring in nature. 

This gives rise to an ultra impressive Operating Profit of +S$7.5Mil in FY2020 relative to FY2019 loss of <S$1.5Mil>- this is an incredulous growth of +S$9Mil (+599%)

Based on current market price of 3.8 cents to its EPS of 0.04cents, this is a PE of 95 times, I think that it will take 3-4 years at least for it to duplicate and expand on its current business model to reach sufficient revenue size and profitability. Basically, profit must increase by 5 times to that of the current FY2020 operating profit level. Not an easy feat in my personal opinion despite turning from loss to profit.

4. Does Oceanus Group senior management really think they can expand the business exponentially  using its 4 pillar strategy over the next few years?
Well, the good news here is that on 15th March 2021, the CEO of Oceanus, Peter Koh, actually went into the market to purchase 12.5Mil of shares at an average price of 4.07 cents- he must be confident in growing the company by at least 5 times over in the next few years and I like his optimism.  

Dr Yaacob Ibrahim, former Minister for Communications and Information has also joined Oceanus Group as an independent director in Sep 2020. This bodes well for Oceanus Group to have director of such super star status willing to come on board its Board of Directors.

5. Parting Thoughts
It is hard to do a valuation of Oceanus Group as it is in the growth stage of its new strategic execution path. If based on FY2020 earnings of 0.04 cent per share,  it is 95 times overvalued based on recent market pricing. But of course, for such "growth" company, the challenge lies in the forecast of its future growth in revenue and profits given the recent investments into new farms and also upcoming growth in its 2nd and 3rd pillar business segments. The half year results which will be announced in July'21 will give us some idea of the strength of its business development momentum. Nevertheless, the best gauge will still be at year end whereby its new investments have commenced production for better visibility of Oceanus future star potential. 

(P.S: Despite the seemingly excessive high valuation at 3.8 to 4.0 cents per share, I have nibbled away some of its share as I like the growth story marketed by its CEO. COVID-19 had exposed weaknesses in the resiliency of the food supply chain in many countries- I believe that Oceanus has embarked on a right path in its current focus of its 4 pillar strategy approach as many countries would be keen to invest in its own locally produced food-tech instead of relying on imports from other countries).

Monday 7 June 2021

Lendlease Commercial REIT Diversification Into Suburban Shopping Mall- Additional Acquisition of JEM

Lendlease Commercial REIT ("LREIT") just announced a proposed additional acquisition of stakes in Jurong East Mall (JEM)  for S$204.1Mil from 2 funds holdings shares in it. LREIT has also offered up to another S$178.2Mil to other 3rd party investors in the Lendlease Asian Retail Investment Fund 3 Limited for up to another 19.8% interest stake if they are keen to sell off their stakes. This will raise LREIT's overall stake in JEM from 3.75% (purchased in Oct''20) to 31.8%. In a way, LREIT seems to be struggling to obtain a 51% majority stake in JEM due to the different external unit-holders holding a single completed property.  

Some key highlights to note:

1. Future M&A exercise going forward is expected to progress at a snail's pace similar to current situation since IPO
One thing that I do not like about the way Lendlease group funded its developments in Singapore is the use of several funds to hold a single development project with multiple major stakeholders taking part in it. This is similar for its current Singapore holdings such as Parkway Parade and Paya Lebar Mall & offices.

Hence to do a 100% acquisition of a single property at any one time is almost impossible due to different investment objectives of the shareholders in each of the investment fund holdings stakes. JEM is a perfect example of a bite size acquisition gradually over time to buy out 3rd party stakes if they decided to offload it at different periods in the future.

Such piece-meal acquisition is no doubt a waste of money as professional fees such as legal fees and valuation fees will need to be incurred again and again albeit is of a small amount relative to the overall valuation of the piece-meal purchase considerations.

2. The JEM acquisition move beneficial to LREIT?
Yes. this acquisition of additional stakes in JEM is expected to be 3.6% DPU accretive. The acquisition is expected to be funded by proceeds from its recent issuance of S$200Mil of perpetual securities, existing cash balances and debt facilities. 

2(i) Perhaps the best part of JEM is that its office component is 100% fully leased to our Ministry of National Development on a 30 years lease. Currently, 24 years of the lease remains. Taking into account its other office portfolio Sky Italia in Milan (also leased to a strong tenant), its office portfolio will provide resilient streams of rental income even during economic downturns. 

The office components post acquisition will mean LREIT having a 28% business segment that is resilient to major economic crisis. This is a hidden gem in the JEM acquisition.

2(ii) JEM's suburban retail mall has established itself as one of the dominant retail mall in Western Singapore with a direct access to Jurong East MRT station. JEM is well tenanted with a high overall committed occupancy of 99.7% as at 31 March 2021. Essentail services trade mix such as F&B services, supermarket and hypermarket account for 58% of its Net Lettable Area. 
Breakdown of New Portfolio by Asset After Acquisition

Breakdown of Portfolio by Asset Segment After Acquisition

The acquisition of JEM thus allows better portfolio diversification from its crown jewel 313@Somerset at Orchard Road which in theory should bring the expected risk premiums down from the current market valuation.
3. Changes in LREIT Senior Management from 1st June 2021-Good or Bad?
LREIT's chairman, Mr Anthony Lombardo has stepped down as chairman to become the Group CEO of Lendlease Group with effect from 1 June 2021. However, he will remain on the board of LREIT as a non-executive director. 

Ms Ng Hsueh Ling will take over as chairman of LREIT. She has been the Singapore MD and chief investment officer at Lendlease since 2017 and is also the key executive of Lendlease Retail. Ms Ng was also previously the CEO of Keppel REIT's manager and also ex-CEO of Ascendas Korea & Japan just before joining Lendlease group. 

Good to see LREIT is still in good hands and as a matter of fact, even stronger connection to its Australian sponsor from the designation change.

Parting Thoughts
Based on projected forward dividend yield (over next 12mths) of at least 7.1%, the current market valuation of S$0.77 per unit appears to be still giving a good return considering LREIT's main portfolio components are focusing on providing retail space and also office properties backed by superstar tenants in Milan and Singapore.