The Bear Trend in S&P 500 Has Not Change

Yesterday's gravestone doji has neither been confirmed or denied by today's candle. I will still urge anyone I know to avoid take speculative positions.

The ARA deal

$ARA Asset Mgt(D1R)

Weeks ago, as I could not find any decent deals and that the market in US shown signs (in charts) of stalling, I decided to liquidate most of my fair-valued investments as well as event driven trades.

As such, the portfolio shrank and ARA Asset Management became, and still is, 50% of my entire portfolio, which is of a very modest amount. It was 50% because I couldn't find any outstanding deals, and it was a very low risk trade. Even when it fell from 1.71 to 1.68, I simply held on as I think there is nothing official being filed at SGX. Hence, no worries. At 1.68 it would be a 12% annualized return, but I do not want to increase my holdings due to risk.

So I am glad that the scheme is passed with overwhelming majority today at the meeting in Suntec today. Of course, a few investors were very vocal and rightly point out that retail investors are being denied of any future prospects in this company. Some questions were raised but not answered, and I am not sure if the board was simply not bothered, or that they were tired of answering questions that were raised earlier (than today). Still, none of them raised their voice and replied amicably.

Some of the questions that were raised but not answered:
a) Is there any way that AVIC/WP will take preferential shares?
b) Although ARA mentioned that they need capital, why is it that funds from the last rights issue utilized at such a snail pace (probably infer by the asking party if they really need these capital)

My view is that $1.78/share is a fair deal; though not an exciting or generous one, but good enough to entice most early investors to realize the profits and arbitragers to take on positions. I was the latter, since I felt that the safe price to enter ARA was below $1. Granted, there were periods in which I could buy it at that price, but I started investing really really late. Still, given the opportunity, I wouldn't say that I definitely will buy ARA because it was cheap based on earnings, and earnings, to me, is volatile.

While I can understand that many "long term" investors (funnily enough, they keep stressing this term when they stood up to question the board during Q&As), that is just how the game works. Investors who has bought before the announcement wish to realize their profits are not wrong to do so since,

a) there is a small but possible chance that the deal might be voted down and the price is certain to go back to where it was before the deal announcement due to traders.

b) there is not much upside to justify the risk.

And in selling their shares, the buyers are likely arbitragers.

Most people who voted yes knew that the future might be sweeter if they held on, but that is just how the game works. Move on and find another gem. It is the dream of all  investors to buy a stock and hold on till it is a multi-bagger, but sadly ARA wouldn't be one of them.

Kimly and M1

These two stocks taught investors a lesson today.

First off, M1. The telco announced that its
"... three biggest shareholders - Malaysian telco Axiata Group Bhd, Keppel T&T and SPH - confirmed on Friday that they are currently in the midst of conducting a strategic review of their respective shareholdings, which may or may not result in a transaction. The three respectively have 29 per cent, 19 per cent and 13 per cent stakes in M1 for a combined 61 per cent holding."

Right off the bat this morning, the stock advanced  to last Friday's height, at 2.28, almost equaling what was reached last trading day. However, the bulls lost steam rapidly and closed almost 1% lower than last closed.

I firmly believe that, for acquisition deals, trying to buy in before any confirmation is risky. With no price point in mind, there is no idea if the deal is worth the risk. With no timeline in place, this deal could become cold. Imagine a deal that pays only 4% a year? That is no higher than what a high-yielding dividend stock. One should also assess the possibility of the buyer's ability to make the deal possible-- if its financial health enable its acquisition.

***

Kimly is a new issue that just started trading today. Its IPO was beyond popular, and many investors took on the easily understood PE of 12x and guess that it is worth more than the commonly price 24 times PE of available issues.

So it was no surprise the stock went straight to 0.50$ during pre-market, and went as high as 0.565, before cooling down to 0.44. For investors who said hello at 0.565, that represents a 22% loss in a single day. I was prepared to only pay 35-40 cents a share for this stock, but its popularity turned me off.

Trading is a bet on human's emotion and crowd direction, while investing is about a company's worth. Nobody knows where this stock might head next.

***
These two popular issues taught investors two lessons today. One, never partake in an arbitrage until it is confirmed. Two, valuation is crucial.

The Optimism of Medical Stocks in SGX (Part Two) Singapore O&G

On previous post, I mentioned about how optimistically the market has guided investors on the prospects of medical stocks. Companies which has performed well are usually priced well above their NAV. One of them is Singapore O&G. I shall refer to it as O&G from now.

O&G debutted in the middle of 2015 and have you had the fortitude to hold on during the 2016 correction, it is currently a two-bagger. (Chart from Yahoo Finance)

  Granted, the stock does not pay much dividends. Below, from www.dividends.sg

Amazingly enough, although this stock does not offer much dividends per se, it will be difficult to pay higher dividends in the future. Dividend payout in 2015 was about 62%. It was 72.6% last year. Do not expect this company to be a dividend aristocrat (a fancy term for a dividend machine/stock)...

But I am sure investors are in for the capital gains :)

Above is the latest income statement for FY 2016, it does indicate that profits are up 64.8%, which is a frightening improvement. However, the income statement is one of the more superficial data.
Note that profit margin actually decrease slightly: from 32.5% to 30.7%

The question is, how well is this company performing based on return on capital?

2015- 25.74%
2016- 24.21%

Although ROC did not increase, it is still impressive as it is.

This company does not have any debts. Purist might find the goodwill sizable.

 Of special interest to me is the > 3 x of goodwill accumulated over the course of one year, more than 10 times of inventories, and little change to its cash and equivalents. Without knowing much of the business, one can tell that business was acquired using shares, as its equity based increased from 24m to 41.6m. It has also incurred plenty of payables.

Should one invest in O&G? That, I am not an expert of, since I invest mainly from the balance sheet. One thing for sure, the growth continues. Another year like this, the business would have gone two fold (rule of 72).

Stocks like O&G are what one call growth stock-- it is not the growth of its share price BUT the growth of its business. Share price did move accordingly with growth, and I say it is well-deserved. However, I will abstain from investing because many situation can arise and dampen its share price-- competition, weaker performance, etc. I still think it is prudent to look for downsides first then the upside.


The management of this company will be the key factor on how well this company fare in the future. As of now, it seems to be on a M&A drive, and the increasing share price will make it easier for them to do so. If so, I can expect them to increase dividends so as to entice these subsidiaries. One should pay attention to its cashflow so see it is sustainable. As of now, the story still looks sweet.

The Optimism of Medical Stocks in SGX

Source: From Stockfacts, www.sgx.com

Medical needs are non-discretionary and investors might view them as safe companies to invest in. However, it appears that investors are placing too much hope in the prices of their security, as you can see, there are companies that are being sold at more than 30 PE. The most outrageous of them belongs to HC Surgical Specialists Limited, a company currently focusing on colonoscopy procedures, with a PE of 52 (Google Finance says it is 62, well... it is expensive, nevertheless).

This company is less than a year old in the Catalist (secondary board) market, having reported its mid-year earnings on the 3-Jan. A declared dividend of 1.8 cents gives investors a 3.3% yield based on the current price of $0.55

One can dissect its earnings as much as one insist on, but a year of earnings, in Graham's words, "should not be taken seriously." The company did pledge to give away 70% of its earnings as dividends, which is highly unusual since the PE is high (reflective of investors' view on its future growth).

What is puzzling to me is that the company planned to put aside 2.8M of its raised capital on acquisition, and about half of that is spent on its very first acquired company-- it has not even started operation. Among the key reasons stated for acquiring this company (or human resource) is that Dr Julian has a potentially worthwhile network and also credible prior job experience. I leave this qualitative justification to insiders but I seriously doubt anyone can have a huge network given 5.5 years of experience.

Investing in growth is fine if you are an insider to the industry, but be cautious of this one. Few medical professionals (in which its entire non-independent and executive board members, are) make excellent businessmen.

Which investors have inspired you so far?

The very first that left a mark on me is Walter Schloss. The way he run his fund is largely unique, in which he will only take a cut off your profits and no management fees are involved. The way he picked companies seems most plausible to a small fry like myself. He had no desires to communicate with management for research, worked a fix amount of hours a day, and diversified his holdings among many companies. He had little help (besides his son), worked in a humble and tiny office, and had no computer. His philosophy is not to buy companies based on earnings but book value instead, since the latter does not vary much. He displayed courage in buying out-of-sorts companies. A pretty unique man whose responsibility and financial intellect would be hard to match.

The second investor is ironically Dr Mike Burry. He is a master stock picker of turnaround plays as shown in (https://www.google.com.sg/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwizgobCwo_SAhUMtY8KHeMwBYEQFggaMAA&url=http%3A%2F%2Fcsinvesting.org%2Fwp-content%2Fuploads%2F2013%2F07%2FMichael-Burry-Case-Studies.pdf&usg=AFQjCNFZtjDWV5PFznAoEZizA6AXIc8NVQ&sig2=z20lXDc79gki25KRfZXUYQ). This is a guy whose financial knowledge is entirely self taught, and his reasoning behind each trade shows a tremendous amount of research done. Without the fame of "The Big Short," he might be recognized more for his intellect rather than his courage.

The last person in mind is Sir John Templeton. Having read his book (https://www.amazon.com/Investing-Templeton-Way-Market-Beating-Strategies/dp/0071545638/ref=sr_1_2?ie=UTF8&qid=1487073194&sr=8-2&keywords=john+templeton), I think there are very few financial genius like him around. In one particular example, his niece described how he had noticed the tech bubble of 2000s blowing up and decided to start shorting companies close to the time where insiders are legally allowed to sell their holdings. This allow him to short stocks safely without the associated timing risk. He was also the first to venture overseas and picking Japan based on his knowledge of economics, followed by predicting that China would have been the next ideal country to invest in.

"If I have seen further it is by standing on the shoulders of giants."

Short Write up on AYN, Global Testing Corp

On the surface, this company looks really cheap, with a low PE, zero debt and a book value of about 1.8 dollars to a market price of 1.0x dollars.

Negatives are
-Lack of consistent dividend records
-customer concentration risk-- largest customer takes 33% of its revenue.
-declining book value per share.

Positive
-management does not seems to be greedy-- salary is actually really low
-large dividend payout last year, although i prefer a consistent payout.
-zero debts on its balance sheet!

I am still split in this company and I probably read the annual report (only 72 pages!) some more.

Update to Mum's Portfolio

An update to my mum's portfolio in an earlier post. As the price of Hong Kong Lands rose to my calculated Residual Income's book value of 6.8x, I managed to sold it for a good profit at over 100+ SGD. There is a certain amount of currency risk here so it is prudent to take profits. As of now, the portfolio is on a positive 3.82%, which is due to both luck and my belief in buying stocks on book value.

As expected, the small stocks that are not popular nor part of STI did not enjoy any movement. Part of liquidity issues.

Keong Hong: The 6.38% Yield. Stay Cautious

 I am sure plenty of us are after a company that pays good dividends with a low price to book ratio, increasing NAV as well as decent ROA.

Superficially, Keong Hong (5TT) seems to fit the bill.

There are a few things I find worrying about this company.

1) Highly paid CEO-cum-Chairman
Probably one of the highest paid CEO/Chairman around for its Market Capitalization. Do note that his salary increased at a crazy rate over the years.

2011, it was stated to be above 500K.
2012, between 1.25 and 1.5
2013, no change
2014, it gone up between 1.5-1.75
2015, it gone up to between 2.75 and 3M (!!!!!!!!)
2016, no change

2) Share Option (? not sure if this is anything to be worried about)
it says here there is about 7m share options not exercised at the highest price of 40cents. It has about 10m in treasury, and about 230m shares in total. I am not sure if this figure is something to be alarm at since I am inexperienced.

PB is about 0.8... okay discount. I don't see corporate or directorship buying back shares for 2016... so I guess current price, as of now isn't anything fantastic.

3) Balance Sheet Worries
Trade receivables makes up a large part of its balance sheet. This company seems to be making a huge investment this year. It says here in the cashflow statement that it loaned 60M to its JV. This is double of any amount it did, in 1 single year, over the last 5 years or so.

History of this company's ROA (net income divided by total assets)
2011- 9.96%
2012- 15.2%
2013- 15.6%
2014- 8.7%
2015- 11.6%
2016- 9.71%

NAV per share
2011- 19.62 cents
2012- 13.35 cents (!)
2013- 41.8 cents (incredible! reduction of 4m shares as well)
2014- 34.4 (rights issue, from 156m to 232.95m shares!)
2015- 49.86 cents (reduction of 6m shares or so)
2016- 59.4 cents (increase of about 3m shares)
This significant increase in NAV might be due to leverage?

Debt to Equity over the years (all bank borrowings + interest-payable financial leases)
2011- 5.2%
2012- 1.66%
2013- 6.93%
2014- 27.9% (!!!)
2015- 59.4% (!!!!!)
2016- 46.6%
Leverage is okay but is the finance cost managable?

Interest cover over the years. (net income / finance cost)
2011- 76.2 times
2012- 301.97
2013- 347.89
2014- 60.69 times
2015- 27.87 times
2016- 8.82 times (!!!!!!!!)

This indicate the company is pretty decent in its management (based on ROA), it is taking on an increasing amount of debt. Its ability to repay debt, from its interest cover, is dropping significantly in the last 3 years.

Trade receivables is worrying high, and customer concentration risk of receivables from 5 customers is about 70+ percent.

At its gearing ratio and that investors are probably at this company for its yield, I recommend a further discount to its current price before investing.

At the moment, there are better companies with lower debt that pays about the same dividends at a lower risk.

The Aztech deal: Was it possible to avoid such a situation?

Imagine we are now in June 2016 and we are looking for some stocks that are cheap based on its book value. Based on its earning report, Aztech had just release its quarterly report and its declared book value of about 99 cents. The share price was 45 cents at that point of time. This represent a good discount of 50%.

Fast forward a few months, the share price has dropped to 30 odd cents, but you refuse to average down... perhaps you want to diversify into other companies. But one day, the offer of 42 cents came in to privatize the company. No matter what happens, you stand to lose at least 3 cents a share.

Due to luck (and lack of capital) I did not invest in Aztech. But this deal could be a valuable learning session for me.

I did a quick and dirty look at its dividend payouts. Take note that the free cash flow component might be wrong.

Right off the bat, there were years that the company was indeed doing poorly but the management opt to pay out dividends. These years are 2008-2011. There were profitable years which I felt they could have paid a dividend, but chose not to. These are 2005 and 2015.

So with the dividend history giving you a mixed result... Are there  any warning signs out there?

Personally I can only come up with a few... but they are hit and miss

1) A history of poor Returns on Assets, Stagnant Current Ratios and Deteriorating Equity
If the ROA and ROE is negative, your book value naturally declines. Hence a bet on its reversion to book value is probably a little dangerous. What about those deep value companies? I guess it takes a different kind of person to be a distressed-asset investor...

The left most field is 2011, and the 2 right most fields refer to the 5 years and 1 year trend.
The 5 year trend average to a net negative... I guess you might be able to blame management for that...

The shareholder's equity has been plunging for the last 3 years, naturally from its negative ROE.


2) Diversification into vastly different fields
Aztech is primarily an electronic company, but have diversify into many different kinds of business.

 I think it might be difficult to see how they can achieve any kind of synergy nor economy of scale, and neither will it be easy to find someone who knows how to manage so many different industries...

3) Moderate to high debt
Most businesses are selling at a low P/B ratio due to bad earnings. It is no surprise that the company is probably facing headwinds, be it as a company or as a sector.  As such, a increasing debt means that the company is not given the luxury of time to recover.

Aztech's Interest Cover in its last profitable year of 2014, is only about 3.5. It's most profitable year, 2006, have a interest cover of about 10.

We are currently in a low-interest-rate environment. Companies and individuals who depended on leverage will definitely be in an unpleasant situation when the tide turns.

----
I guess I am extremely disturbed by this episode. Even though I am not vested, sooner or later, I might be caught up in this sticky situation.

What lessons can I learn from here?

1. Diversify so that blow ups like this will not hurt me too badly.
2. Invest in old companies with a consistent record in ROA. Aztech's ROA is a bit of a see-saw to be honest...
3. Low debt. Debt kills. Period.

Strategy for 2017

It will be the first day of trading tomorrow and nobody in the world has any idea where the market will go. After a year studying and researching companies, I surmise that the stock market and the economy are largely uncoupled. Hence, there is simply no point extrapolating market growth (or shrinkage!) from the economy indicators.

I started investing trading in late 2015 and give it up after a couple of months, only to start investing at the prelude of the correction period of Jan-Feb 2016. I saw one of my holdings go as much as 40% in the red. I had many walks around the reflexology paths (one of the free amenities that I am god-damn grateful for) confronting my inner self doubts.

I went for a few low-cost talks, and had a fairly expensive course about investing. I finished reading a few books that shaped my ideas about my investing. I still have no idea how to use derivatives, such as warrants and options, and I intend to keep it that way. I was tempted to short the banks with CFD, got myself an account, but pull out in the end.

I guess that is because I am extremely risk adverse.

***

I ended 2016 with a disappointing 0.75% gain, including closed positions and dividends. According to my report in SGXCafe, I have a time-weighted return of 6.89% so far, and have 2.03% in XIRR. Along the way, I participated in a couple arbitrage deals, namely SMRT and ARA Asset Management (which I hope will come to fruit by April). I made a couple of mistakes in selling stocks way too early based on charts, and tried to time market reversion on the telcos way too early (again!).

These mistakes will prove educational in the near future.

The investment strategy for 2017 will not be too different from 2016. I will remain focus on investing in cheap stocks by book value, while ensuring that dividends are sustainable, debts are low and management have OPMI's (outsiders, passive, and minority investors) welfare in mind. That is all is to it. I resolve to have an open, but independent, mind to the markets. It is about time to stop focusing on just the Singapore Stock Exchange. Value investing is about looking globally for opportunities, and having just local stocks is myopic.

Good luck to everyone for the next 52 weeks.