Chinese Saying "Quenching the thirst by drinking Poison"

Came across this article in Business Times today and I think its a good reflection for many investors who have the perception that the future is going to be rosy from this point onwards.

An Ex-Morgan Stanly economist, Andy Xie is criticising Ben Bernake for his low interest policy which is fuelling the next wave of speculative capital that may cause the next global crisis. Critics of Ben Bernake low interest policy have been damning Bernake because even though he manage to steer the economy away from the worst possible economic crisis ever since the Great Depression, he is doing so at the expense of crumbling the financial system in the near future. The economist believed that Bernake is making decision based on "marginal considerations" that will help spur short term growth and employment instead of focusing on the soundness of the system.

The major flaw in Bernake policy is that the low interest rate will drive inflation as the low cost of borrowing will spur increases in asset prices. And to him, Bernake's action can be termed as quenching the thirst by drinking poison.

Andy prediction should be taken into serious consideration. Inflation usually tends to lag money creation and this lag could be more than 18months long. What will start to happen is a vicious wage-price spiral. Hot money inflows may stoke asset bubbles and once the money stop flowing, the bubble will bust again.

I believe this is a valid point and it should not come as a surprise at a time when so much money is being poured into the system. Very soon, the inflationary effect will be felt and there will be another set of problem for the government to resolve.

When one takes into consideration for the possible impacts of the current policy in the future, it seems that we are heading for another crisis. But one should also recognise that in view of a possible crisis, one should hold enough hoards of cash available to reap potential benefits that the crisis may present.

My plans are in place if this crisis that is being postulated is going to take place, have you thought about yours?

10 minute rule to stock selection

Recently, I have been very busy with my work. Still trying to get used to the habit of logging in a blog entry but always felt that it was a chorte for myself. One could tell that my last post was about 4months ago. Totally pathetic.

Anyway, here i am trying to jump start this journal again.

Not too long ago, i finished this book by Pat Dorsey, author of "The five rules for successful stock investing" I thought the book was quite well written, supplemented with examples and step by step analysis. Very good book for beginner.

Well, today's post is about finding the choosing the right stock to purchase. I am extracting a chapter that i read from the book to be shared here. Well you see, sometimes, stock selection can be a very tedious affairs. There are so many stocks out there in the market. You can be doing a detailed analysis of every single one of them. However, everyone of us have a full time job and we need to make use of the time efficiently. In short, this entry is on how to narrow your stock selection to a few good ones using the following method.

Broad Picture - You determine the industry that you are interested to look at. Eg biotech, services, manufacturing, commodities. After determining the industry, generate a list of the companies in that industry and measure them according to the metrics below.


1. Company must be generating profits.
Easier said than done. Most often firms that are still in the money losing stage sounds the most exciting for promise of major turn-around. Think again.

2. Consistent CF from operations.
It is possible for the company to report profits even before they generate cash. Company with a persistent negative cash flow eventually will have to seek re-fnancing options and increase the risk for the Shareholders.

3. Return of equity of more than 10 percent
This is a baseline figure but its a good gauge. one thing to note is that firm must practicse adequate leverage to achieve a high ROE. (exception for firms in cyclical industry. But one can try to annualised the annual growth rate to determined if earnings are lumpy)

4. Earnings growth must be consistent.
Lumpy earning growth could mean that the firm faces tough competition and have yet to strengthen its foothold in the industry. This is a issue for concern.

5. How clean is the balance sheet. (Debt to equity ratio and net cash position as strong indicators)
Make sure you understand the debt that the company is taking. Company that is involved in too much complex deriatives should be avoided.

6. Does the firm generate Free Cash Flow.
Yes this should be the case always but in the case of a negative CF and you understand that these are capital expenditures used for expansion then its alright.

7. Has the number of shares increased or decreased over the years.
Increasing shares through placements and rights are anti-stakeholders action and dilute the SH value whereas company that re-purchase its own stocks are generally creating more SH value. But take this with a pinch of salt.

After going through this metrics, you should have narrowed down your selection by a lot. Whats' next?

Examine the 5 year I/S, B/S and C/F statement. Read more about the company industry, their business models, who are the competitors to get a better knowledge of the company that you are looking at.

After which, the most tedious part is to start valuing the company. Using valuation multiples or discounted cash flow valuation to do your work. Establish a rough guideline and establish a reasonable margin of safety and decide for yourself if the company is worth buying.

Fundamental characteristics of a value investor

Today, I will be touching on an important topic that forms the central pillar of my investment philosophy. There are four aspects of value investing.

1. Value investing is taking ownership of an excellent business.

2. There will always exist a disparity in the price of the business versus its underlying value.

3. The primary basis for buying/selling out of a business will depends on a measure of underlying value versus its market price.

4. The stock market only exists as a convenient mean to buy into or sell out of the business.

How to be a value investor

It really doesn't take much to be a value investor. You do not need to be a financial guru, shrewd economist or diligent accountant to excel in value investment. These are good to have but not necessary. What is really important is for the person to have (1) rational thinking, (2) an open mind with a willingness to adopt new perspectives and (3) emotional disengagement from the stock market, courage and patience.

A Rational Mind The value investor must have a person who has a desire to improve his knowledge through his own reading up or cross sharing with others and must be able to apply what he has learnt in school to perform his own independent judgement. He must have an open mind and is willing to accept new ideas that will challenge how the general public perceive things. In this way, the value investor will be able to see what the public cannot see and achieve what the general crowd will not be able to achieve.

Emotional Disengagment from the stock market,A value investor is able to ignore the noises created in the market and hence disengage from the emotions and mood swings that comes witht the stock market fluctuations. Only when this is achieve, the value investor will be able to make sound and rational decisions, while capitalizing on the herd's foolish behaviour.

Courage This is the next most important thing after intelligence. This is one of the most difficult thing to achieve for a retail investor. A value investor need to garner immense courage to act against herd behaviour and run in the opposite direction. The next step after completing a thorough financial analysis is to wait for the right opportunity for the investor to take a swift and decisive action to purchase the stock.

Patience - "Inactivity strikes us an intelligent behaviour. Warren Buffet once said: Wall street makes money on market activity, retail investor makes money on market inactivity. The value investor has to be patient and recognise the fact that as long as value of the company has been correctly ascertained and acquired at a significant bargain, the price will take care of itself, in due time, the market will rise to match the underlying value of the stock. The value investor should direct efforts in doing more research on the company and acquire new perspectives to analyse the business. If the company business strengthen and the market still continues to ignore it, the value investor will be even happier as he will be able to purchase the stock at a greater discount. and hence making a value for money purchase.

Introduction to Courage Marine

Courage Marine was one of the stocks that I actively traded during the boom time of 2007 and 2008. My last purchase price for Courage Marine was 44 cents which coincides with the peak of the Baltic Dry Index. Since then, the stock had dropped by more than 50%. Price as of 31 Jul 09 is 23.5 cents. Even so, I attribute this to my error of trying to time the market and got myself burn. I am still holding onto this stock, as it has a sound business model and good management despite being in a volatile industry.

A general background of the company

Courage Marine deals in the marine transportation industry. It is a dry bulk carrier group which owns and operates 8 dry bulk carriers that transport raw materials for Asia's growing needs. Its fleet is deployed around Greater China, Japan, Russia, Vietnam, Indonesia, Blangadesh and elsewhere in Asia.

The vessels transport mainly dry bulk commodities such as coal, gravel, cement, cement clinker, iron ore and various minerals. One can observe that these are the basic materials required for development and is closely related to the global economic state. The fleet that company has contains, Handsize, Handymax and Panamax vessels.

Competitive Strengths of the company

In basic terms, these groups of vessels belong to the smaller class size as compared to large ones called the Capesize. The advantages of owning a smaller group size of fleet means that it gives the management more flexibility in optimising the transportation requirements to ensure full optimization of the available Deadweight Ton. In layman terms, the company ensure that every time the ship set sail, it will be loaded with the max tonnage so as to maximise the ship capacity. This is extrememly important given the volatility of the industry. It is very important to stay lean and flexible without comprising on the optimal deployment of the Group's fleet capacity.

Externally, the group has extensive presence in the Asia region meaning that it will be able to tap on to the economic boom for this promising and developing region. The group will be well placed to meet increases in the existing customers and potential new customers transportation requirements.

Internally, the group has a strong operating cash flow and a net cash position providing opportunities for the company to acquire vessels for its expansion plans.

The company comprises of a strong management team that has beening running the company in a efficiently and this is clearly the case as the company has been listed as one of the World's Top 10 Shipping company for the 3rd year in a row. This recognition reaffirms the group position as a strong and consistent performance among the world's 100 shipping firms. It also shows credibility towards the Group's asset light business model that is built on diligent cost management and prudent expansion policy.

Key downside risks

Path to economic recovery will be the key factor determining how fast the company can come out of the wood. Referring to my previous post on the dry bulk industry, one will be able to know what are the main factors affecting the valuation of companies in this industry.

Why am I still holding onto this stock?

One, it has a proven track record. Though it posted a net loss in the 1Q09, when one look at the Financial Year since the company was incepted, it has never made a loss and despite the economic downturn that plague the global economy, the company has continued to issue dividends, creating shareholder value.

Secondly, its accolades speak volume of this company. So right now, I will continue to accumulate shares of this company using the dollar cost averaging method. I hope this sleeping monster will awake soon.

Results of Suntec REITs 2Q09

SUNTEC REIT announced its results on 30 Jul. 2Q09 results were above expectations with a 6.6% YoY increase in 2Q09 DPU to 2.98 cents. Revenue was up 8.9% YoY underpinned by higher rents achieved for Suntec City and Park Mall properties. Suntec City was the main contributor, generating 87% of the Total Gross Revenue for 2Q09. Closing price for Suntec on 30 Jul was $1.1 and Div Yield is 11.8%

Current Situation

Office

Office sector is the major contributor for Suntec REIT however there has been downward pressures on the rental rates for office supply as demand continues to drop. Occupany rate for 1H09 stood at 94.8% as compared to 99.4% for 1H08. Passing rents for Suntec City office average about $6/sq ft, marginally below the spot transaction of $6-7/ sq ft. The managment has stated that this is clearly still a tenant market and the focus on tenants' retention is paramount. I believe that in view of this, the management will focus on optimisation of the occupancy rate at the expense of rental rates and it is unlikely that rental rates will revert to an upward trend anytime soon.

Retail

Retail space occupies 36% of Suntec REIT portfolio but they contribute to 53% of the total revenue of 2Q09. This segment has remained resilient over the economic downturn and is a key support for Suntec REIT performance thus far. Occupancy rate remain at 98.4% for 1H09, not much difference compared to the 98.9% figure in 1H08.

Macro business forecast (2009 - 2011 )

The office sector will remain to be under downward pressures for the foreseeable future due to the completion of new commercial block, increasing the overall supply of lettable office space amidst a declining demand. For Suntec to maintain its edge, it will have to consistently managed the office space through renovation and upgrading the facilities to attract and retain tenants.

The retail sector will be received a huge boost in the coming years given the completion of the two circle line at Esplanade and Promenade together with the launch of the IR at Marina Sands. These projects will strongly enhance the traffic flow at Suntec City and will be a key driver for the retail segment.

Finally, the lack of debt obligation till 2011 will free the management from any worries for the short term.

Strategies for the future




I extracted this diagram from the management presentation. As shown, Suntec REIT key to growth will be to identify possible areas for key development or for acquisitions. This will help to solidify Suntec REIT competitive advantage in this area. However, one key challenge for this will be to balance between acquiring/developing spaces that will encroach on its current portfolio of buildings.

Factors affecting value of REITs

Most often than not, people like to highlight the factors to showcase the attractiveness of an investment. Well, I believe one should look at the risks facing the investment and by understanding the risks involved, one will be able to appreciate if the investment is worth buying.

Warren Buffet two most famous advice to his shareholders are: (1) Dont lose money in investment. (2) Dont forget the first rule. For most of us who cant monitor the market properly, it is important to understand your investment so that you can sleep peacefully at night. Dont get too distracted by the noises formed in the market, as they only serve to create disillusion and fear and indirectly cause you to make irrational decision.

Back to the topic on REIT, i have identified four factors that will affect the valuation of REITs. Will attempt to briefly explain to you what each of this means and how they affect the value of the REITs independently.

1. Asset Value: Also known as Net Asset Value (NAV), the NAV of REIT is a reflection of the current market value of the property. During boom times, REIT trade at a premium over the NAV while during bearish crisis, they tend to trade at a discount. A REIT trading many times above the normal industry average of NAV will trigger some concerns about it being over-valued while a REIT trading at a discount to its NAV may either signal that the REIT is in trouble or it is a true value play.

2. Rental Income: How much a REIT can distribute every quarter will really depend on how much rental income it collects. Rental rates is a true reflection of the demand and supply of different asset types (commercial space vs retail space vs industrial space). During a financial boom, demand for office space is strong, demand outstrip supply and the rental rates climb. This is good news for investors as they can expect higher distribution rates per quarter. However, the same is true for economic downturn as one can expect rental income to fall due to falling demand. However, certain asset class are more resilient and within the asset class, certain REIT will perform better due to factors such as quality of the asset, the accessibility etc.

In short, the understand the direction of the rental rates, one will have to look at the macro environment to understand how resilient the asset class is in different economic conditions and also to factor in the conditions of supply and demand and how they will unfold over time.

3. Occupany rate: This is related to rental income too. Occupany rate reflects the amount of space that is being taken up for retail/commercial purpose for a property. The higher the occupany rate, the better it is for shareholder. However, one has to understand the intricate balance between achieving a high occupancy rate versus a higher rental income.

For instance, rental income per sq ft may be high but if occupany rate is too low, it could mean that the company is losing money due to over-valuation of its properties. Conversely, a 100% occupancy rate with a lower than average rental income may mean that property space are being under-value. For asset manager, they have to do a difficult job of balancing this two factors to optimise the value of the property being used.

4. Debt refinance: This is the make or break factor for most REITs. REIT needs financing for expansion or acquisition plan. However, such financing are usually short-term notes / credits from the bank lasting 2-3 years. After which, the asset management firm will have to source for new credit line. From the perspective of banks, they will look at a few factors to identify if the asset management firm can make its repayment.

Factors such as the value of the underlying real estate assets, the trend in property values and for the particular property type and outlook for the sector. Egs, oversupply of apartment units or growth of online retail are factors that will negatively impact the value of the REITs in these areas. Finally, the management ability and capacity to successfully operate the entire portfolio of properties and real estate will determine if the banks are willing to refinance their loans.

Thus, many a times, investors will look at REITs that have secure a new refinance plan and that they do not have any financial obligations within the next 2-3 years as a sign that the company is stable.

Thats' all for today post on REITs. Before I go, I have extracted this list of datas from an analyst reports and it is for your viewing pleasure. Enjoy.

Suntec Reit: An Introduction

My first foray into REITs was to purchase Suntec Reits. During the early Mar 09, sentiments were at all time lows and I was really seeking to purchase defensive equities to hedge myself during an economic downturn. With some guidance from my stock broker as well as some personal research, I started with 2 lots of Suntec Reits.

This first post on Suntec REIT is to give a reader a basic understanding of the Suntec REIT business model.

Introduction

Suntec REIT deals mainly with office and retail properties. The properties under its belt include Suntec City Mall, Suntec City Office Towers, Park Mall, Chjimes an Raffles Quay. As of March 2009, Suntec REIT has $5.4 billion of assets under management, comprising approximately 1.9 million sq ft of office space and 1.0 million sq ft of retail space.

Accessible location being its key advantage.

The attractiveness of the properties managed by Suntec REITs is that the properties are all located in the Central Business District. Park Mall is located along Orchard Road, right next to Dohby Ghaut MRT and the NEL as well. Chjimes is a retail, F&B outlet that is recognised as a UNESCO site and has strong heritage value. Suntec City is Singapore 2nd largest retail mall and has 1.3 million Prime grade A office space of 1.3 mil ft. Finally, One Raffles Quay is locate at the Heart of CBD and has excellent connectivity to Raffles Place MRT and it has strong tenant base comprising of international and local blue chip financial institutions.

The business structure of SUNTEC REIT is as follows:

Ever since its inception, Suntec REIT has produced consistent growth in its distribution per unit and this is a sign that the business model is sustainable and scalable.

That is all for the first post on Suntec REIT. The next post will discuss about macro and business outlook for the REIT and highlights some of the key challenges facing the compay in the short term.