What the analysts been saying recently

Recently I did a compilation of analysts targets (total of 7 research houses) - these information were extracted from "sginvestors.io"

Here are some observations:

1. Large cap companies tend to have a bigger following - so theoretically they should be better priced (i.e. not too far from fair value)

2. On considering whether to add dividend yield to these average prices, I realized that would be double counting. The analysts have already imputed those information into their calculations so it would not be right to add it in.

3. Average targets and the subsequent upside would not be complete without a calculation of the dispersion of analyst targets....interestingly DBS had the biggest dispersion while some smaller companies like Guocoland have analysts agreeing pretty much with each other on the fair value.

Here's the list of data with a little comments from TFG. Enjoy and happy analyzing.

On Blue Chips (STI):
- ST Engineering, Thaibev & Singtel look like safe bets for the year with the least dispersion and higher target prices

On Reits:
- Reits look fairly valued and may see only single digit gains (inclusive of dividends) for 2018.

On Small caps:

- The kind of stocks that give you the big boost over the next few years. Small companies with lower analyst coverage but with strong moats and significant growth story could be the right play for years to come.

Cheers.
TFG

Special situations - is it a gamble or a subset of what we already know? (The case of RHT Healthtrust)

Today's topic is about Special Situation investing.

For the uninitiated, Special Situations refer to any of the below scenarios:

1. Merger & Acquisition
2. Asset Sales & Purchase
3. Recapitalization and turnaround

etc.

If you know what you are doing. Sometimes a very complicated deal may make sense. But if you don't know what you are doing, there is no shame in admitting it. Only when people pretend they are experts, then its a real shame - plonking money in something you don't understand is really gambling.

Personally in the field of special situations - I admit, I have much to learn and have bought Joel Greenblatt book "You can be a stock market genius" - apparently the best selling primer on such deals which I come to love and appreciate.

Now on to the case:

Recently I did a simple analysis for RHT Healthtrust. A quick introduction as below:

RHT healthtrust owns healthcare assets in India. Leasing the asset to its parent company Fortis. As of 14th Nov, Fortis decided they have a change of heart (strategy) and wanted to go asset heavy once more.

This news caused the share price to surge 15% on the news. People were a little murky on the details and couldn't figure out the price with debt, without debt repayment etc.

I had half a mind to jump in immediately, but some quiet meditation and thoughtful thinking later, I decided to let the dust settle first before looking at the deal.

As of couple of days back, the price fell within a sweet spot. Which I call the low risk high return quantum of minimum 3x upside compared to the downside.

How did I derive upside price? Here's my 3 part analysis

Part 1: Figuring out what the deal is worth

Given that the deal is valued about 46.5 bln rupees. And paying off the debt, the offer values the company around the range of 765m SGD. This would give an offer price about $0.94. Adding some accrued dividends, we should get a final price of $0.97. The deal takes a big chunk and matters most, therefore a 50% weight is a minimum.

Part 2: Taking into account what the analysts think

Taking a simple average of 4 analysts - we get an average of $0.8875. Given they are experts, I give them a 30% weight.

Part 3: Some basic due diligence (Relative Valuation)

Using the only peers available on the SGX, Parkway life and First Reit. You get two very different players but in similar business of leasing out healthcare assets. Using dividend yield, P/B we come up with two values.
Dividend Yield gives about $0.8605. P/B gives a value of $1.2905. By the PB ratio basis, this deal is really undervaluing the potential of the company, dividend wise - about the normal.
I gave both valuations 10% weight each.

Assumptions:
1. FX (INR-SGD) remains constant
2. Company does a payout of cash and dividend
3. Deal goes through with no competing buyers (this is actually positive on the upside but affects the deal timeline)
4. Company pays down debt, pays out cash and winds up the business

Downside
Quantitative risk
1. Blockage/Deal does not go through - company worth intrinsic value of 0.84
2. Lowest closing price of 0.795 and lowest 52 week price 0.71
Price Average 0.782
Downside risk -4.09%

Qualitative risks
1. Depreciation of INR
2. Other possible risk such as Fortis going belly up/unable to raise capital are minimal given standard chartered's commitment to a 50bln rupees capital raising event
3. Parent has yet to pay relevant fees for half year (potential query as to its cashflow issue)

Announcement                      15-Nov

Time frame                            60 days

Expected conclusion             14-Jan

Remaining days                     33 (as of 15 Dec)

Weighted price expectation  $0.971

Purchase Price                      15-Dec @ 0.82

Expected returns                  18.42%

Annualized return                203.76%

Final conclusion: Buy by sizing (no more than 10% of portfolio due to country risk) 4.5x upside vs downside.

Disclosure: Author has a small sizable position of 5% of his portfolio in the deal.

Stalwarts of the 90s and the end of moats

Listed on the SGX, many of the below companies have grown over the years from strength to strength. Today's article covers the problems they face in the face of disruption.

1. Singapore Press Holdings
2. Singapore Post
3. Singtel
4. Comfortdelgro

5. Keppel Corporation
6. Noble

7. Singapore Pools (not listed, but just here to illustrate a point)
8. Singapore Technology Engineering
9. SATs
10. Singapore Exchange

How the mighty has fallen in the era of disruption

As technology and new business models threaten industries. Many billion dollar companies have been hit by the smaller players who grew up and have big ambition/plenty of money.

Think media - SPH. A company with brand and substance to back and yet they are failing. Why?
This probably lies in the complacent nature of management and its inability to disrupt the status quo. We could see new media/social media appear. I mean if you had ambition, you would grow business times/share investor to become something like Fortune, Baron's, Financial Times - basically international news. And only now they started shifting their strategy.....to areas of healthcare, property, education. Well good luck, if that is not 'diworsification', I don't know what is.

Think delivery - Singapore Post. Hit by itself really. In an era where they are still a monopoly, they failed to grow any secondary industry....even now while no one is really disrupting the delivery business but they have horrible service and an inability to grow inorganically. Their bad acquisitions just show a poor level of management capabilities to handle the new era. I think even Alibaba isn't betting on this horse as it acquired Lazada and Redmart to play in the region.

Think telecom - Singtel. Singtel is a smart company. As a true blue chip, it has grown its presence all over Asia - in India, Australia and around. While telecoms remain an expensive business with high capital expenditure costs. It is unlikely to be disrupted to the same extent as the basic understanding is that communication is a basic, provision of broadband is a necessity and well entertainment (cable tv) is part of life. Does anyone watch TV these days though?
On a side note TPG is threatening to eat into its Australia and Singapore business....can a business truly under-price everyone else to take out a market leader? I wonder.

Think transportation - Comfortdelgro. While probably no one is disrupting the infrastructure of train and buses. People are disrupting the transport business with the model of shared economy. These days, private cars have taken to the roads and provide the very service of transportation. Grab, Uber has transform the industry and are beginning to take on the delivery business of food as well. Can they vertically change the industry? Only time will tell if their cash burn can grow their presence to a sustainable size. Comfort on the other hand has seen its number of taxis being rented declined to the extent that it has reached out to uber for further collaboration.

---------------------------------
Cyclical business

The second group of companies I want to cover are those with exposure to commodities.
Namely Keppel Corp (to oil) and Noble (to hard and soft commodities).

Keppel's position as no.1 O&M offshore rig was really admired 5 years ago. To think that we were reading about how the battle for Brazilian oil rig deal was the big big thing. Fast forward today, allegations about corruption/bribery/govt espionage. Man. That's really not a pretty sight when the music stops. Will Keppel survive? I certain believe so, the company has some of the brightest talents and their strength allows them to grow their fund management business, property development, infrastructure and different parts of O&M (e.g. LPG). O&M is cyclical and well....it remains to be said but I don't believe their moat has been destroyed, just cyclically under performing for now.

Noble on the other hand, is on the highway like a lemmings off the cliff. Many years of high debt has finally caught up to it as shortsellers circled it like a shark. The company in desperation to stay afloat sold all its crown jewels. What is left is a couple of junk trading business that is resulting in all the key management leaving. If the captain of a ship (CEO and Chairman) is taking the life boat out, I advise that you don't stay on as well.

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Business with strong moats

Singapore Pools. Undisputed money churning company of providing hope. Even two casinos could not take away the regular habit/hobbies of people just punting and hoping for a brighter future with winnings (hopefully millions). Online gambling is illegal in Singapore and well, people don't trust digital money so much as it may just be an online theft.

ST Engineering. With a business with the SAF. How could you possibly go wrong. As the only AAA rated listed company in the fixed income market in Singapore. ST Engineering has the orderbook and dividend that pays. Early shareholders know the testament and enduring nature of the defense industry and as long as Singapore govt continues to dedicate 5% of its GDP to defense, we are going to continue to see the company roll on.

SATS. A company closely intertwined with Singapore's aviation industry. As Singapore remains an Aviation hub for the region. SATS has a strong plan of providing food and ancillary services to the aviation industry such as logistics and handling services. Till the day people are able to travel quick and safely via another mode of transport other than flight or Singapore loses its Aviation hub status. SATS will be here to stay as it rides on Singapore new air terminals opening.

SGX. Trading stocks, bonds, derivatives and listing companies is a bread and butter business. Will this industry ever disappear. Very unlikely so. While the digital era has enabled bond raising through private means (such as crowdfunding and IOUs). The size and segment that SGX caters to are still big fund managers and nobody really could replace exchanges in such a market.


What should you invest in then?
1. Look for companies with a strong moat (competitive advantage) - e.g. the 3rd group / Avoid companies without it!
2. Look for those with great managers and strong corporate cultures of putting the customer and employee first before shareholders
3. Figure out a fair price to pay, and wait for that day to come. Buy when its on sale.
4. Review yearly by going through step 1-3.

Behavioral bias, laziness and the arrival of an eCommerce titan

When I was a university student, we published the results of our project that covered the behavioral bias of human nature - in particular related to investment decisions.

Today, I address 3 key thoughts about the week:

1. Home Bias & the problem of investing in your own backyard
I was watching at a google talk by Meb Faber recently. And it appears that the problem with most investors is that they focus a lot on just investing in their home markets creating a concentration risk that affects the upside of the wealth accumulation process. Feel free to catch the story below as he talks about CAPE (Shiller 10 year ratios) as well as the problem of home bias.
Mebane Faber: "Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns"

Lesson: The opportunity sets are larger overseas and it may be good to look outside your country.

2. Problem of coat-tail investing & the problem of laziness
People that invests on hot tips, following fund managers, bloggers, insiders etc.
The problem with this is that it creates a culture of laziness - and I find myself guilty of these in recent times when I have less time. The damaging effect of thinking that others have done the homework and that we can just hop on board rather than taking the effort to think and rationalize each decision...

Think about what happened with Noble Group (negative cashflow), Sabana Reit (bad interest rates and declining DPU) and the likes of it....if we do not take the effort to do our homework...we are really setting up ourselves up for trouble - if you just buy a stock because a famous investor is onboard, you wouldn't have appreciated the process of reaching that outcome, this would make you a speculator and you would be the first to flee when the price starts falling.

Lesson: Be objective, think it through. Don't let the price or the investors affect your need to do due diligence and make good judgement about a business.

3. The rise of e-commerce and the inability of companies to adapt
Amazon Prime is here - and certainly the ultimate challenger is here to take on all our incumbents. Think retail malls, f&b, Singpost etc etc.

Companies that would survive this onslaught may be the ones that build a strong brand loyalty, and how companies do that will have been through building up great customer experiences. I strongly believe that capitaland's strategy of managing retail malls is the best-in-class and they are probably onset to replicate this to cover a large part of China.

On the flipside - companies like Singpost may be in trouble. Notwithstanding bad acquisitions with failure of corporate governance, Singpost appears to be the milking of an old cow - as mail service drops, they attempted to acquire TradeGlobal which resulted in a massive writeoff in the tune of about 180m. Tails of insider transactions and you wonder why nobody is punished as yet.

Recently I also tried to purchase something from Amazon through vPost. Long story short, vPost provides really bad customer service and incomplete instructions when you are shipping items that do not compile with their 5000 pg articles.

Lesson: eCommerce is here to stay. But to invest in this industry, you need to be aware of how the companies adapt and create an enduring experience for their customers to keep coming back - easy to say, hard to execute. On a sidenote, dear vPost- I probably will never buy from you again. Bad financials, bad management and horrible customer experience - it is now increasing clear why Alibaba prefers to build a logistics arm in Malaysia rather than ride on Singpost one. Jack Ma to launch Alibaba's regional distribution hub in Malaysia: sources

2017 looking like a decent year to most investors (or is it?)

2017 has look a lot brighter for me personally. It feels like sunshine is thawing a long cold winter.

On the investment front, some of my recent picks this year have done well....even the bad picks of last year are looking brighter.

Top 3 picks:
Venture Corp  + 23.64%

Capitaland      + 15.41%

CWT Ltd         + 13.37%

As a portfolio manager, nobody knows our needs better than us. If we don't take responsibility and exercise discipline, we could find ourselves in a lot more trouble when the tough times hit. This is when I often think about the past and know that given the game is so hard - it is best to avoid the losers. 

After all, even Warren Buffett's two rules underline the fundamental that as long as you don't lose money - it is a great sunny day. You live to fight on.

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As a relatively young working adult, I believe it helps to reflect on things often and while being young means time is on your side - It always pays to be humble, and continue to learn. The most pertinent warning comes from this 2007 TNP article I chanced upon recently.

BURNT BY STOCKS - I LOST $700,000 IN 3 MONTHS

Student on winning stock market streak, then he loses dad's life savings

https://www.valuebuddies.com/thread-618.html

Lesson points:

1. Money doesn't come "easy"

If you think money is easy to be made, you may be sorely wrong - people may be right for the wrong reasons and wrong for the right reasons. The game is never in your control - the day you think you are 'master of the universe'  - that's a very dangerous day

2. Never borrow money to invest

Markets can stay irrational longer than you stay liquid. If you do not have the holding power, you cannot ride out a storm.

3. It is an emotional game

Mastering control over fear and greed is necessary to do well. Otherwise just stick to regular investment in index funds.

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With this lessons in mind, I am cognizant that some rethinking and rationalizing of my portfolio is necessary.

My strategy

1. Reassess the worse case scenario (maximum downside that any asset could have) 

    + This is defined as the point where you will bet the house (but someone else's blood is on the 
        street)

2. Managing the cash/bond portion of the portfolio (having a larger portion in this segment will reduce volatility) 

    + The goal is target quarterly re-balancing to 60-20-20 (Equity-Bond-Cash)

3. Take some profits off the table to manage risk (Rome wasn't build in a day and neither is personal wealth)

    + Bird in hand is worth two in a bush. My father often told me profit is (paper profit - unrealized)   
       but losses are actual losses as it may never 'come back'.

All the best.

TFG

What can you learn from the SGX shortseller report?

Shortselling report top 18 STI stocks by value

It's valentine and all I see is....

Data data data. Sometimes you ask yourself, I have so much data, how do I make sense of all of it?

Well. In essence, it helps to know what you are looking for, then look for the data that may give you the answer.

As my banking professor used to say context. You need to get the context right!

Take the example of SGX shortselling report. A useful report which few people know how to use...in essence what causes market fluctuations? How do you know a stock is bottoming out? How do you know you better stay away because the huge fund managers are hitting the stock on the dollar?

Well, maybe I can give some insight...hopefully its right because its very much my intuition.

1. If there is high shortselling percentage based on the shortsell ratio (e.g. >20%) + sharp drop in price (e.g. < - 2%).... do stay away because the selloff is not done yet.
- Think DBS and OCBC right at the top

2. If there are high shortsell % + minimal movement of share price downwards (or even increase)....do take notice...a possibility is that the upside is coming as the buyers are accumulating.
- Think Singtel, Starhub, HPH Trust as above

3. If there are low shortseller interest and the stock price falls significantly....maybe its best to cash out, it could mean the buyers are selling out totally and the stock may be a junk piece soon.

Additional PLUS point
4. If there are low shortsell interest and significant rise in price (e.g.>2%), take note because the upside is really there especially when paired with high volume.

In a nutshell, bottom fishing can be done with some thoughtful thinking. Alternatively, you can take note of your favorite great stocks (think good fundamentals) and wait for the shortsell ratios to drop to low percentages...that's probably a reasonable time to enter a purchase.

Happy investing,
TFG

IREIT global v Croesus Retail Trust

I was considering looking into two shares that have great yield - both in terms of yield and wale.

As I looked at both the german and japanese economy, it seemed that the economy and government of germany are rather prudent in their approach. Steady slow growth seems to be evident for IREIT while Croesus has the stimulus package of the Japan economy that could push it upwards.

Given the same amount of money, the companies are rather similar apart from the country and industry they are in. In an additional note - IREIT appears to have a strong new sponsor (or more asset flow which requires more equity - note nearly 900m in real estate on standby) in Tikehau Capital while Croesus Retail has internalize its asset manager creating strong alignment of interest for the long run.

Honestly, both appear to be good companies with a growth path of some sort. Hard to say which will emerge top but japan does appear politically more stable while europe may break up. But as peter lynch said, no point second guessing the economy - it is likely a waste of time.

On a side note, both trusts are undervalued compared to that of their peers listed locally which could mean we are sitting on good value. You can research the undervaluation causes independently. Likewise - Quarz capital management has a well detailed one here (https://www.quarzcapital.com/en/research/i-reit). 

Based on Quarz target...a 25% upside + 8.54% gives a nice window of 33.54% baring no unforeseen circumstance.

Breakdown of data. Country's economic data courtesy of OECD

Happy investing,
TFG

Finance talk with a titan in Microfinance - Professor M. Yunus

Have you read the book - Banker to the Poor? 

If you haven't, maybe you should.

This is in view of the current shift in political tectonic places could mean that Muhammad Yunus ideas may be more important than ever. The human race has so many problems, many are left behind, wealth is not shared, rich are getting richer, ethics are being compromised and society created many individuals that really don't care about anything other than making more money.

The dear gentleman and professor was in NTU on the 23rd Jan 2017. I was really happy to be in the audience in NTU as I learned so much from an individual that shaped and changed the world using the capacity and resources he had.

Key argument is that while profit is a great incentive, it is not the only one. To the contrary, making other people happy is super happiness. The problem with charity money is that it goes out but never come back. It is difficult to raise, you spend more time raising it then doing the actual job. In contrast, social businesses focus on the objective of charity but are backed by the business engine.

Problems of capitalism

Capitalism assumes that human is driven by self interest. But this is a gross misinterpretation and is only just one dimension. There are other values that matter such as doing it for others.

Currently 8 of the world’s richest people own more wealth than the bottom 50% of the people. The system build and encourages this…this is not sustainable.

Happy reading
-TFG

-------------------- Notes and transcript as per below -------------------

Redesigning economics to redesign the world - M.Yunus

Microcredit beginnings

- The reality of the famine problem in Bangladesh show that traditional economics does not work. It is a fiction!

- Decided to make himself useful to one person, to just try

- Met all of the stakeholders (victim, loan shark)…decided to loan the money himself. The main idea is that the victim doesn’t need to borrow from loan sharks. 

- Soon he realized that this is not sustainable!

Bankers – part of the solution?

- Banks did not want to lend money to the poor, they wanted to lend money to those who have plenty of money. 

- Work around this problem by volunteering to be a guarantor.

- Banks became reluctant as the lending based grew…prof yunus decided that the reluctant banks should not be his partner

- Applied to create a bank…in 1983, it became a full bank

- As of the moment, 9m borrowers…97% of which are women.

- A very big challenge early on was that culturally, apologetic…women didn’t want to take the money needed for their business  Undoing the history is the tough job

- Started the target as 50-50

- Decided that women were delivering and managing money better…decided to increase the women ratio

Dealing with other monetary problems

1. Night blindness

- Distributed vitamin A tablets and vegetable seed selling business

- Vegetable Business under Grameen is self-sustainable as the profits earned are pump back into the business to grow it.

2. Sanitary Latrine 

- New clause started - If you want to join the Grameen Bank, dig a hole

- Grameen gave a separate loan for this building of latrine point and introduce a contracting company (self-run) that installs this for them

- This is a form of social liberation as women now can go anytime they want (instead of waiting for nightfall)

3. Cataract operation

- Setting up of eyecare clinics for villages by bring the clinic to the people (i/o people going to city)

- 10,000 ops per year

- People who pay full price do so, profit is made

- People who can’t, pay a token

- First clinic broke even in 4 years, Second clinic broke even in 3.

4. Malnutrition 

- Paired together with Danone to deal with the problem of malnutrition.

- Danone put all the necessary micronutrients in one small yogurt. Typically this taste bad but Danone made it taste good

- Over 6-7 months, children who took it recovered

- Only investment money is taken back while the social business continues to thrive

5. Food wastage

- Mccain the worldwide potatoes maker (60% market share) decided to do a social business in France

- 26% of all potatoes previous was thrown away simply because they weren’t the right shape for fries or chips

- The company decidedly made potatoe soup, a social business soup which a famous chef also agreed to endorse and put his name on it. Tasted good too

The moment the company put on the social business lens, they saw things differently.

- Likewise with ugly vegetables…previously these are not bought and as many as 1/3 of crops are all thrown away.

- Company chopped them up and sold them cheaply. Win-win.

1. The more people go into social business, the better…there will be more equality

2. Truth is life is not about jobs. Grameen bank states that a job is an obsolete idea. Everyone should not be job seekers but job creators. Jobs make young people feel small, entrepreneurship makes them feel strong and tall.

o Take the example of cavemen  they are the go-getters. problem solvers, the gathers, farmers, hunters.

o All human beings were born entrepreneurs, a creative entity…jobs created by capitalism is an artificial human destiny.

3. Grameen VC - social enterprise investor…make money return the money thereafter

o Young entrepreneurs that have no money, no experience, no one will lend him money…this is a wrong mindset that capitalism brought about

o At our VC, nobody is rejected, we work with you to create what you like and what we believe is feasible so that we invest in it. 

o We redesign the world not on greed but on wealth sharing.

15 lessons from 10 years of negative investment trades

Sometimes in life, you win some, you lose some and you lose a lot.

So I was wondering what to start the year with and this really interesting video by Guy Spier at Google Talks caught my attention.

He speak about an investment checklist which is not so much what you look out for in an investment but what are the common mistakes to avoid, which is very much in considering that if you protect the downside, the upside will take care of itself.

Here are my 15 lessons from 10 years of investing:

1. Not having a firm investment thesis and target price so that overvalued/speculated stocks may be sold

2. Blue chip companies are not foolproof. Highly leverage companies are slaughted when the liquidity dry up.

3. Speculations are really for the short term. Limit the resources (time/money/effort) spent on them.

4. Not all techniques (FA/TA) works on all shares. Ultimately, management track record matters in the long run.

5. Don't trade if you do not have a 'crystal ball ability'

6. Past dividends and M&A activities are no indicator of good stocks

7. A good stock can be severely overpriced

8. No turnaround story is guaranteed. Wait for signs of profitability before considering

9. A good stock can be slammed by the macro-environment. Management may be short-sighted/overly optimistic in the short term.

10. Don't buy a stock on a hot/friend/remiser's tip. Do your own homework.

11. An illiquid stock can suffer from negative price movement despite undervaluation.

12. Don't buy a stock with no moat/weak moat.

13. Speculative news (M&A) must be managed with care.

14. Don't sell at the wrong time. Buy back at the right time.

15. The stock market can mis-price stocks in the short term. See point 1 - Stick with the investment thesis and have a time frame.

Happy investing
TFG
2017