Saturday, August 19, 2017

The Real Incentive Behind Achieving Financial Independence

I've written two themes about financial independence this year and they are both about passive income. You can refer to the link here and here.

The allure of being able to have no worries about money is the main attraction of financial independence and you can quickly see so many people taking advantage of this when they tried to sell courses or investment opportunities like unit trust and other investment units.

When I get invited to speak at InvestFair this year, they are still related to money. I don't see Love and Children Fair inviting me to speak about how financial independence can relate to that.

Don't get me wrong. 

I am not saying that passive income is a factor that isn't true. 

In fact, when I started my investment journey when I was still single and carefree, passive income is the only thing that attracted me because of the huge allure of money concept that is working hard for you. I can tell you it has benefited me in a lot of ways, both financially and mentally in many other spectrum of life.

We are the new rebels and bandits of the new generation.

We are the new batch of generation who probably doesn't owe much to our jobs than our grandfather generation. While some of us do struggle individually in getting a good paying dream job, or some to settle down, we do not appreciate it hard enough.

As I move up the ladder in my stages of life, I had experienced different flows and benefits of the real incentive behind the aspect of financial independence, especially after I become a father.

I think a lot of people have talked about this concept Ikigai in detail.

I am not going through the concept in detail but rather literate them with my own experience.




Since I became a father of two children, I had always prioritized family on top of anything else. This is not a default by choice but something which I put on top of my priority list in front of the other things I love.

I like to play around with my two children, mess around with them, bring knowledge to them, travel around, messing around again, spending more time with them and then messing around with them again.

You can't translate this feeling into someone who has not had a children yet. You just have to experience that to understand.

Growing my passive income has become part of that bigger plan because it can help me in many ways that would allow me to achieve that.

To illustrate the case for example, I love to read financial statement and analyze a company prospect when I am investing but they are fun when they are vocational and are under no pressure. Let's assume one day I am recruited by a company to perform the same task with deadlines and KPIs, I might like it a lot more less. In essence, it feels different once you have an obligation to perform in exchange for a return.

The same goes with the profession.

I think there are many people who goes to work, and stayed for the same company for 10 or 20 years and then get comfortable with it. I've heard of many cases where you get so comfortable with your 9 to 6 jobs over the years that you don't know what else to do once you freed up your time. If you fall under that category, I think there's an emptiness or void that you have not managed to find. Find that and you'd feel a lot differently.

Ultimately, everything revolves around the bigger part of the goal.

The best part of it is it doesn't have to be family that is part of your mission. You just need to search what you are living for in this world and find your own unique ikigai.

There would be a time when my kids would eventually grow up and be spending lesser time with us. That would be a day when we would find another mission in life to cover the void in our ikigai.

But for now, financial independence means a lot to us and that means a lot more than just the allure of money itself.

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Wednesday, August 16, 2017

Why Is My Stock's Share Price Declining Despite Announcing Favorable Earnings Results?

Share price of a company moves up and down everyday for many different reasons.

During earnings announcement, they are especially more volatile because investors are pricing in adjustment to the share price based on what was announced in the earnings. Earnings are a significant underlying determinant factor that can move the share price of a company very quickly, either for the good or for the worse.

In general, whenever a company announces earnings which was not favorable, and I defined not favorable at this point by lower year on year comparison, the share price would usually dived southwards. On the similar end, when a company announces favorable earnings results, the share price would usually get boosted the next trading day, signaling positive sentiments and outlook from investors.

This is not always the case though however.

The Singapore market recently is behaving like one which baffled many new investors.




Take UMS for example, a semi-conductor company which is enjoying its upcycle period in these few years. The earnings result was very favorable and more than doubled the previous year earnings. The company even managed to reward shareholders by issuing a 1 for 4 bonus on top of the usual interim 1 cent dividend. Upon the announcement, the share price dived from a high of $1.17 to the current period of around $1.02, almost a 15% decline in share price.

The same goes for another semi-con company, AEM.

Another example recently in the market is Elec & Eltek. The company issued a profit guidance announcing that the company would make exceptional earnings this year. The share price went up for a few months and upon the earnings result, the company announces a 500% increase in earnings per share. Despite the favorable result, the share price dipped the following day by about 4-5%, signaling the market's disappointment perhaps by the lack of the interim dividend, which have mostly been priced in the expectations.

I think this is what makes investing an interesting and challenging experience.

The fact that market reacts mostly dependant upon priced in expectations signals that it is very difficult to predict movement in the short term. In the longer term, they would retrace back to the fundamentals of the company and share price and valuations would follow eventually.

This is probably the reason why value investing for longer term is such difficult to follow because you really need to have patience and by that it means having to stomach the up and down of market sentiments almost on a daily basis.

On one hand, you need to ascertain the outlook fundamental of the business and on the other hand you need to evaluate the current valuation of the company that you paid for. It needs to go both hand in hand to capture the most reward and they are often difficult to find which makes an exceptional investor having to go a step ahead of the others before others find the gem.


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Monday, August 14, 2017

Dividend Income Updates - Q3 FY2017

With most of my companies already reporting earnings for this round of quarterly earnings, it is once again time to update my favorite part of the dividend income.

If you recall in the past two quarterly updates (here and here), I am on a good decent track to hit a record high dividend received for the year, so it'll remain to be seen with one more quarter how things can go from here.

These days, with market doing rather well this year, it becomes a lot harder to stay invested in dividend companies when valuation gets higher and it becomes a question on whether you should sell off the golden goose for the meat.

I think there should be a good strategy allocation down there.



With that a due, here is the dividend income received in the 3rd quarter of 2017.


CountersAmounts ($)Payable Date
FLT2,944.00 29-Sep-17
Comfortdelgro2,392.00 29-Aug-17
M12,340.00 8-Aug-17
CDLHT984.00 29-Aug-17
FCOT (Scrip)966.00 29-Aug-17
First Reit174.00 28-Aug-17
OCBC6.00 18-Aug-17
Total9,806.00

It's a pretty solid dividend income received in the 3rd quarter. This usually tends to be my strongest quarter as most companies are reporting their interim so it's a good way to build up cashflow during this period.

That makes up $24,948 received so far year to date up till the 3rd quarter. This is profits that are returned back to the shareholders in terms of income received.

With another quarter still left to go, I'm keeping my hopes on a few more thousand to come in terms of dividend.


This should really be the base moving forward and I am keeping most of the companies intact for the foreseeable future.

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Friday, August 11, 2017

Comfortdelgro - Q2 FY17 Results & Thoughts

I was quite anticipating the results from Comfortdelgro and even more so after reading the results in the previous week by Vicom and SBS where both increased their payout to issue higher dividends to shareholders.

I mentioned previously that I thought there was a good decent chance that Comfortdelgro might maintain their dividend as last year despite the poorer taxi division due to the better cashflow that they have. This remains something which I am taking a close look still.






In terms of earnings for the Q2, revenue was down 3% while nopat was down 9% year on year.

Revenue for the taxi division was down by more than 10% due to the lower leasing fleet and higher competition. You can see that in the overhead driver's benefits also quickly went down so margins are steady but it was still a very strong decline.

The public transport did much to mitigate the situation otherwise it could have been worse.

In terms of geographical, the UK segment was the part intriguing to me. Not sure if their bus division there are facing some pressures.

Despite the lower earnings, operating cash flow was higher due to the lower grant, as well as higher free cash flow due to the lower capex. The free cash flow yield I computed is at 17 cents or 7.3% based on current share price. They would be well able to pay the current payout they are paying to shareholders in term of dividend.

Other than that, there are not much new development that we will know about the taxi business and how the management would tackle the current situation.

I think overall there would probably a point where the drop in taxi would reach saturated point, and the disruptors would face more pressures in terms of less incentives so that would be a time where competition is really head to head. I mean think about this, if there are a disruptor in airline and they keep giving huge incentives for you to take their flights you probably do that too. The question remains when will that last. Their technology and light asset model are obviously a huge advantage too.

I'm still skeptical as well about the margins on the new downtownline later this year as well as the public fare reduction. Sentiments should continue to remain poor.

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Sunday, August 6, 2017

"Aug 17" - SG Transactions & Portfolio Update"

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
Comfortdelgro
55,000
2.32
127,600.00
20.0%
2.
Guocoland
55,000
1.95
107,250.00
17.0%
3.
M1
55,000
1.775
97,900.00
16.0%
4.
Fraser Logistic Trust
80,000
1.085
86,800.00
15.0%
5.
Fraser Comm Trust
40,377
1.385
55,922.00
9.0%
6.
Katrina
210,000
0.205
43,050.00
8.0%
7.
CDL Hospitality Trust
24,000
1.57
37,680.00
6.0%
8.
First Reit
8,134
1.35
10,980.00
2.0%
9.
OCBC
34
11.21
     381.00
1.0%
10.
Warchest*
45,000.00
7.0%
Total SGD
612,564.00
100.00%

I'm updating the Aug transactions a bit early as I don't foresee much activities going on as I will be focusing on the earnings instead, in particular my top few position, Comfortdelgro and Guocoland.



I divested my positions in Singtel and Capitamall Trust as part of the plan right before they went ex-dividend at $3.91 and $2.03 respectively. As you can see, I divested them a bit early and missed out on the dividend but they were all along part of the plan to move in and out to lock in the gains first.

From the buy side, I managed to initiate a new position in Guocoland which I blogged over here. I think given the strong run up in leading developers like Capitaland, CDL and UOL and having reported good results, we'll probably see more upside for developers. I am hoping Guocoland will follow suit over time being a lagger.

I also increased my position further in M1 at $1.785 after seeing their price stabilize after going ex-dividend. I think the outlook is still rather grim but I think we'll still see some sort of value there from valuations point of view and that's where I am putting my bet on it. In terms of results, I think it's not totally unexpected with a fall in ARPU but I thought volume and customer base remained good overall.

On CDLHT, I managed to ballot for excess shares and I received 2,000 excess shares at a price of $1.28 which I thought its decent. I think hospitality will see it bottoming this year but valuation wise it's no longer as attractive as previously I had last year so I am reducing this portion. Still with a base of 24,000 shares, I am going to hold it out for any further upside.

Net Worth Portfolio

The portfolio has gone back on track into the right direction from the previous month of $608,501 to $612,564 (+0.6% month on month; + 39.2% year on year). This portion includes capital injection.

As much I'm happy that the equities portfolio has gone in the right direction again, it is the cashflow that matters much to me. I think it'll be a lot less given I'm not putting my money more into companies which gives a lower payout.

In terms of warchest, not much is left but a decent amount to add on to any opportunities for now.




Child Portfolio 1 (Age: 3 years and 4 months)

I also divested my child's portfolio and Singtel and added a bit of the amount there in Comfortdelgro at $2.30 as I see some value out there over the longer term. The portfolio has now crossed over the $15k mark, which is a new record high so far.

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
Comfortdelgro
6,500
2.32
15,080.00
100.0%


Child Portfolio 2 (Age: 6 months)

I did the same too for this account with the intention to grow this over time.

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
Comfortdelgro
1,000
2.32
2,320.00
67.0%
2.
Singtel
300
3.84
1,152.00
33.0%
Total SGD
3,472.00
100.00%


Invest Fair 2017

On some other news, I was kindly invited to be one of the panelist in the Sunday Invest Fair 2017 together with fellow bloggers Jes (http://simplyjesme.blogspot.sg/), Alison (https://heartlandboy.com) and Kenny (http://mystocksinvesting.com). 


Mark (Moderator), Alison, Jes, Me, Kenny

The topics were on "Investing in our 20s, 30s and 40s". I thought crowd attendance was excellent considering it was the earliest event in the morning and we thought it wouldn't have so much crowd. Still, it was too bad time was short so much cannot explain in detail and I hope the crowd goes home getting something out there.


I also had the chance to drop by Investing Note and had a little chat in the morning with the owner, Shanison. It's great to know their plans and how their platform can help reach out more to the community.



Thanks for reading.


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Thursday, August 3, 2017

Guest Post by CK - Accounting For Development Properties Using Bukit Sembawang As Case Study


One of the many favoured investment options is to buy properties for capital gains and rent it to receive passive rental income. Such properties are classified as developed or development properties in the balance sheet of the Company. Put it simply, these properties are built to be resold to end users.





In this post, I hope to let readers have a better understanding on how these development properties are being accounted for and also to shed some lights on a developer illustrated and how we can appreciate the value within using Bukit Sembawang as case study.






The Financial information below is extracted from the annual report of Bukit Sembawang for the financial year ended 31 March 2016.






Asset
S$’000
Development property
941,883
Cash and cash equivalent
411,908
Total assets
1,457,695
Liabilities
 
Trade and other payables
141,048
Total liabilities
167,863
Net asset
1,289,832




 
S$’000
Revenue
281,997
Cost of sales
(169,998)
Gross profit
111,999
Total profit
91,979
GP margin
40%







How are development properties being accounted?

















Accounting for development property is set out in page 56 of the annual report: “Development properties are measured at the lower of cost and net realisable value.” In another words such properties will be held at cost and will only take into account any downside movement but not the appreciation that has taken place.
Trading at around $4.50 per share during March 2016, would give the Company a market capitalisation of about 1.16 billion (number of shares of 258,511,000 multiply by $4.5). Relative to the net asset of $1.29 billion, the share was traded at a discount of about 10%.
But given the manner of accounting at lower of cost and net realisable value,  is there more value to the Company than the net asset reflected on the balance sheet? Some history on Bukit Sembawang will shed some light to it.
Bukit Sembawang started off as a leading rubber company in 1911. Arising from the legacy, the Company “inherited” a substantial potion of freehold land which they have successfully developed into landed housing over the years which the most recent ones being Luxus Hills off Ang Mo Kio.
Lack of detailed information, one shortcut method to compute the estimated market value of the development properties is to regross the development properties using the gross profit margin using the gross margin of 40%.
Taking development property of $941,883 yielding a gross margin of 40% would result in an implied development property value of about $1.57 billion. ($941,883/60%) which is an uplift of 0.63 billion of its net asset of 1.29 billion to about 1.9 billion.
The discount of market capitalisation to revised net asset? A cool $0.74 billion or about 40%.
Another plus point to highlight is that the Company is debt free and is probably biding its time to launch its projects at a suitable time.


Investment considerations for such companies
Unlike REITs whereby there is a requirement to distribute 90% of its distributable income, the issue with investing in developers is the timing of return. Hence the track record on dividend payout (i.e. how willing is the Company is willing to reward its shareholders while waiting for the eventual upturn is important.

Bukit Sembawang is not too shabby in that respect. Below is a table on their dividend distribution history.


Year
2016
2015
2014
2013
Dividend (S$)
0.33
0.33
0.16
0.15
Yield based on $4.50
7.3%
7.3%
3.6%
3.3%


 
Another consideration to take note is the sustainability of the Company’s dividend payout and more importantly how long can they capitalised on their low cost land bank before it runs out.

One metrics to look at is taking development properties balance divided by cost of sales which will yield a result of 5.54 years. This is a conservative metrics as it assumes the Company will not make new land acquisition which the Company will be able to do so given its net cash position and this metrics also have to be benchmark against the industry especially in land scarce country like Singapore.

The other more traditional metrics will be looking at dividend payout ratio which is a respectable 1.08 times for Bukit Sembawang. This means the Company is not dipping into its reserves to give back to its shareholders.

There are obvious value to it and personally, I have invested in Bukit Sembawang at around $4.50 in September 2016. Fast forward to today, lets recap the key concepts introduced and summarise the various value indicators based on the latest financial results and market capitalisation.


Value indicators
2017 (S$billion)
2016 (S$billion)
Estimated value of development properties #
1.66
1.57
Revised net asset value
1.94
1.92
Gross profit margin
62%
40%
Market capitalisation
1.76 billion based on share price of $6.80
1.16 billion based on share price of $4.50
Discount to RNAV
9.3%
30.6%
Development properties/Cost of sales
18.5
5.5
Dividend payout ratio
0.85
1.08
Dividend yield
4.85%
7.33%
Gearing
Net cash
Net cash


# Estimated value of development properties for 2017 is uplifted on the basis of 40% gross margin as a conservative estimate although gross profit improved in 2017. 


Take note that the revenue recognised for 2017 is $143,395,000 compared to $281,997,000 recognised in 2016. This explains the increase in development properties to cost of sales ratio due to the lower denominator with a fixed numerator.

If adjusted by the revenue recognised, the ratio would be more comparable by taking 18.5/281,997*143,395 which would yield a result of about 9.4. Based on the above analysis, it suggest that the Company has been selling more of its units with a lower cost by observing a higher gross profit margin and also highlight the adequacy of land bank to sustain the Company’s operation with a higher development properties to cost of sales ratio after adjusting for revenue.

From a value investing standpoint, the discount to revised net asset value has narrowed considerably and dividend yield has compressed significantly. Realisation of the eventual market value of the land would entail the Company’s successful execution in development its land bank and more importantly overall market sentiments on the Singapore residential market.

For the record, I have disposed my shareholdings in Bukit Sembawang at around $6.10 or at around 20% of the discount to the revised net asset value of the Company.

Thanks for reading.


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