Quick review
ARA surprised on the upside because some risks I highlighted didn't materialize and certain development(s) were more positive than expected and certain development(s) were not captured even though it should have been.
Things that Were Not Expected
1) AUM
I was concerned that there could be downward revaluation when year-end came. There wasn’t. So base fee was not going to drop as I was afraid of. Good.
Moreover, ARA managed to increase the AUM for private funds. Totally not expected.
2) Real Estate Management Arm
I screwed up here. I forgot to take this into account when doing the analysis. Because it was not captured in the 3Q09 results, doesn't mean it will not be in captured in the 1Q10. It was publicized. It was in press releases. I should have read those a bit more thoroughly. And if I did, I would have realize how earning accretive this move will be. Luckily, this was a surprise on the upside – S$2.9m in 1Q10. If it was a surprise on the downside, I would be slapping myself silly. SERIOUS BLINDSPOT. READ THE NEWS ABIT CLOSER.
3) Other income/ Gain on disposal of REITs units
I was aware of this. And I highlighted that this will help pull earnings up. But what I didn't realize is that this could potentially be a key swing factor on the earnings. Mainly because this is pure profit. There is no cost base for this. So it feeds straight down to the bottom line. WOW. Expect this to persist as the prices of REITs have strengthened. But note that this is a double-edged sword even markets turn.
4) Bottoming of rents
Expect to bottom sometime in 2011. But according to DTZ, has already bottom in 2Q10. Exceed expectation.
So performance fees may not drop as much as expected.
Things Expected
1) Cache Logistics
That was spot on. The key catalyst for re-rating.
2) Increase in market cap and thus attract greater institutional interest
Didn't write that down previously. But was a key secondary hypothesis I was waiting to verify. This particular experiment on ARA seem to provide a positive response.
3) Bottoming of Capital Values
Spot on.
4) Increased investment activity in ADF private fund.
As expected, ARA is trying to invest a major portion of the fund by this year, to hit the 75% target that will release them from the clause which prevents them from raising a new fund.
Conclusion
Despite the MAJOR blindspot, I got a few of the major points right (Cache Logistic, office market turning). That was important. Important to be right on the critical points. Makes you money even if you were wrong on the minor points.
However, I was overly conservative on some points (e.g. AUM revaluation) and was off on the timing (e.g. rental bottoming). Which is good because my BUY analysis of ARA is not based on the most optimistic outlook and therefore somewhat prudent. But is bad because being overly conservative makes you lose out by not buying more – mistake of omission. Not clear if it is possible to improve significantly on this because of the risk/return trade-off.
As a result, the above factors led me to underestimate profit growth. So instead of a growth of 8 – 15%. I now expect a higher growth rate because the negative pressures have reduced and the positives have exceeded expectations. It is probably somewhere closer to 15 – 25%.
2010年8月8日星期日
2010年8月4日星期三
C&O
Dear Readers
I recommend you all to take a closer look at C&O. I believe that this may be a profitable venture for those who pay attention. The signal of unusual activity, in my opinion, is the high dividend payout YTD.
I may write more when I have the time and effort to. In the meantime, go mull over it :)
I recommend you all to take a closer look at C&O. I believe that this may be a profitable venture for those who pay attention. The signal of unusual activity, in my opinion, is the high dividend payout YTD.
I may write more when I have the time and effort to. In the meantime, go mull over it :)
2010年7月28日星期三
VICOM - Part VIII (Misc)
Miscellaneous
They have a new side business – emission testing. Please see below for extract from company’s website.
VICOM Emission Test Laboratory (VETL) is a state-of-the-art laboratory dedicated to fuel emission and fuel economy testing. Set up by VICOM, VETL provides a comprehensive range of testing services pertaining to vehicle emissions and fuel efficiency.
As the first of its kind in South-east Asia, VETL offers the foremost in vehicle emission testing technology for cars, motorcycles and commercial vehicles. The facility has the capability to carry out testing up to Euro 5+ and other international standards. We provide an exhaustive range of testing needs for our customers. Also, with nearly 30 years of establishment in the vehicle inspection market, we provide our customers with an unmatched track record in reliability and professionalism.
They have a new side business – emission testing. Please see below for extract from company’s website.
VICOM Emission Test Laboratory (VETL) is a state-of-the-art laboratory dedicated to fuel emission and fuel economy testing. Set up by VICOM, VETL provides a comprehensive range of testing services pertaining to vehicle emissions and fuel efficiency.
As the first of its kind in South-east Asia, VETL offers the foremost in vehicle emission testing technology for cars, motorcycles and commercial vehicles. The facility has the capability to carry out testing up to Euro 5+ and other international standards. We provide an exhaustive range of testing needs for our customers. Also, with nearly 30 years of establishment in the vehicle inspection market, we provide our customers with an unmatched track record in reliability and professionalism.
VICOM - Part VII
Conclusion
The company is the clear market leader in the vehicle inspection business with a market share that has consistently been >70%. The business is driven by the LT secular trend of a growing vehicle population and the inevitable need to inspect your vehicle. This provides the business with a stable growth characteristic.
It has also displayed a clear track record in growing the non-vehicle testing business independent of the economic environment. The expansion of current facilities is a positive. Moreover, the presence of overseas facilities makes me believe that it might eventually grow to be a regional powerhouse in non-vehicular testing. But that will take a really long period (think 10 years).
Hence, at current valuations, this is a fair price to pay for a good quality business that has consistently achieve top and bottom line growth with a >15% ROE while paying out half of earnings in dividends. In fact, I note that if you have invested in 2005, you will have seen a 100% in share price (it hardly dropped in the market downturn) and have received another 33% worth of dividends. So you will have seen a 20+ return in your earnings
The company is the clear market leader in the vehicle inspection business with a market share that has consistently been >70%. The business is driven by the LT secular trend of a growing vehicle population and the inevitable need to inspect your vehicle. This provides the business with a stable growth characteristic.
It has also displayed a clear track record in growing the non-vehicle testing business independent of the economic environment. The expansion of current facilities is a positive. Moreover, the presence of overseas facilities makes me believe that it might eventually grow to be a regional powerhouse in non-vehicular testing. But that will take a really long period (think 10 years).
Hence, at current valuations, this is a fair price to pay for a good quality business that has consistently achieve top and bottom line growth with a >15% ROE while paying out half of earnings in dividends. In fact, I note that if you have invested in 2005, you will have seen a 100% in share price (it hardly dropped in the market downturn) and have received another 33% worth of dividends. So you will have seen a 20+ return in your earnings
VICOM - Part VI
Risks
Regulations
Changes in regulations that affect growth of vehicular population and more importantly, inspection requirements can impact earnings significantly. Regulations will also affect the non-vehicular testing business as less stringent requirements will lead to lower level of testing needed.
This is a huge underlying risk of this investment. In fact, so much so that I will call this a regulatory play on sustained need to test more things so as to increase safety and quality.
Execution risk
Growth in non-vehicular testing may slow if company is unable to continue expanding scope of items tested, acquire new business and maintain/grow margins.
Liquidity
The stock is tightly held by ComfortDelgro and has a low daily volume traded. So you may not always be able to exit at the current quoted price (liquidity discount). Neither are you able to buy a huge amount at any point in time. Hence, you CANNOT place a huge amount in this stock.
Things Which Are Still Unclear – ALSO A RISK!
What are drivers of non-vehicle testing business? / What’s the huge other payables in the balance sheet?/ Sustainable Margins?
I note that the only information I have are from the annual report and the company’s website. Hence, there might be blind spots and faulty conclusions reached. For instance, I had to come up with the drivers of non-vehicle testing business. With no confirmation from management of my understanding, I could very well have got it wrong.
I also could not identify what constitute the huge “other payables” in the balance sheet. It is unclear why other payables are consistently more than trade payables.
Neither could I confidently ascertain the growth and sustainability of the margins. I suspect operating leverage is at play and maybe (just maybe) improved pricing power and billing for finished work done for the integrated resorts. But I note that all these are merely my suspicions.
Why cash not given out? Why hold so much cash?
Why give out only 50% when cash generation capabilities have continued to increase? I propose the following hypotheses:
1) Earning figures are fake so they can't give out as much
a. Evidence 1 – margins jump too crazily and is faked
b. Counter Evidence 1 – Why would they lie when they are not covered by any analyst? Maybe ComfortDelgro wants wants to boost their earnings and thus pressured Vicom to fake the earnings. However, Vicom’s contribution to their earnings is insignificant compared to their overall earnings (S$220m in 2009). Hence, ComfortDelgro has little incentive to manage earnings and would desire accurate reporting instead. In fact, I propose the notion that ComfortDelgro will want to see more cash being sent back up to them instead.
2) Margins at this level are not sustainable so current cash generation capabilities is unsustainable. Hence, want to manage expectations by not giving out too much dividend, so that they can show DPS growth next year
3) They need the money to expand the non-vehicle testing biz - like building a new extension and to buy new equipment.
I believe that hypothesis 2 and 3 are more likely than 1.
I note that they don't pay out all when they face certain uncertainties and when they want to grow the business by buying eqpt (e.g. 2005 – Idacs business slowdown, 2008 – recession, 2009 – construction for new extension) But then, the current payout ratio is low compared to average of past 10 years where they pay at least 60% of earnings. With sufficient money (30+m of cash) set aside for the construction, I believe there is a good chance that they might not need to retain so much more cash. Hence, the payout ratio is likely to increase.
There is nothing wrong with giving out less if they can use the $ more productively and return 20% ROE on the money retained. In fact, if they can grow the money at 20% IRR, I will rather that they keep it because I sure can’t find many 20% IRR opportunities myself!
Regulations
Changes in regulations that affect growth of vehicular population and more importantly, inspection requirements can impact earnings significantly. Regulations will also affect the non-vehicular testing business as less stringent requirements will lead to lower level of testing needed.
This is a huge underlying risk of this investment. In fact, so much so that I will call this a regulatory play on sustained need to test more things so as to increase safety and quality.
Execution risk
Growth in non-vehicular testing may slow if company is unable to continue expanding scope of items tested, acquire new business and maintain/grow margins.
Liquidity
The stock is tightly held by ComfortDelgro and has a low daily volume traded. So you may not always be able to exit at the current quoted price (liquidity discount). Neither are you able to buy a huge amount at any point in time. Hence, you CANNOT place a huge amount in this stock.
Things Which Are Still Unclear – ALSO A RISK!
What are drivers of non-vehicle testing business? / What’s the huge other payables in the balance sheet?/ Sustainable Margins?
I note that the only information I have are from the annual report and the company’s website. Hence, there might be blind spots and faulty conclusions reached. For instance, I had to come up with the drivers of non-vehicle testing business. With no confirmation from management of my understanding, I could very well have got it wrong.
I also could not identify what constitute the huge “other payables” in the balance sheet. It is unclear why other payables are consistently more than trade payables.
Neither could I confidently ascertain the growth and sustainability of the margins. I suspect operating leverage is at play and maybe (just maybe) improved pricing power and billing for finished work done for the integrated resorts. But I note that all these are merely my suspicions.
Why cash not given out? Why hold so much cash?
Why give out only 50% when cash generation capabilities have continued to increase? I propose the following hypotheses:
1) Earning figures are fake so they can't give out as much
a. Evidence 1 – margins jump too crazily and is faked
b. Counter Evidence 1 – Why would they lie when they are not covered by any analyst? Maybe ComfortDelgro wants wants to boost their earnings and thus pressured Vicom to fake the earnings. However, Vicom’s contribution to their earnings is insignificant compared to their overall earnings (S$220m in 2009). Hence, ComfortDelgro has little incentive to manage earnings and would desire accurate reporting instead. In fact, I propose the notion that ComfortDelgro will want to see more cash being sent back up to them instead.
2) Margins at this level are not sustainable so current cash generation capabilities is unsustainable. Hence, want to manage expectations by not giving out too much dividend, so that they can show DPS growth next year
3) They need the money to expand the non-vehicle testing biz - like building a new extension and to buy new equipment.
I believe that hypothesis 2 and 3 are more likely than 1.
I note that they don't pay out all when they face certain uncertainties and when they want to grow the business by buying eqpt (e.g. 2005 – Idacs business slowdown, 2008 – recession, 2009 – construction for new extension) But then, the current payout ratio is low compared to average of past 10 years where they pay at least 60% of earnings. With sufficient money (30+m of cash) set aside for the construction, I believe there is a good chance that they might not need to retain so much more cash. Hence, the payout ratio is likely to increase.
There is nothing wrong with giving out less if they can use the $ more productively and return 20% ROE on the money retained. In fact, if they can grow the money at 20% IRR, I will rather that they keep it because I sure can’t find many 20% IRR opportunities myself!
VICOM - Part V
Valuations
Assuming margins shrink to 24% (because the sharp rise in margins may not be sustainable) and sales grow at 7% (which is not unreasonable given they have grown faster previously), at S$2.83, you are buying at ~12x P/E, which is 8.3 E/P. FCF is ~11x P/FCF and is a FCF yield of 8.9%. Dividend yield at the historical 60% payout ratio gives you a decent 5% yield.
This is my “prudent” case. I believe these assumptions are prudent and won’t fall too far short of it. And thus even if I get it wrong, the results of the company, supported by the previously mentioned growth drivers, will grow at a fast enough clip to erase any folly of mine on the valuation level which I am entering into.
Assuming margins shrink to 24% (because the sharp rise in margins may not be sustainable) and sales grow at 7% (which is not unreasonable given they have grown faster previously), at S$2.83, you are buying at ~12x P/E, which is 8.3 E/P. FCF is ~11x P/FCF and is a FCF yield of 8.9%. Dividend yield at the historical 60% payout ratio gives you a decent 5% yield.
This is my “prudent” case. I believe these assumptions are prudent and won’t fall too far short of it. And thus even if I get it wrong, the results of the company, supported by the previously mentioned growth drivers, will grow at a fast enough clip to erase any folly of mine on the valuation level which I am entering into.
I note that dividend payout prior to 2005 is ~60%.VICOM - Part IV
Financial Analysis
Using a Dupont analysis, ROE has been increasing across time, driven mainly by net profit margin expansion. Net profit margin expansion was driven mainly by operating margin expansion and partly by lower tax rates. Leverage is nil because no debt is employed. Asset turnover fell largely because of increased holding of cash.
Growth in 2009 has been propelled by a sharp increase in margins. One suspect if it is sustainable, though it is hard to establish a conclusion either ways without additional information.
Using a Dupont analysis, ROE has been increasing across time, driven mainly by net profit margin expansion. Net profit margin expansion was driven mainly by operating margin expansion and partly by lower tax rates. Leverage is nil because no debt is employed. Asset turnover fell largely because of increased holding of cash.
Growth in 2009 has been propelled by a sharp increase in margins. One suspect if it is sustainable, though it is hard to establish a conclusion either ways without additional information.
VICOM - Part III
Growth Analysis
Growth is going to come more from the non-vehicle testing, where margins are lower than vehicle inspection. Growth will depend on both top line growth and margins expansion. Top line growth is likely to continue, though one wonders how much more can margins possibly grow at this rate. Arithmetically, it is impossible because if it continues like this, its margins will hit 100% in 15 years!
VICOM - Part II
Segmental Analysis
VICOM and JIC vehicle inspection centres
It is a statutory requirement to inspect your vehicle periodically. Hence, demand will always be there. The risk however is that regulations become less stringent (e.g. # of inspections reduces) and this will have a significant impact on the business. This was what happened in the vehicle assessment business.
Vehicle Age Inspection Requirement
Motorcycles & Scooters > 3 years Once a year
Motorcars 3 - 10 years Once in 2 years
Motorcars > 10 years Once a year
The business is driven by 1 long term secular trend and 1 cyclical trend. The secular trend is the increasing number of cars on the road. Have you not noticed more cars on the road than 5 years ago? The number of cars is driven by new COEs issued (+) and vehicle deregistration (-). A lower vehicle deregistration tends to be accompanied by a lower number of new COEs because the government takes an active effort to control the growth of the vehicle population (ASSUMPTION). This is what is happening now and the increase in older vehicles will benefit VICOM in the short to intermediate term.
A lower vehicle deregistration benefits the company immediately because the number of old cars on the road stays high but it will dis-benefit them in the long term because the lower number of new cars now, means a lower growth in number of old cars in the future. This relationship dictates the cyclical nature of growth. Note that this is true if the assumption above is true. It could very well be that we see both a higher number of new COEs and lower vehicle deregistration than historically.
VICOM Assessment Centre (VAC)
IN 2005, it was no longer compulsory to make accident reports at the Independent Damage Assessment Centre (IDAC) which VICOM runs. This immediately saw business shrink by 80% and even now, the business borders on the line of unprofitability. This highlights the regulatory risk which I mentioned above.
As it stands, this business segment is insignificant in terms of bottom line contribution.
SETSCO
The company has branches across Singapore (Teban Gardens, Changi), Malaysia (Selangor) and Vietnam (Ho Chi Minh).
According to the FY09 annual report, the company expects to expand its scope of work to new areas like digital radiography, phased array ultrasonic testing and thermal conductivity testing. The company is also planning to test new products such as sanitary ware, electrical, glass and drinking water treatment appliances.
To meet the growing demand for non-vehicle testing services, Setsco has installed both a modern universal test machine that is able to test stronger materials, and a sophisticated metal analyser that can test metals at a faster turnaround time.
This year (2010), construction on an additional laboratory and office block at Setsco’s current premises in Teban Gardens will begin. It is expected to be completed in the first half of 2011.
This is the key driver for VICOM’s business. Things always need to be tested so growth is partly independent of economic growth.
Growing business – can expand scope to test an increasing variety of things. Things always need to be tested So growth can be independent of economy because
Testing volume = ∑i (# of unique items being test i * frequency of testing/item i * # of clients for item i )
The # of unique is driven by expanding in business scope to other areas (endogenous/controllable by company). Frequency is more of an exogenous item and driven by economic activity (e.g. construction biz)/regulations for testing. The # of clients is also within the company’s control because the company can go acquire more clients and increase market share for the testing of a particular item.
In terms of said endogenous factors, the company has been trying to achieve both and has proven to be quite successful in growing the business. This can be seen from the fact that top line growth of the segment has been strong (>10% p.a.) and they need to expand current facilities to meet demand.
In terms of exogenous factors, regulations can go either way – a wild card. But the trend has always been more testing because of quality and safety reasons (think melamine milk and lead in toys). Economic activity is definitely a factor but you are safeguarded by the fact that you are diversified across industries. Proof is that biz grew even in downturn (2008/09).
So overall, expect the business to continue experiencing top line growth. Bottom line growth will depends on sustainability of margins.
Rental Income
Should go up as rental rates pick up.
VICOM and JIC vehicle inspection centres
It is a statutory requirement to inspect your vehicle periodically. Hence, demand will always be there. The risk however is that regulations become less stringent (e.g. # of inspections reduces) and this will have a significant impact on the business. This was what happened in the vehicle assessment business.
Vehicle Age Inspection Requirement
Motorcycles & Scooters > 3 years Once a year
Motorcars 3 - 10 years Once in 2 years
Motorcars > 10 years Once a year
The business is driven by 1 long term secular trend and 1 cyclical trend. The secular trend is the increasing number of cars on the road. Have you not noticed more cars on the road than 5 years ago? The number of cars is driven by new COEs issued (+) and vehicle deregistration (-). A lower vehicle deregistration tends to be accompanied by a lower number of new COEs because the government takes an active effort to control the growth of the vehicle population (ASSUMPTION). This is what is happening now and the increase in older vehicles will benefit VICOM in the short to intermediate term.
A lower vehicle deregistration benefits the company immediately because the number of old cars on the road stays high but it will dis-benefit them in the long term because the lower number of new cars now, means a lower growth in number of old cars in the future. This relationship dictates the cyclical nature of growth. Note that this is true if the assumption above is true. It could very well be that we see both a higher number of new COEs and lower vehicle deregistration than historically.
VICOM Assessment Centre (VAC)
IN 2005, it was no longer compulsory to make accident reports at the Independent Damage Assessment Centre (IDAC) which VICOM runs. This immediately saw business shrink by 80% and even now, the business borders on the line of unprofitability. This highlights the regulatory risk which I mentioned above.
As it stands, this business segment is insignificant in terms of bottom line contribution.
SETSCO
The company has branches across Singapore (Teban Gardens, Changi), Malaysia (Selangor) and Vietnam (Ho Chi Minh).
According to the FY09 annual report, the company expects to expand its scope of work to new areas like digital radiography, phased array ultrasonic testing and thermal conductivity testing. The company is also planning to test new products such as sanitary ware, electrical, glass and drinking water treatment appliances.
To meet the growing demand for non-vehicle testing services, Setsco has installed both a modern universal test machine that is able to test stronger materials, and a sophisticated metal analyser that can test metals at a faster turnaround time.
This year (2010), construction on an additional laboratory and office block at Setsco’s current premises in Teban Gardens will begin. It is expected to be completed in the first half of 2011.
This is the key driver for VICOM’s business. Things always need to be tested so growth is partly independent of economic growth.
Growing business – can expand scope to test an increasing variety of things. Things always need to be tested So growth can be independent of economy because
Testing volume = ∑i (# of unique items being test i * frequency of testing/item i * # of clients for item i )
The # of unique is driven by expanding in business scope to other areas (endogenous/controllable by company). Frequency is more of an exogenous item and driven by economic activity (e.g. construction biz)/regulations for testing. The # of clients is also within the company’s control because the company can go acquire more clients and increase market share for the testing of a particular item.
In terms of said endogenous factors, the company has been trying to achieve both and has proven to be quite successful in growing the business. This can be seen from the fact that top line growth of the segment has been strong (>10% p.a.) and they need to expand current facilities to meet demand.
In terms of exogenous factors, regulations can go either way – a wild card. But the trend has always been more testing because of quality and safety reasons (think melamine milk and lead in toys). Economic activity is definitely a factor but you are safeguarded by the fact that you are diversified across industries. Proof is that biz grew even in downturn (2008/09).
So overall, expect the business to continue experiencing top line growth. Bottom line growth will depends on sustainability of margins.
Rental Income
Should go up as rental rates pick up.
VICOM - Part I
Have you been sending your car for inspection lately? If you have, you will probably have visited a facility run by the company that I am going to introduce shortly. Not only does the company provide good service for your car, it will perform a great service for your wallet too!
What is VICOM
VICOM Ltd was incorporated in 1981 and publicly listed on Singapore's stock exchange in 1995. The VICOM Group is a subsidiary of ComfortDelGro Corporation Limited.
Vicom owns 3 main business divisions:
VICOM and JIC vehicle inspection centres With over 300,000 vehicle checks conducted at our centres annually, and with car evaluations at 30,000 and counting, VICOM is the premier one-stop inspection service provider in Singapore. In 2009, it has 70% of the market share in Singapore.
VICOM Assessment Centre (VAC) provides a one-stop, post-accident service solution – towing services, car rentals, assistance in accident reporting, claims filing, repairs and safety checks through its three Independent Damage Assessment Centres (Idac), co-located within our VICOM inspection centres. VAC has also expanded its capabilities to include accident reconstruction using computer simulation and analysis, which assists in court litigation of disputed accident cases.
SETSCO forms VICOM’s non-vehicular inspection and testing arm. SETSCO provides testing, calibration, inspection, consultancy and training services to the
i) aerospace,
ii) marine and offshore,
iii) biotechnology,
iv) oil and petrochemical,
v) building construction and
vi) electronics manufacturing industries.
Its services include
i) quality assurance testing and evaluation of building materials,
ii) structural and chemical analysis,
iii) food and microbiological analysis,
iv) environmental monitoring, amongst others.
One of its recent developments is the setting up of SETSCO Aerospace Testing Centre (SATC) in November 2006. SATC provides a range of non-destructive testing of aircraft components. SETSCO’s advent into the aerospace industry has been duly validated, as demand has been strong with many top local and foreign companies utilising their services.
They also lease out parts of the buildings which they occupy and so rental income comprises a small part of their income (~5%). They also offer some miscellaneous services like consulting, motor insurance which form approximately 10% of 2009 income.
What is VICOM
VICOM Ltd was incorporated in 1981 and publicly listed on Singapore's stock exchange in 1995. The VICOM Group is a subsidiary of ComfortDelGro Corporation Limited.
Vicom owns 3 main business divisions:
VICOM and JIC vehicle inspection centres With over 300,000 vehicle checks conducted at our centres annually, and with car evaluations at 30,000 and counting, VICOM is the premier one-stop inspection service provider in Singapore. In 2009, it has 70% of the market share in Singapore.
VICOM Assessment Centre (VAC) provides a one-stop, post-accident service solution – towing services, car rentals, assistance in accident reporting, claims filing, repairs and safety checks through its three Independent Damage Assessment Centres (Idac), co-located within our VICOM inspection centres. VAC has also expanded its capabilities to include accident reconstruction using computer simulation and analysis, which assists in court litigation of disputed accident cases.
SETSCO forms VICOM’s non-vehicular inspection and testing arm. SETSCO provides testing, calibration, inspection, consultancy and training services to the
i) aerospace,
ii) marine and offshore,
iii) biotechnology,
iv) oil and petrochemical,
v) building construction and
vi) electronics manufacturing industries.
Its services include
i) quality assurance testing and evaluation of building materials,
ii) structural and chemical analysis,
iii) food and microbiological analysis,
iv) environmental monitoring, amongst others.
One of its recent developments is the setting up of SETSCO Aerospace Testing Centre (SATC) in November 2006. SATC provides a range of non-destructive testing of aircraft components. SETSCO’s advent into the aerospace industry has been duly validated, as demand has been strong with many top local and foreign companies utilising their services.
They also lease out parts of the buildings which they occupy and so rental income comprises a small part of their income (~5%). They also offer some miscellaneous services like consulting, motor insurance which form approximately 10% of 2009 income.
2010年6月25日星期五
Cerebos Pacific
Been a while! Been wanting to update on ARA but unfortunately, yours truly, is a lazy bum. All I can say is that ARA has been up 50% since I first wrote my post, partly due to bottom line growth and partly due to mutiples expansion (yield compression). Both which are expected but the latter surprised on the upside.
K. Now that I got that out of the way (k. fine. i will write a longer one later), let us take a look at this stock called Cerebos Pacific. I am writing this off the top of my head, so pardon me if I may be a tad brief on the details.
*spoiler alert* i am not recommending a buy on this one *spoiler alert*
I am writing this primarily to note down some salient points about this company.
Cerebos Pacific is the company best known for its Brands Essence of Chicken and related products. Its has 2 main business segment - Health Supplements and Food.
Health Supplement
The Health Supplements business operates primarily in Asia. The products under this division can be split into liquid health supplements (e.g. Essence of Chicken) and tablet health supplements. The company has been trying to leverage off the strong brand name of "Brands" by creating new products such as "Bird Nest with Rock Sugar" under the same brand name.
The 2 key markets are Taiwan and Thailand. These 2 markets provides almost all the net profit of Cerebos's. Other minor markets include Singapore, Hong Kong and Malaysia. They also have operations in China but that has been perenially unprofitable, though one can argue that the small losses in the short run help lay the way for large potential returns when the brand gets established.
Food
The Food division can be sub-divided into coffee, asian sauces (think the Woh Hup brand) and western sauces.
The food division operates primarily in Australia and NZ. The company focuses on gourmet coffee and western sauces. The Asian sauces sub-segment mainly exports to U.S and Europe. The Asian sauces sub-segment is small compared to the other 2 segments.
The food division contributes significantly to the top line but nothing to the bottom line.
Financial Performance
The truth is that the business as a whole is not great. The only gem in the business is the Health Supplement division. The Food division does not contribute meaningfully. In fact, losses in the division drag down earnings and compresses margins by contributing signficantly to the topline but nothing to the bottomline. Maintaining and attempting to grow the Food business in Australiasia consumes money and it begs the question - why deploy equity into an area that is not making any returns? The Food business may turn a profit in the future but it did not in the past and one should not harbour hopes that it will in the future. If it does, then it should just be taken as icing on the cake.
The only reason why anyone would buy into Cerebos is for its Health Supplement business. The "Brands" brand name is one which is well known for quality. Essentially, it is the thing that keeps giving in both good times and bad. One should note, however, that the key markets are Thailand and Taiwan. These 2 markets contributes >90% of the earnings. Hence, put simply, buying Cerebos for the Health Supplement business is to underwrite the risk/growth in the markets of Thailand and Taiwan.
The company has consistently returned a ROE of >20% over the past 5 years. The company's earnings has been growing through the past 10 years though it tends to face a dip in earnings in poor economic condition too. But they have always bounced back up to the long term secular growth trend when the economy recovers. The rationale goes like this - People might cut back a bit on health supplements when the economy is down and the wallet is tight. However, many would still continue to be a consumer especially since the product is usually targeted to students (parents will pay a good price to make sure their kids do well with 'brain food' such as Essence of Chicken).
A Branded Cash Cow
The company is a cash cow. It has been giving out 25cents of dividends per share consistently for the past 5 years. I note that there were years where the payout ratio was more than 100%.
The company claims that good management with good cost control and innovative packaging to mitigate pricing pressure (e.g. selling in packs of 3 at X price instead of packs of 2 for Y price) allows the company to continue churning out cash. I say that all these might be true. But the real reason is that its brand name allows it to maintain pricing power and be the preferred choice despite being a pricer option. And this benefit does not cost a significant amount to maintain as compared to the benefits it churn out. The company has been hiring celebrities such as Wang Lee Hom and organizing activities such as Suduko to promote the brand name (their target audience is the student population).
Liquidity
The market cap is >S$1b. However, the free float is low because its parent, Suntory, holds >80% of the stock. Conseuqently, there is a lack of liquidity. For most months, <1m stocks gets traded in the month itself.
Why Buy This Stock
At its current price, the dividend yield is ~6%. That is pretty decent. You also get consistent earnings growth of 20% y-o-y.
And the dividend might increase beyond 25cents because the company is churning out more and more cash while not deploying it since they have already spent most of the capex they needed to increase production capacity.
It is however trading at 3x book and will take a good 6years for you to get your initial investment back.
Don't expect the stock price to move up too much since the float is low and there won't be stock catalysts coming into the picture (its a nice, stable, growing business) and there won't be liquidity coming in from institutionals to boost up the stock price.
So buy it if you are a long term holder and accumulate on any dips because it will always bounce up.
Conclusion
As it stands, I don't find the price particularly attractive (or unattractive for that matter). Hence, I doubt I will put my money up for this unless the pricing goes down to a more attractive level. Moreover, will need to do a bit more further research/digging before the funds can be committed.
K. Now that I got that out of the way (k. fine. i will write a longer one later), let us take a look at this stock called Cerebos Pacific. I am writing this off the top of my head, so pardon me if I may be a tad brief on the details.
*spoiler alert* i am not recommending a buy on this one *spoiler alert*
I am writing this primarily to note down some salient points about this company.
Cerebos Pacific is the company best known for its Brands Essence of Chicken and related products. Its has 2 main business segment - Health Supplements and Food.
Health Supplement
The Health Supplements business operates primarily in Asia. The products under this division can be split into liquid health supplements (e.g. Essence of Chicken) and tablet health supplements. The company has been trying to leverage off the strong brand name of "Brands" by creating new products such as "Bird Nest with Rock Sugar" under the same brand name.
The 2 key markets are Taiwan and Thailand. These 2 markets provides almost all the net profit of Cerebos's. Other minor markets include Singapore, Hong Kong and Malaysia. They also have operations in China but that has been perenially unprofitable, though one can argue that the small losses in the short run help lay the way for large potential returns when the brand gets established.
Food
The Food division can be sub-divided into coffee, asian sauces (think the Woh Hup brand) and western sauces.
The food division operates primarily in Australia and NZ. The company focuses on gourmet coffee and western sauces. The Asian sauces sub-segment mainly exports to U.S and Europe. The Asian sauces sub-segment is small compared to the other 2 segments.
The food division contributes significantly to the top line but nothing to the bottom line.
Financial Performance
The truth is that the business as a whole is not great. The only gem in the business is the Health Supplement division. The Food division does not contribute meaningfully. In fact, losses in the division drag down earnings and compresses margins by contributing signficantly to the topline but nothing to the bottomline. Maintaining and attempting to grow the Food business in Australiasia consumes money and it begs the question - why deploy equity into an area that is not making any returns? The Food business may turn a profit in the future but it did not in the past and one should not harbour hopes that it will in the future. If it does, then it should just be taken as icing on the cake.
The only reason why anyone would buy into Cerebos is for its Health Supplement business. The "Brands" brand name is one which is well known for quality. Essentially, it is the thing that keeps giving in both good times and bad. One should note, however, that the key markets are Thailand and Taiwan. These 2 markets contributes >90% of the earnings. Hence, put simply, buying Cerebos for the Health Supplement business is to underwrite the risk/growth in the markets of Thailand and Taiwan.
The company has consistently returned a ROE of >20% over the past 5 years. The company's earnings has been growing through the past 10 years though it tends to face a dip in earnings in poor economic condition too. But they have always bounced back up to the long term secular growth trend when the economy recovers. The rationale goes like this - People might cut back a bit on health supplements when the economy is down and the wallet is tight. However, many would still continue to be a consumer especially since the product is usually targeted to students (parents will pay a good price to make sure their kids do well with 'brain food' such as Essence of Chicken).
A Branded Cash Cow
The company is a cash cow. It has been giving out 25cents of dividends per share consistently for the past 5 years. I note that there were years where the payout ratio was more than 100%.
The company claims that good management with good cost control and innovative packaging to mitigate pricing pressure (e.g. selling in packs of 3 at X price instead of packs of 2 for Y price) allows the company to continue churning out cash. I say that all these might be true. But the real reason is that its brand name allows it to maintain pricing power and be the preferred choice despite being a pricer option. And this benefit does not cost a significant amount to maintain as compared to the benefits it churn out. The company has been hiring celebrities such as Wang Lee Hom and organizing activities such as Suduko to promote the brand name (their target audience is the student population).
Liquidity
The market cap is >S$1b. However, the free float is low because its parent, Suntory, holds >80% of the stock. Conseuqently, there is a lack of liquidity. For most months, <1m stocks gets traded in the month itself.
Why Buy This Stock
At its current price, the dividend yield is ~6%. That is pretty decent. You also get consistent earnings growth of 20% y-o-y.
And the dividend might increase beyond 25cents because the company is churning out more and more cash while not deploying it since they have already spent most of the capex they needed to increase production capacity.
It is however trading at 3x book and will take a good 6years for you to get your initial investment back.
Don't expect the stock price to move up too much since the float is low and there won't be stock catalysts coming into the picture (its a nice, stable, growing business) and there won't be liquidity coming in from institutionals to boost up the stock price.
So buy it if you are a long term holder and accumulate on any dips because it will always bounce up.
Conclusion
As it stands, I don't find the price particularly attractive (or unattractive for that matter). Hence, I doubt I will put my money up for this unless the pricing goes down to a more attractive level. Moreover, will need to do a bit more further research/digging before the funds can be committed.
2010年5月8日星期六
Ways to Make $ in Stock Market
There are 2 main ways to make some moola in the stock market:
1) Buy low, sell high
2) Buy high, sell higher
If you can short, you basically doubled the number of ways available. Since shorting is symmetric to longing, we can just limit our discussion to taking a long position. I note that there is another method which is to arbitrage - combining both long and short method. But let's leave that for another day.
The 1st method is best examplifed by fundamental investing. In essence, fundamental investing describe what prices SHOULD be by its derivation of intrinsic value.
The 2nd method is best represented by momentum investing. In essence, it describe where prices WOULD be by an array of tools such as charts.
1st Method - What Prices Should Be
The 1st method works best if you are patient money and you can wait for the price reversion to the intrinsic value. Note that it may take eternity to happen -i.e. no good.
It is best to couple this approach with identification of catalysts which would spark a reversion to intrinsic value. E.g. M&A activity, potential positive news release about new ventures/results which are not anticipated by market.
It is also advisable to couple this with a huge margin of safety - i.e. % difference between intrinsic value and current price. This is because you could be wrong in your "intrinsic value" determination. Firstly, your input may be faulty. Secondly, your model (based on the very flawed DCF, CAPM concepts) could spit out a wrong number because it converts the inputs into a faulty output. So you need a margin of safety to compensate for your potential errors.
2nd Method - What Prices Would Be
The 2nd method works best if you can identify trends and capital flows well. It puts aside the concept of intrinsic value. What is important is knowing how prices are determined (what prices would be) and not what is the right price (what prices should be/intrinsic value). I postulate that prices are determined by demand and supply. And the factors that affect future prices are current prices, preferences, budget constraints and probabilities. What is critical is the 2-way relationship between these factors and their 2-way relationship with fundamentals (i.e. feedback loop) and the changes in these components. I note that the expression of demand is in capital flows (voting with your $) and is a key focus of this approach.
This approach is more concerned about direction rather than a certain price point.
It might also be used to assess when the direction will change. So it can be for buying low and selling high as well (e.g. timing the bottom) but it is not an integral component of the concept.
Additional Dimension - Time
Let's add another dimension to the discussion - time. You can adopt a proactive approach or a reactive approach. You can invest in anticipation of relization of a certain event. Or you cna invest subsequent to the realization of the event. For example, you can invest in anticipation of a bottom. Or you can invest after it is clear that a bottom has been established.
The 1st method implicitly apply the proactive approach - you anticipate price to revert to intrinsic value. The 2nd approach can be both proactive and reactive. You can buy in anticipation of a change in direction (e.g. tops and bottoms) or you can ride the trend after the change in direction has been established.
It is often times safer to take the reactive approach because the proactive approach implicity assumes that you can hold on long enough for the event to occur or may even implicity suggest that you know when the event may occur. That requires 20/20 foresight. Which is not easy. It is easier to be reactive because the event has already occur. So yes, you may not be out before a market top but you never know it is a top until after the fact and it is presumptuous to say you know. So why not react only after the fact. You may not make as much money because you got out late but you may also have lost out on the continued climb upwards if you call the top wrongly.
The reactive approach put the odds in your favour. The proactive approach work well too if you have significant certainty about the event happening - e.g. you are sure positive news will be released.
Conclusion
There are basically 4 combinations
1) What Prices Should Be + Proactive
2) What Prices Should Be + Reactive
3) What Prices Would Be + Proactive
4) What Prices Would Be + Reactive
No one way is superior all the time and differ under different circumstances. But why choose? Use all 4!
Cheers.
1) Buy low, sell high
2) Buy high, sell higher
If you can short, you basically doubled the number of ways available. Since shorting is symmetric to longing, we can just limit our discussion to taking a long position. I note that there is another method which is to arbitrage - combining both long and short method. But let's leave that for another day.
The 1st method is best examplifed by fundamental investing. In essence, fundamental investing describe what prices SHOULD be by its derivation of intrinsic value.
The 2nd method is best represented by momentum investing. In essence, it describe where prices WOULD be by an array of tools such as charts.
1st Method - What Prices Should Be
The 1st method works best if you are patient money and you can wait for the price reversion to the intrinsic value. Note that it may take eternity to happen -i.e. no good.
It is best to couple this approach with identification of catalysts which would spark a reversion to intrinsic value. E.g. M&A activity, potential positive news release about new ventures/results which are not anticipated by market.
It is also advisable to couple this with a huge margin of safety - i.e. % difference between intrinsic value and current price. This is because you could be wrong in your "intrinsic value" determination. Firstly, your input may be faulty. Secondly, your model (based on the very flawed DCF, CAPM concepts) could spit out a wrong number because it converts the inputs into a faulty output. So you need a margin of safety to compensate for your potential errors.
2nd Method - What Prices Would Be
The 2nd method works best if you can identify trends and capital flows well. It puts aside the concept of intrinsic value. What is important is knowing how prices are determined (what prices would be) and not what is the right price (what prices should be/intrinsic value). I postulate that prices are determined by demand and supply. And the factors that affect future prices are current prices, preferences, budget constraints and probabilities. What is critical is the 2-way relationship between these factors and their 2-way relationship with fundamentals (i.e. feedback loop) and the changes in these components. I note that the expression of demand is in capital flows (voting with your $) and is a key focus of this approach.
This approach is more concerned about direction rather than a certain price point.
It might also be used to assess when the direction will change. So it can be for buying low and selling high as well (e.g. timing the bottom) but it is not an integral component of the concept.
Additional Dimension - Time
Let's add another dimension to the discussion - time. You can adopt a proactive approach or a reactive approach. You can invest in anticipation of relization of a certain event. Or you cna invest subsequent to the realization of the event. For example, you can invest in anticipation of a bottom. Or you can invest after it is clear that a bottom has been established.
The 1st method implicitly apply the proactive approach - you anticipate price to revert to intrinsic value. The 2nd approach can be both proactive and reactive. You can buy in anticipation of a change in direction (e.g. tops and bottoms) or you can ride the trend after the change in direction has been established.
It is often times safer to take the reactive approach because the proactive approach implicity assumes that you can hold on long enough for the event to occur or may even implicity suggest that you know when the event may occur. That requires 20/20 foresight. Which is not easy. It is easier to be reactive because the event has already occur. So yes, you may not be out before a market top but you never know it is a top until after the fact and it is presumptuous to say you know. So why not react only after the fact. You may not make as much money because you got out late but you may also have lost out on the continued climb upwards if you call the top wrongly.
The reactive approach put the odds in your favour. The proactive approach work well too if you have significant certainty about the event happening - e.g. you are sure positive news will be released.
Conclusion
There are basically 4 combinations
1) What Prices Should Be + Proactive
2) What Prices Should Be + Reactive
3) What Prices Would Be + Proactive
4) What Prices Would Be + Reactive
No one way is superior all the time and differ under different circumstances. But why choose? Use all 4!
Cheers.
2010年2月28日星期日
ARA Results
Extract From The Edge Singapore:
ARA Asset Management Ltd announced a 32% increase in net profit, to $48.3m for the year ended 31 Dec 2009. Revenue rose 23% to $86.3m, led by higher acquisition and performance and project fees, including the establishment of the ARA Harmony Fund in September as well as the acquisition of 3 retail properties in Hong Kong by Fortune REIT.
As at 31 Dec 2009, ARA had assets worth some $13.5b under management. ARA is proposing a final cash dividends of 2.5 cents per share, as well as bonus issue of new shares at 1 bonus share for evey 5 existing shares. Going forward, ARA plans to strenghten its foothold in the industrial logistic sector, led mainly by the impending listing of Cache Logistics Trust - a joint effort with CWT.
ARA Asset Management Ltd announced a 32% increase in net profit, to $48.3m for the year ended 31 Dec 2009. Revenue rose 23% to $86.3m, led by higher acquisition and performance and project fees, including the establishment of the ARA Harmony Fund in September as well as the acquisition of 3 retail properties in Hong Kong by Fortune REIT.
As at 31 Dec 2009, ARA had assets worth some $13.5b under management. ARA is proposing a final cash dividends of 2.5 cents per share, as well as bonus issue of new shares at 1 bonus share for evey 5 existing shares. Going forward, ARA plans to strenghten its foothold in the industrial logistic sector, led mainly by the impending listing of Cache Logistics Trust - a joint effort with CWT.
2010年2月22日星期一
Water Analysis - Part III
On a global basis, there is sufficient water to go around to meet demand. However, the issue is one of demand/supply imbalance across different parts of the world. As it is, you already need to increase supply and decrease demand. The situation is made worse by the fact that demand is still increasing and supply is decreasing.
One need to note an interesting point on pricing – a demand/supply imbalance does not affect prices of water here because prices are government regulated. Generally, the price of water is below the economic cost of providing the water. Hence, there is an implicit government subsidy being provided here. Theoretically, a demand/supply imbalance should make such subsidies unsustainable, especially as the imbalance worsens and the cost of providing such subsidies increase. This is true but one must acknowledge that subsidies tend to be persistent/sticky and any expectations of rapid changes in the pricing of water need to be taken with a pinch of salt.
The demand/supply imbalance is one experienced globally across many countries. Hence, we should think global when making our investment decisions. To that end, we need to decide where to invest in particular. Ideally, the best place to invest should be:
One need to note an interesting point on pricing – a demand/supply imbalance does not affect prices of water here because prices are government regulated. Generally, the price of water is below the economic cost of providing the water. Hence, there is an implicit government subsidy being provided here. Theoretically, a demand/supply imbalance should make such subsidies unsustainable, especially as the imbalance worsens and the cost of providing such subsidies increase. This is true but one must acknowledge that subsidies tend to be persistent/sticky and any expectations of rapid changes in the pricing of water need to be taken with a pinch of salt.
The demand/supply imbalance is one experienced globally across many countries. Hence, we should think global when making our investment decisions. To that end, we need to decide where to invest in particular. Ideally, the best place to invest should be:
1) facing a demand/supply imbalance – an opportunity
2) have a supportive regulatory environment which recognizes the situation and actually support that with action – increase in tariffs, favourable tax laws, PPP that lead to more investment. An important point, because this industry is largely a regulatory play. Moreover, even if an imbalances imply a need for investment, it does not necessarily translate to actual investment unless the government takes active step to. This is largely because it is a regulated industry and does not react as readily to market forces.
These are the basic criteria because a demand/supply imbalance is already serious enough in many countries and there should be cause for action to address the issue.
But to sweeten the deal, additional favourable factors should be considered
These are the basic criteria because a demand/supply imbalance is already serious enough in many countries and there should be cause for action to address the issue.
But to sweeten the deal, additional favourable factors should be considered
3) growing demand for water – because this will increase the utilization of your plant. So you want places that are experiencing industrialization, urbanization, etc
4) growing imbalance (e.g. supply decrease at a faster rate than reduction in demand) – so that government is compelled to act
These 4 factors should be taken into account when deciding where to invest globally.
After filtering down on the countries, we need to decide the particular segment(s) of the value chain to invest in.
In particular, we want:
1) a particular segment which is facing the most stress and which the government feels the most need for action on – favourable regulations and PPP opportunities
These 4 factors should be taken into account when deciding where to invest globally.
After filtering down on the countries, we need to decide the particular segment(s) of the value chain to invest in.
In particular, we want:
1) a particular segment which is facing the most stress and which the government feels the most need for action on – favourable regulations and PPP opportunities
2) a particular segment that does not serve the public so that there will be no/low public opposition when prices are moved – so that tariffs can be raised to reflect the true economic cost with little opposition. This may not be a necessary requirement in countries where the public are generally more okay with price changes but you have the best odds when you avoid the risk altogether. Note that segments which serve the public are generally more stable as public demand is less volatility – so you may be trading higher returns from increase in tariffs for higher volatility stemming from volatility in volumes.
3) Low cost of funding environment
After deciding on the sector, you will need to do the filtering by companies
So firstly, you need to determine whether to invest in the operator or just the EPC or something between those 2 – companies with both EPC segment and a BOT/TOT segment.
Logically, an EPC might be better than an operator in an environment where regulations are unfavourable and you don’t earn enough to adequately cover your costs. But if we work backwards, we may also realize that an EPC will not do well in an environment where their client (the operator) may not make profits because few will venture into the industry if it is not profitable. And if few would want to venture into the industry, then demand for EPC works will correspondingly drop. Hence, even though the EPC will be a better play relative to operators in such environment, it may still not be such a good play overall on an absolute basis. Ideally, you want to be in a sector that works well for both types of company.
After deciding on the sector, you will need to do the filtering by companies
So firstly, you need to determine whether to invest in the operator or just the EPC or something between those 2 – companies with both EPC segment and a BOT/TOT segment.
Logically, an EPC might be better than an operator in an environment where regulations are unfavourable and you don’t earn enough to adequately cover your costs. But if we work backwards, we may also realize that an EPC will not do well in an environment where their client (the operator) may not make profits because few will venture into the industry if it is not profitable. And if few would want to venture into the industry, then demand for EPC works will correspondingly drop. Hence, even though the EPC will be a better play relative to operators in such environment, it may still not be such a good play overall on an absolute basis. Ideally, you want to be in a sector that works well for both types of company.
Regardless of which type of company, you need to choose one that is able to get debt and at a low cost. This is because this is a capital-intensive industry.
In particular, a company transiting from a pure EPC to a TOT/BOT operator will have greater pressure on their funding because they recover their cost over a much longer period of time than when they were doing EPC work, where they recover the cost + profit once they finished the construction. On this point, companies with the potential to improve their capital structure/ improve their financing cashflows via capital recycling through a water trust will be preferred.
In terms of size, we may want to look at mid-caps (what abt small caps?) This is largely due to the fact that contract size has reduced due to several factors – 1) companies are moving to smaller cities which are growing, need the infrastructure but need it on a smaller scale compared to the larger cities, 2) shorter payback periods for smaller plants, 3) its easier to scale up to meet increased demand than to scale down and risk having a plant running at low utilizations.
We could also switch the sequence of analysis around, look at sectors first than countries before we filter by companies. It might lead to a set of companies that are unique from the initial approach.
Filter…
§ By Countries
But following the initial approach, we see that the countries we want to invest in are likely to be emerging markets like MENA, Brazil, China and India. In particular, the list get reduced to Middle East, Brazil and China. North Africa is removed as it is unclear that clear favourable regulations exist. India may have a supply/balance imbalance but there is a surprisingly lack of coordinated effort to address that (just like their transport system). There might be other countries. Any suggestions welcomed.
I am particularly for a focus on China because I can get access to China-related stocks much more easily than companies which do Middle East or Brazil.
§ Sectors
In terms of these countries, low-priced water is a given. Hence, to expect huge tariffs hikes in these countries without the relevant public backlash might be unrealistic. Nonetheless, I note that China has proven an ability to hike prices in the recent years. More research need to be done here to ascertain the quantum of increase but it might still be better to play in segments with less risk of a public backlash.
Using our criteria list, we see that companies dealing with wastewater treatment plant and water recycling plants are the best placed to ride the trend. As water consumption increase, wastewater naturally increases. In particular, industrialization and urbanization often leads to hikes in wastewater volumes that need to be treated due to construction works. Wastewater plants may deal with the public (municipal) or it may not (industrial). Hence, you may have companies that do both and thus give you a portfolio of assets and exposures to both segments – one offering more stability (municipal), while the other offer the returns (industrial) Moreover, from a regulator’s perspective, a wastewater treatment plant kills two birds with one stone. Firstly, it helps increase supply of water as it reduces the pollution that brings water supply down. Secondly, it helps improve the pollution issue that governments are concerned with and help improve the overall standard of living.
Water recycling plants are equally attractive to a regulator because by recycling the water, you help to immediately increase the supply of water available (think x2) And recycled water is generally cheaper than other forms of new water supply (e.g. desalination) and suitable for use in industrial applications where water of high quality standards is not needed, which inevitably free up potable water for use by the general population. By the same vein, water recycling plants tend to concern themselves with the non-public sectors.
§ Companies
In these 2 sectors, I am personally for operators because I like the associated cashflow stability and the asset-heavy nature of the business. Makes it easier to value. Plus, volumes and in turn utilization should go up as demand growth is pretty rapid in emerging markets like China, especially with the rate of urbanization and industrialization which lead to increase in wastewater volumes.
Using our criteria list, we see that companies dealing with wastewater treatment plant and water recycling plants are the best placed to ride the trend. As water consumption increase, wastewater naturally increases. In particular, industrialization and urbanization often leads to hikes in wastewater volumes that need to be treated due to construction works. Wastewater plants may deal with the public (municipal) or it may not (industrial). Hence, you may have companies that do both and thus give you a portfolio of assets and exposures to both segments – one offering more stability (municipal), while the other offer the returns (industrial) Moreover, from a regulator’s perspective, a wastewater treatment plant kills two birds with one stone. Firstly, it helps increase supply of water as it reduces the pollution that brings water supply down. Secondly, it helps improve the pollution issue that governments are concerned with and help improve the overall standard of living.
Water recycling plants are equally attractive to a regulator because by recycling the water, you help to immediately increase the supply of water available (think x2) And recycled water is generally cheaper than other forms of new water supply (e.g. desalination) and suitable for use in industrial applications where water of high quality standards is not needed, which inevitably free up potable water for use by the general population. By the same vein, water recycling plants tend to concern themselves with the non-public sectors.
§ Companies
In these 2 sectors, I am personally for operators because I like the associated cashflow stability and the asset-heavy nature of the business. Makes it easier to value. Plus, volumes and in turn utilization should go up as demand growth is pretty rapid in emerging markets like China, especially with the rate of urbanization and industrialization which lead to increase in wastewater volumes.
However, I recognize that the true potential might lie in EPCs who are transiting to an operator model. Such companies are preferred because their earnings stream will increase in stability, and this will lead to improved valuations as investors preferred that. Hence, therin lies an opportunity but as mentioned, there is a risk here because of the financing stress which the companies might face. it is important to have a sound funding model due to increased stress on funding that comes with the change in the business model. Hence, the companies best positioned for this will be companies who already have a portfolio of assets which they can create a trust with. They could list the trust and use the trust as a capital recycling vehicle. Being able to do a trust will see a marked improvement in the financing structure and will represent a growth inflection point.
Lastly, choose mid-size (small size?) companies, with low cost of funding.
So in a nutshell, mid-cap (small cap?) Chinese water companies in wastewater and water recycling sectors, transiting from EPC to BOT/TOT model and has a portfolio of assets to create a water trust with. Need also to have a successful track record of growth/winning contracts, so that the capital raised from the water trust is able to fund growth.
Lastly, choose mid-size (small size?) companies, with low cost of funding.
So in a nutshell, mid-cap (small cap?) Chinese water companies in wastewater and water recycling sectors, transiting from EPC to BOT/TOT model and has a portfolio of assets to create a water trust with. Need also to have a successful track record of growth/winning contracts, so that the capital raised from the water trust is able to fund growth.
Now, you just have to find that company!
"Mama say waterrrr is goooddd" - From the movie Water Boy
Water Analysis - Part I
Had an interest in water. Did some research. Here's some excerpt of my research:
1. Current Status
1.1. Global Distribution of Water
There is roughly 1.4bn km3 of water on Earth, of which 35m km3 (2.5%) is freshwater.
Of the total amount of water used globally, 65% is from surface water (rivers, streams and lakes). Just over 20% of water used globally is from groundwater.
1.2. Global Water Demand-Supply Balance
In aggregate, there is sufficient fresh water to meet global demand.
We only need10.5m km3 of freshwater to adequately supply the current 6.5 billion global population.
According to United Nations World Water Development Report, 2007 – providing universal access to the basic minimum of 50 litres a day per person would mean re-distributing just 1% of the amount of water used currently.
§ Key Issues
Hence, the key issue is not insufficient water globally but insufficient water locally. If we could export water to places where it is needed, then the problem will be solved.
But the water demand-supply balance is a very location-centric issue. Essentially, there is insufficient water supply in areas where we demand water. Particularly, the concentration of water demand in a smaller geographical area has increased stress on water supply.
In these areas particularly, the supply of water is falling even as demand for water is rising.
Moreover, the volatility/variance in water supply has also increased
At the core of it, it is a question of distribution of freshwater resource given spatial and time variations in its natural delivery – i.e. matching demand to supply.
Where we can’t effectively match demand to supply, the solution is to decrease demand and increase supply.
§ Measures of Water Deficiency
There are two measures of water deficiency as defined by the UN:
a) The absolute standard
Water stressed: <1700m3/person
Water scare: <1000m3/person
b) The relative standard – ratio of water demand relative to supply
High relative water stress: Demand/Supply >40%
Medium-high water stress: 20%> Demand/Supply > 40%
1.3. Global Water Supply
§ Overuse
Sharp falls in groundwater levels (in India, Australia, China and parts of the US, in particular) and natural reservoirs (for example, the Aral Sea) illustrate the unsustainable nature of water consumption patterns.
§ Pollution
Pollution has further reduced the available resource.
As one measure of river pollution, we can look at the Biological Oxygen Demand (BOD) of water. This is a chemical procedure for determining the rate of uptake of dissolved oxygen by the biological organisms in water. The higher the BOD reading, the worse the level of pollution.
§ Climate Change
Climate change will affect the volatility of water supply – where, when, how much and how water falls,
One of the main impacts of global warming is on glacial river flow. If the glacier disappears then so does the river (at least in the dry season).
In Australia, shifts in rainfall patterns (attributed to climate change) saw inflows into dams decreased by between 30% and 70%, according to the Australian Water Services Association. Brisbane came close to running out of water before rain late last year, according to the Australian Water Association.
It might also affect the overall level of water available in the system
1.4. Global Water Demand
3 main sources of water demand
1) agricultural demand – 70%
2) industrial demand – 22%
3) domestic demand – 8%
§ Increase in Population
Increase in population will naturally increase the overall water use.
§ Increased Water Usage per Capita
Not only has population been increasing but water usage per capita has increased too. This is natural given that water is a normal good and as GDP per capita increase, its consumption per capita will rise.
Growth in water usage has significantly outstripped population growth for three broad reasons:
(i) Rising real incomes have increased the demand for food and more water intensive food groups
(ii) Growth in industrial processes has added to greater demand for water
(iii) Tech advances & urbanization make it more convenient for people to use in greater quantity
§ Intensity of Demand
Rural/urban migration is increasing the stress on the supply/demand balance for two reasons:
(i) Increased water usage due to increased accessibility to water
(ii) a greater concentration of consumers in a smaller geographical area typically places increased pressure on neighbouring water resources (i.e., local water tables)
2010年1月20日星期三
ARA Update
I still do not have time to write up a summary of the lengthy ARA analysis. My apologies.
I have time, however, for a quick update. On 13 Jan 2010, the Business Times reported that ARA is going to set up a REIT with CWT. This was mentioned in passing in a short paragraph in an article that is almost totally irrelevant (it was about the future of SGX as a listing ground). Makes you wonder if it was a deliberate leak. I take that back, lest I get sued.
On 14 Jan 2010, ARA and CWT came out and clarified that they are planning to put together a logistic REIT but nothing is firmed up. SGX has yet to provide the approval. But given that SGX is desperate to get more listing fees (especially since few Chinese co. are listing here, many are planning to go HK and the newest sign of desparation - proposing to allow SPAC (essential a backdoor vehicle for an SGX listin) on the exchange), this is unlikely to get in the way. The deal is more likely to fall through if ARA and CWT can't agree on the terms between themselves.
The potential listing of this REIT was first highlighted in the previous posting(s). And you know that favourite pet phrase they use on TV? I am going to say it - And You Heard It First on wIy.blogspot.com!
Stock has gone up in tandem since the announcement. Makes you wonder why it didn't move when they annouced the cooperation with Regency Group. Was it already all priced in before the annoucement? (someone knew someone who know someone who knew and had all bought the stock?) Or did the lack of price movement merely reflect an inefficient market and the price should move up further to price that in?
Something to mull on - investment food for thought.
I have time, however, for a quick update. On 13 Jan 2010, the Business Times reported that ARA is going to set up a REIT with CWT. This was mentioned in passing in a short paragraph in an article that is almost totally irrelevant (it was about the future of SGX as a listing ground). Makes you wonder if it was a deliberate leak. I take that back, lest I get sued.
On 14 Jan 2010, ARA and CWT came out and clarified that they are planning to put together a logistic REIT but nothing is firmed up. SGX has yet to provide the approval. But given that SGX is desperate to get more listing fees (especially since few Chinese co. are listing here, many are planning to go HK and the newest sign of desparation - proposing to allow SPAC (essential a backdoor vehicle for an SGX listin) on the exchange), this is unlikely to get in the way. The deal is more likely to fall through if ARA and CWT can't agree on the terms between themselves.
The potential listing of this REIT was first highlighted in the previous posting(s). And you know that favourite pet phrase they use on TV? I am going to say it - And You Heard It First on wIy.blogspot.com!
Stock has gone up in tandem since the announcement. Makes you wonder why it didn't move when they annouced the cooperation with Regency Group. Was it already all priced in before the annoucement? (someone knew someone who know someone who knew and had all bought the stock?) Or did the lack of price movement merely reflect an inefficient market and the price should move up further to price that in?
Something to mull on - investment food for thought.
2010年1月4日星期一
The Fallacy of Debt/GDP
If you read the news, you will often read about economists, politicians and god knows who opining on countries having excessive debt/GDP ratio and it is all unsustainable because a debt/GDP ratio is bad. Now before you accept that and go down the street with a placard saying that the world is going to end, hang on and think - does it make sense?
What does debt/GDP ratio measure? GDP is akin to the income that a country makes annually - not unlike what my annual income is to me, which by the way is pathetic. So debt/GDP = debt/annual income.
To see why the debt/GDP ratio does not make sense, let us draw a parallel to a common situation that many of us have found or will find ourselves in. Let's say you want to borrow some moola from the bank. What does the bank look at when assessing whether to lend you some money? The bank will look at your debt/asset ratio. The bank will also look at your interest coverage ratio - income/interest payment. But does it look at your debt/income level? No! Because it doesnt make sense. The comparison is flawed because there is no basis of comparison between the numerator and denominator.
The correct way to see it is to look at the debt of a country versus its assets. But admittedly, it will be hard to identify and place a value of the asset. An alternative is to look at the debt payments versus the tax revenue of the country - a much easier analysis. And undoubtedly a more correct one. Moroever, this measure makes more sense, because when we talk about sustainability, we also bring into the concept of solvency - the ability to meet payments. A interest coverage ratio for the country shows that. A debt/GDP ratio does not.
I have yet to done the requisite work to prove this but I am pretty convinced that if we measure sustainability by a debt/asset or a debt payment/tax revenue method, we will see that many countries that are deemed to have a non-sustainable debt level is actually pretty much sustainable.
To include an additional dimension to the analysis, let us expand on the concept of sustainability. Sustainability does not just include the concept of interest coverage and leverage but also the ability to roll over debt. And also equally important - at what terms does the debt get rolled over at? Unlike an individual or a corporation, the government/country is in a unique position to influence the cost of debt. This is because the cost of debt is partially determined by the market (investors) and by the existence of alternative investments which price or return is partly determined by the country's monetary policy. And many a times, the reason why a country's debt gets to roll over may not be based solely on sustainability of the country's fiscal position but could very much be contingent on other factors not dissimilar to factors that influences a bank decision to lend more to existing high risk clients - e.g. a country is too big too fail.
In conclusion, I put forth the hypothesis that many countries have a sustainable debt level if measured by the correct measure. And if that is true, all these concerns by renowned economists are over-hyped. And if the markets move in fear of such concerns, that will represent a golden opportunity to profit at the misinformation of the masses.
What does debt/GDP ratio measure? GDP is akin to the income that a country makes annually - not unlike what my annual income is to me, which by the way is pathetic. So debt/GDP = debt/annual income.
To see why the debt/GDP ratio does not make sense, let us draw a parallel to a common situation that many of us have found or will find ourselves in. Let's say you want to borrow some moola from the bank. What does the bank look at when assessing whether to lend you some money? The bank will look at your debt/asset ratio. The bank will also look at your interest coverage ratio - income/interest payment. But does it look at your debt/income level? No! Because it doesnt make sense. The comparison is flawed because there is no basis of comparison between the numerator and denominator.
The correct way to see it is to look at the debt of a country versus its assets. But admittedly, it will be hard to identify and place a value of the asset. An alternative is to look at the debt payments versus the tax revenue of the country - a much easier analysis. And undoubtedly a more correct one. Moroever, this measure makes more sense, because when we talk about sustainability, we also bring into the concept of solvency - the ability to meet payments. A interest coverage ratio for the country shows that. A debt/GDP ratio does not.
I have yet to done the requisite work to prove this but I am pretty convinced that if we measure sustainability by a debt/asset or a debt payment/tax revenue method, we will see that many countries that are deemed to have a non-sustainable debt level is actually pretty much sustainable.
To include an additional dimension to the analysis, let us expand on the concept of sustainability. Sustainability does not just include the concept of interest coverage and leverage but also the ability to roll over debt. And also equally important - at what terms does the debt get rolled over at? Unlike an individual or a corporation, the government/country is in a unique position to influence the cost of debt. This is because the cost of debt is partially determined by the market (investors) and by the existence of alternative investments which price or return is partly determined by the country's monetary policy. And many a times, the reason why a country's debt gets to roll over may not be based solely on sustainability of the country's fiscal position but could very much be contingent on other factors not dissimilar to factors that influences a bank decision to lend more to existing high risk clients - e.g. a country is too big too fail.
In conclusion, I put forth the hypothesis that many countries have a sustainable debt level if measured by the correct measure. And if that is true, all these concerns by renowned economists are over-hyped. And if the markets move in fear of such concerns, that will represent a golden opportunity to profit at the misinformation of the masses.
2010年1月1日星期五
Summary of "The General Theory of REIT Investment"
· Best REIT to buy is the one that can make yield accretive investments (raise DPU across time)
1. Discount to P/B
2. Sufficient cash on book so that they do not need to raise eqty to make acquisitions
3. Gearing is low so that don’t have to raise eqty to bring gearing down in order to make acquisitions
4. Able to secure low cost of debt and high leverage
· In circumstances where it is the best time to buy REITs, it is generally good for any real estate stock. So you are better off buying higher beta real estate stock in this environment.
· If you are buying REITs for yield, a REIT may be inferior to a fixed income product.
· Bond + developer stock may give a better risk/reward proposition than REIT+ developer stocks
· Angle 1: LT Hold – Buy when DPU is at a level below the average LR average level and is going up.
· Angle 2: ST Hold – Buy REITs when they are super depressed P/B wise and you buy to get an income stream while waiting for a recovery in the real estate/eqty mkt so that the share price moves up
1. Discount to P/B
2. Sufficient cash on book so that they do not need to raise eqty to make acquisitions
3. Gearing is low so that don’t have to raise eqty to bring gearing down in order to make acquisitions
4. Able to secure low cost of debt and high leverage
· In circumstances where it is the best time to buy REITs, it is generally good for any real estate stock. So you are better off buying higher beta real estate stock in this environment.
· If you are buying REITs for yield, a REIT may be inferior to a fixed income product.
· Bond + developer stock may give a better risk/reward proposition than REIT+ developer stocks
· Angle 1: LT Hold – Buy when DPU is at a level below the average LR average level and is going up.
· Angle 2: ST Hold – Buy REITs when they are super depressed P/B wise and you buy to get an income stream while waiting for a recovery in the real estate/eqty mkt so that the share price moves up
The General Theory of REIT Investment
What is the Best REIT to Buy – The REIT That Can Make Yield Accretive Investments
Ceteris paribus, a REIT that can only make yield accretive investment is the one where div yield < leveraged asset yield. And that’s only possible when P/B >1
But it doesn't make any sense to buy something at P/B>1. Might as well go buy actual asset (if you can afford).
When P/B <1,> leveraged asset yield. Unless they make investment without raising new eqty.
Buying asset at discount is good (i.e. P/B <1).
But if REIT wants to make acquisitions and they do it via eqty raising (because they don't have enough cash), then it will bring yield down
We assume that book is asset – debt = eqty. There might be some random stuff within assets which is not the property.
So the best REIT to buy is the one that can make yield accretive investments (raise DPU across time)
1. Discount to P/B
2. Sufficient cash on book so that they do not need to raise eqty to make acquisitions
3. Gearing is low so that don’t have to raise eqty to bring gearing down in order to make acquisitions
4. Able to secure low cost of debt and high leverage
When is the Best Time to Buy REIT – When DPU will increase for the overall market
So far, we have been assuming ceteris paribus. So what is it that we have been holding constant?
1. Cost of debt
2. Amount of debt (Leverage)
3. Yield on assets
4. Capital values
Asset acquisitions may give a leveraged asset yield > dividend yield if
1. cost of debt continues to go down,
2. amount of leverage possible go up,
3. yield on new assets higher than existing assets
4. capital values going up
Capital values affect debt capacity. So when capital value go up, leverage possible can go up. Or when the credit market is looser – when banks are ready to lend more as % of asset.
Yield on assets increases when rents are expected to go up or when capital values are falling but rents are falling proportionately less because of mitigating factors such as long-term leases in place/rent escalation clauses, etc. (the latter don't hold because the capital value that matters is the price u paid for)
The best time to buy REIT is when
1. Cost of debt is expected to stay low or go lower
2. Credit environment improves – leverage % increases
3. Yield on assets are expected to go up - rents are going up
4. Capital values going up
But in circumstances where all these applies, it is generally good for any real estate stock. So you are better off buying higher beta real estate stock in this environment.
Why You Want to Buy REIT
Hence, the only reasons you want to buy REITs are
1. You want something with supposedly less volatility (REITs may not be less volatile?);
2. You have a yield objective that higher beta real estate stocks like developers can’t provide.
In the long run, you should only be able to achieve the average asset yield enhanced by the average level of leverage at the average cost of debt (aka the average leveraged asset yield)
· Because you buy REIT mainly for the income, you have to MIN[capital risk].
· Because this is a stock, not a fixed income product, you may not get back your capital at the end of the day, depending on the stock price.
· So in fact, REITs may be a less attractive proposition relative to some high-grade corporate bonds, where you face lower risk of default, better chance of getting something back if they default because you are a debtor not an equity holder, you are assured of your capital after X year and you may enjoy a higher return. Plus, your yield (DPU/your entry price) is not secured because of potential capital raising (your yield is volatile)
· The downside of bonds is that you may have no, if limited, capital upside. Movements in REIT’s share price arguably give you a capital gain component. But remember, the time when it is positive for REIT is when it is good for the general real estate sector. So buy higher beta stocks if you want to benefit from the upside. REITs are only good for income? --> I guess the other angle is to buy REITs when they are super depressed P/B wise and you buy to get an income stream while waiting for a recovery in the real estate/eqty mkt so that the share price moves up (i.e. get dividend stream when waiting) --> REIT are good in a depressed eqty mkt.
· The downside of bonds is that it is not inflation-adjusted. Rental stream of real estate arguably is. But may not be true because if you look at the rental levels of real estate, it has not been going up across time (e.g. SG office rent). However, one may say inflation is take into account using the rental escalation clauses. But this only works if you have such clauses. Such clauses do not exist for office market
Hence, a REIT may be inferior to a fixed income product. So you may want to consider corporate bonds instead.
REITs may be combined with real estate developer stock to give you a better risk/reward proposition. But in view of the above analysis, bond + developer stock may give a better risk/reward proposition. Diversification works better across asset classes (eqty + fixed income) May not work well in the same asset class and especially same industry class.
But if you still really really want to buy REITs……
When Is REALLY The Best Time to Buy REITs
Angle 1:
Given that you want to min capital risk, you need to buy in at a level where you are most unlikely to face capital dilutive issues.
Hence, you need to buy in at a level where
1. yield is sustainable,
2. leverage is sustainable,
3. cost of debt is sustainable
4. rental rates are least volatile – govt regulations involved
AND THIS WILL ONLY WORK IF YOU HOLD FOR THE LONG-TERM (10,20years?)
· So idea is not max yield but max sustainable yield.
· Buy in at a level where DPU is sustainable in the long run and expected to keep going up – Imagine a curve where DPU oscillates across time like.
· So best to buy when DPU is at a level below the average LR level and is going up. The ideal is bottom of DPU curve.
Angle 2:
Buy REITs when they are super depressed P/B wise and you buy to get an income stream while waiting for a recovery in the real estate/eqty mkt so that the share price moves up (i.e. get dividend stream when waiting)
Therefore, REITs are good in a depressed eqty mkt where you wait for the upturn.
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