Far East Orchard Review

Price drop to 1.1 with yield of 5 percent. Fixed dividend payout of 6 cents for the past 8 years regardless of good and bad performance. Defensive balance sheet with low debt ratio.
Nav is 2.8 vs price of 1.1 indicating low valuation. Dividends largely financed by recurring income from its property investment and hospitality business and not from its property development arm.

Their developed properties are almost done and ready for launch. For example in Singapore wood square and UK west minister. Expect to turn these holdings into cash once they commence selling at a profit. Properties in overseas are freehold so they can hold long without worry.
 Current debt of 400MM will be refinanced to longer tenure. Interest coverage on the low side at ard 5-6 times (5mm interest expense vs net profit of 30mm) which is near our requirements of at least 5x. If we consider interest income of 3mm from their cash holding, the coverage will be much higher. Hence, we don’t see significant debt financing issue.

 Moreover they can pay off debt easily by selling off their assets. Cash on hand is 260MM while properties held for sale is 160mm. Investment properties and JV total around 1B. Not concern of liquidity.
Current yield of 5% is attractive which pay investor to wait for future upside.
Potential candidate to be take provide. With the large discount from NAV, chances of upside is high. Market Cap is 500mm while cash on hand is 260mm.
Control shareholder owns 60% of company. To pay off minority shareholders, they need to pay 300MM. Basically they only need to top up 40 MM to pay off minority shareholders. They can easily finance it with debt. With the recurring income from their business, the debt can be paid off easily and there is no need to pay dividends to minority shareholders once it was taken private.

Potential risk/red flag that company may not pay a premium to prevailing stock price during a market crash (for example down to $0.5 compare to $1.15 now) and take company private as they are major shareholder.  Recent privitisation deals indicate a 20-50% premium. Refer to Hupsteel and Memtech. We expect such premium should FEO be taken private.

If company not taken private, it remains an attractive yield play given its track record of consistent payment though not increasing. Dividend is sustainable based on its recurring income.
If there is bad year and recurring income not sufficient to cover dividend, it can be finance from its cash holding of 260mm vs yearly dividend of ~30mm which  explains why they can pay dividend every year.
Ability to pay dividends is confirmed. With its defensive balance sheet and easy to understand business model of buying properties to rent out for  yields, we felt we can invest more into this business.

Estimated fair value is $1.5. Entry price @ 30% discount is $1.05. However, historical fair value margin is 13% while current discount is ~21% indicating a value gap to be realised by the market. Current price of $1.15 is interesting. Potential entry in general weak market conditions.

Power of compounding and consistent saving

Never underestimate the power of consistent saving and compounding. 1k a month with 5 percent return for 20 years yields close to 400K versus 240K of  capital investment.
400k gives you 20k annual income which is 1.5k per mth based on 5 percent return.
Together with CPF life which gives around 2k per mth, monthly income will be 3.5k. By the time we retired, we should aim to be debt free. Hence 3.5k is purely for our own expenses for food, clothing utilities etc which appears to be adequate based on my personal experience. How much you can eat per mth? You don’t buy clothes every month also? Public bus and mrt is relatively cheap. There will be adequate leftover for that yearly trip to overseas.

All the figures are nominal, if we assume 3 percent inflation over 25 years, our spending power will be halved. So the retirement income figures above will be essentially halved as well.

What does this means? Start saving now and aim to save more to Ensure adequate retirement income. Minimise debt and refrain from chasing the latest car or condo. Live below your means or at least don’t spend beyond your means. If you can save at least 1k cash per month, you can achieve the basic. Retirement life style. If u save more, you can do more.

Please plan early.... don’t forget hospital insurance such as MediShield life enhance coverage and life insurance policies. If you are the Passive person who is not interested in investing, a couple of endowment funds will help. They give around 3 percent return . So you need to save even more.

Unit Trust Portfolio Construction and Selection Philosophy

Unfortunately Singapore don’t have a good ETF investing platform that support monthly investment programme. The best alternative we have is invest via unit trust though we understand that majority of fund managers fail to beat the index over Long term due to higher management cost and lack of consistency in investment performance.
Hence we aim to minimise the performance GAP between unit trust and index fund via the following selection philosophy:
a) Long term track record
b) Low expense ratio than its peers
c) Beating index since inception and on a 3, 5, and 10 years basis. One year and shorter duration Performance poorer than index is acceptable. Historical performance is for reference and we know it’s not indicative of future performance l
d) Preferably no star manager and management by a team so performance of fund is not due to any individual. Returns will be more sustainable and consistent.

In terms of portfolio construction, Simple and fuss free is key. Core funds include
a) global equity
b) global bond
c) Asian equities

Weightage to be based on risk appetite and current equity market valuation. Global equity is made up of 50 percent us stocks which is overvalued hence weightage is Low to minimise risk. Overall we are 50 percent in bonds and around 15 percent in global equity with remaining 35 percent in Asian and emerging market equity which is relatively lower in valuatiOn. Together with DCA and periodic portfolio rebalancing to sell winners and buy losers, we aim to get a relatively less volatile returns of 4-5 percent on a Long term duration. This is based on long term equity return of 7 percent and bond return of 3 percent.

10 percent of the portfolio will also be reserved for tactical sector exposure which we felt price has been beaten up badly. For example, oil and energy and turkey equities. We will initiate small position via DCA and reduce risk due to poor market entry timing.

With current market conditions, we believe such conservative approach will give us better sleep at nights knowing that we will not be subjected to individual stock risk and instead will only be subjected to general market risk as a result of general economic performance or geopolitical issues. With this mechanical approach, we aim to remove and if not, reduce the amount of emotions in the investing operation to minimise the mistakes we made when the market corrects. Last thing you want is to sell Low when the market corrects and later miss out on the subsequent recovery.

1977 Berkshire Hathaway Letter Key takeaway

4 key notes in order of importance before making an investment in a business
1) We understand the business. Everyday business around us like grocery, telco, utilities etc. Improve with more reading or individual industry research to widen circle of competence
2) Favourable Long term prospects. No major headwinds or risk of being disrupted. GME is one mistake that violate this principle. Even I am not buying physical copies of games. Trend is internet download. This is one area which we can identify easily by reading more but at the same time environment changes so fast that even favourable prospects will worsen. Such as retail and shale oil etc. Safer to go with defensive business which is not cyclical.
3) Competent and honest management. Hard to gauge. Need to read more into company and management history
4) At attractive price. Long term returns are dependent on entry price (dividend or earning yields) and Long term growth rate. If purchased at a Low yield, need to depend on high growth rate to have high returns

To quote Ben Graham, stock is best seen from the perspective of a perpetual bond with growth like characteristics and price volatility. Future returns are strongly dependent on purchased yield .

Adopting these 4 criteria will help an investor stay calm during market turmoil and not sell out at price weakness and hopefully give the investor courage to buy more at the discounted price with the knowledge that the fundamentals of the company is still sound.

Quotes

Meaningful quotes gathered over the years. This post is LIVE and ON-GOING......

1. We like to work with people that we like, trust and admire : Buffet
2. I aspire to inspire before I expire: UNKNOWN
3. You can have anything but you can't have everything: UNKNOWN
4. You can get the timing right. You can get the price right. But you cannot get both the timing and price right easily: UNKNOWN
5. Price is what you pay. Value is what you get: Graham
6. Market is a voting machine in the short term but is a weighing machine in the long term
7. Always surround yourself with smart people if you are a leader. If as a leader, you are the smartest in the room, something is not right: UNKNOWN
8. Always look at the downside, the upside will take care of itself: UNKNOWN
9. Buying at the right price means half the battle won: GZG
10. Have a philosophy of investment and try to follow it: Schloss
11. If you are honest, hardworking, reasonably intelligent and have good common sense, you can do well in the investment field as long as you are not too greedy and don't get too emotional when things go against you: Schloss
12. https://www.inspiringquotes.us/author/5561-walter-schloss
13. 
    

Straits Trading Review --> Balance sheet and Interest Coverage not strong

2 Main divisions: Property development/investment and Tin smelting

Income predominantly comes from property development and recurring income from its property investment portfolio which includes:

1) 20% of ARA management ($ 80B portfolio)
2) 90% Straits Real Estate
3) 30% Far East Hospitality Group
4) Freehold land from their existing smelting plant to be redeveloped. Near prime location at Penang

Company initially was net cash position 5 years ago but with its investment in various assets, the company is now in net debt position with debt to equity ratio of close to 40% and interest coverage < 5x on a profit before tax basis. $27M interest expense vs $100M profit before tax.
However, based on cash flow statement, the actual finance cost paid is 14M versus operating cash flow of 12M. The base business is not cash flow generating enough. There is dividend payout from associates but the coverage is <5x.

Majority of its revenue still comes from its tin mining and smelting division. only 5% comes from property. It is receiving dividend and interest income of $30M per year. The company is very sensitive towards commodity price in view of its large exposure to the tin industry.

Tin revenue is 430M vs cost of 380M with gross margin of 50M which is ~10%. Essentially, very thin profit margin available for this business. Any time may swing into loss and impact the whole business.

5-6% of dividend yield from its investment securities and 3% from its investment properties.
Cash on hand is 245M vs current debt of 247M and long term debt of 617M and total equity of 1.6B

There is a reason why market is valuing them at ~40% discount to their NAV of 3.6 and market price of 2.2. Probability not a good time to buy now though company is actively buying back their shares indicating their confidence in the business.

We would prefer a company with lesser debt and higher coverage ratio to fill comfortable especially in current market trend with overprice equity and low interest rate environment. Company may make loss and unable to pay dividend and leading to large price drawdown.

Wait and KIV.

Appropriate interest coverage level

Intelligent investor chapter 6 by Graham indicates that interest coverage for a well run and safe railroad company should be at least 5x based on earnings before tax. We can take reference and extend the same argument  to other defensive companies which generate stable cash flows and are not cyclical in nature. For example, REITs utilities supermarket transportation etc.
Companies that does not meet such criteria shall look deeper into their balance sheet and cash flow status history and confirm is it a once off or sustained situation into the future. If that is the case, there is great solvency and liquidity risk in terms of servicing the debts.
We should stay clear from such companies no matter how attractive the valuation is.