Commentary on the market (1-June-2018)

It would be fair to say that the Singapore stock market has taken a fair amount of beating recently. While stocks are generally less riskier when the prices are lower, I do observe a handful of practices adopted by the investing populace that will do them no good, no matter how the general market is behaving.

Purchase of securities with high dividend yields
With price falling, dividend yields naturally goes up. However, the popular saying that "yield is a proxy for risk" holds. Consider the curious case of Starhub. A long-time favourite among income investors, management reduced yearly dividends from 20 cents to 16 cents. This might seem prudent until one dished out his trusty calculator (or excel) and pored through financial statements in its recent history.

The issue wasn't that Starhub had a huge amount of debt-- it simply did not have free cash flow to pay off 16 cents of dividend yearly _even if it maintains its profitability_. In other words, in a business environment that had become more challenging, Starhub has to grow its earnings to meet dividend payouts. What are the odds?

I would agree with some value hunters that Starhub could become a value play since a) it might cut dividend again, this time to a sustainable amount, and b) falling out of index means a lot of indiscriminate selling without regards to its value. I would suggest that we wait until the management cuts the dividend drastically. But in my humble opinion, now may not be the time to make speculative investments. The Singapore market is a lot more efficient in pricing.

Catalyst Stocks
The other popular operation is to bet on stocks where there might be a catalyst or event in play. For instance, Duty Free International (DFI), a business that has been running duty-free shops around Malaysia. The company is now contesting a legal claim that it has to pay duties of about 41m to the state of Perak. DFI has about 370m cash in its books. On the surface, this looks like a pretty risk-free operation.

One might note that earnings from this company has been on a steady decline, and its high dividend payout is unsustainable from its cash flow. Records shown that it had been paying over 100% of its earnings for the last six years. While the company had bought back some shares late last year, one notes in its latest un-audited year-end report that over 100m new shares were created via placements since 2016. Its share buyback of 10.4m shares while commendable, has some way to go. Ultimately you are betting that business operations will improve since it isn't cheap compared to its assets.

Either that, you are an expert in legal matters... but there are too much timing involved.


Large, unpopular companies
Lastly,  steep price declines of blue-chips. Investing in such operations is actually recommended by Graham in The Intelligent Investor. One such example is Yangzijiang (YZJ). YZJ had fell a stupeflying 40% since Jan this year (1.60 to 0.96 as I write).

One must note that YZJ has about 14b worth of "financial assets," representing a considerable amount of its total assets of 42b. Understanding these assets are beyond me. If one were to consider that there are 27b worth of liabilities on its book, the stated book value of YZJ at 1.4 SGD may provide a lower margin of safety than it suggests. At the risk of being perceived as overly prudent, one should wait for a further discount instead of being suckered into buying... especially from the attention YZJ gets from the media for its share buy-backs.

In short, one should consider the odds without the influence of news or recent price decline. Is this company cheap? Are the problems temporary? Is this uncertainty or is it risk? Losing the opportunity does not equals to losing money.