Portfolio Commentaries, 3 weeks into Q3

Since the last portfolio-related post on 20-June, nothing has changed. The market continues to experience draw-downs in prices. Tariffs were threatened, between United States and internationally. It is not my policy to invest based on macro trends-- I take a simpler, bottom-up approach to investing.

Year-to-date, my little portfolio returned 10.48% against -2.53% for STI. This is due to one of the best, single-day returns today.

There were only 4 significant transactions done since the last update:
1) First investment into Hop Fung group, which is incredibly cheap by book value. I didn't find this stock, I credit this to my mate who found it.

2) Slight increase in Religare Health Trust (RHT) after auditors sound off a going-concern matter. I believe the Fortis privatisation deal should be either done or that RHT could refinance. The market was very concern, going from 0.77 to 0.71. I bought a few more at 0.735 (didn't saw 0.71 coming).

IHH and Fortis sealed the deal today and RHT went up 4% on news. I suppose we should see further movement in 2 months. I might just reallocate capital to another idea.


3) Liquidation of Perfect Shape. There are still trade receivable concerns that goes unaddressed by the Investor Relations. Overall I am glad to get a 40% gain off in less than 2 months.

However, I would not have sold if not for the issue of the receivables. I was quite confident I found a growth stock at a bargain price, but the earnings were questionable, at least for me.

4) Purchase of Wheelock Properties, as espoused in the previous post.  It was a very small position that went up over 6% today. I have no idea what is going on. Perhaps the market agreed with me for once.

OKP

This is going to be a morally reprehensible post.

It was just announced that OKP and LTA has mutually agreed to terminate the PIE-Tampines Expressway road viaduct contract, worth 94.6m in 2015.

OKP is a repeated safety-issue offender. The previous incident was in 2015 and they were fined $250,000.
I doubt they will be fine much more this time.

 

They have purchased an Aussie property for about 45m SGD and will yield, according to this article,
about 3m every year, despite a 20% vacancy. I suppose they got a pretty good deal, so this 45m is well spent.

Let's go ahead and assume that OKP will be fined 5m dollars. That will leave OKP with 87m worth of cash. That means that after deducting 48.708m worth of liabilities, there is 38.3m worth of cash, which is (based on 308,430,594 shares) 0.124 worth of cash per share.

There is also a 27m worth of receivables. Let's go ahead and take a 30% discount off that. This is worth about $0.06 a share. The undiscounted value of its receivables is 0.0875 a share.

OKP last closed at 0.295 per share. While this announcement sounds terrible, OKP does not have to pay for any demolition. The article claims that "...The replacement contractor will be responsible for completing the construction of the viaduct, including the demolition of any structures deemed unsafe." This means that OKP is not on the hook for any more things other than legal repercussions.

Given its grassroots leader links, I estimate that it will at most take them 5 years for the public to forget about this disaster, and that they will start getting projects again. Given the strength of its balance sheet, it is unlikely to go bankrupt. Heck, they might even just rename the company, delist, etc....

With the legal issue, headwinds in the property sector from government-initiated cooling measures, and possible temporary loss of management/leadership, the company will look ridiculously cheap if it get sold down to the low 0.2x a share.

The ugly side of capitalism and stock picking.

Commentary on the Property/Developers crash on Friday, 6-July-2018

My idea of investing is that the thesis should be as simple as possible. If the idea cannot be expressed within the confines of an A5-sized notepad, it is probably too complicated or difficult.

Let's start with APAC Realty (APAC).

The stock price on Thursday (referred from now as "pre-crash") is $0.83. It closed at $0.58 on Friday.

Let's value APAC on earnings; it has a sizable amount of good will in its books, making it unsuitable to be priced on assets.

According to its annual report, the net income of APAC looks something like this:

According to the AR, APAC has 355,197,700 or 355.1977m shares outstanding.
 

355	2014	2015	2016	2017	Average
Net Income (million)	12.2	8.5	15.9	25.9	15.625
Earnings per share	0.034347	0.02393	0.044764	0.072917	0.0439896
PE (based on $0.83)	24.17	34.68	18.54	11.38	18.87
PE (based on $0.58)	16.89	24.24	12.96	7.95	13.18

Hence, based on the bad year (lowest earnings) of 2015, the PE is 24.24 on today's price, and the best year (last), it was 7.95. Clearly the market does not believe future prospects to be warming. The average PE of APAC, based on only 4 years, is 13.18. I wouldn't say that the market has priced the company to "stupid-low" levels.

What can I learn from this episode? First, valuation based on earnings is fraught with danger. Many accounts of insiders in the oil-and-gas industry, who tried to time stock purchases during the last few years, were surprised by the protracted depression of the industry (and oil prices). The property market is a cyclical one.

Second, there is no way one could have accounted for the cooling measures.

Third, do not invest in companies during good times.

It is far safer to invest with companies whose immediate prospects are depressing, but possesses well-fortified balance sheets. One is not an optimist by parking their cash alongside companies with well-heeled futures; it is far better to be a realist than an optimist.


I am not vested in APAC Realty/Propnex.

***

Which bring us to the next company in question, Wheelock Properties (M35 in SGX). I did not come up with this idea-- this idea was brought to me by a senior value investor.


Wheelock fell about 6% during the crash. Let's take a look at its balance sheet during the last quarterly report. The net asset value (NAV) is stated at $2.68 a share, representing a 30 percent discount.

Some points to take note:

• It has 1196.559876m shares, giving Wheelock a market cap of 1.878B or so.
• Equity growth is at a CAGR of 4.3% for the last 10 years.
• A dividend of 71.794m has been paid for every of the last 10 years. It has no problems paying this out of its estimated reserves, or cash hoard, for the foreseeable future.
• At the closing price of $1.57, it represents a dividend yield of close to 3.9%.
• The company has next-to-no debts.
• It has 918.08m of cash. On the non-current assets, it has a further 423m worth of investments for sale. This presents $1.12 worth of liquid assets per share, leaving $0.45 for its properties for sale and rental. 
• Most of their development properties are sold-- the remaining 20 units of Scott Square properties are freehold and currently leased out.

While earnings and cashflow are not on the steady side, a level-headed (Graham's phrase) appraisal suggest that this company is likely a much, much safer investment than others.

I am vested and will add on further weakness.

I will leave you with the beautiful writings of Graham in his book "The Intelligent Investor." As written in chapter 14, "Stock Selection for the Defensive Investor,":

"

...

Nevertheless,  the  future  itself  can  be approached in two different ways, which may be called the way of prediction (or projection) and the way of protection.
....
By  contrast,  those  who  emphasize  protection  are  always  especially  concerned  with  the  price  of  the  issue  at  the  time  of  study. Their main effort is to assure themselves of a substantial margin of indicated  present  value  above  the  market  price—which  margin could  absorb  unfavorable  developments  in  the  future.  Generally speaking, therefore, it is not so necessary for them to be enthusiastic over the company’s long-run prospects as it is to be reasonably confident that the enterprise will get along.

"