Singapore Stocks - Bargain Hunting

After a dramatic plunge below 3,000 points in February, the benchmark Straits Times Index has since recovered to close above. Yet a good many stocks remain undervalued or underowned. In this post, we will highlight 2 stocks – CWT and CSE Global.

CWT

CWT has 2 main business segments, logistics and Commodity SCM business. CWT is trading at 6.4x FY14F PER, representing a steep discount to its peers (average 16.7x). CWT has traded down from its 52 week high of $1.83 due to over-estimation of risks in Commodity SCM and lack of clarity on earnings growth ahead. The volatility in earnings due to its commodity related business has caused investors to reduced ownership of the stock. However the Commodity SCM business is less risky than perceived as CWT fully hedges prices in its Commodity SCM business, rendering the trades back-to-back and eliminating risk of losses through adverse price movements. Also, its main logistics business is expected to grow at 16% with the addition of redeveloped Jurong East Logistics Centre, Cold Hub 2 and Pandan Logistics Centre.

CSE Global

CSE Global is another stock that has underperformed the STI but have paid dividends over the last 12 months. CSE’s FY13 bottomline took a hit as it made provisions for project cost overruns amounting to S$8.1m. Following the successful divestment of CSE Global’s entire shareholding interest in Servelec Group in Dec last year, the company can now focus on driving its growth largely from the oil and gas sector. CSE has significant exposure to the Gulf of Mexico and the company is expected to benefit from the on-going recovery following the ill-fated Macondo oil spill incident and the imminent liberalisation of the Mexican oil and gas market.

Beside these 2 stocks, investors can also screen stocks that are undervalued by a few parameters such as positive free cash flow, a high dividend yield, low debt to equity ratio. The Edge Magazine in a February article did a screening of Singapore stocks that have underperformed the STI. pay a dividend, generate free cash flow and are in a net cash position. The screen produces stocks such as Chosen Holdings, Civmec, Keong Hong Holdings, F&N, Smartflex Holdings and TTJ Holdings

Income Investing: Low Key Contractor with Good Dividend Yield - Lum Chang

This is an excerpt of article which appeared in the Edge on 29th April 2013

Family-controlled Lum Chang Holdings does not attract much attention in the market. Yet, the decades-old contractor is an interesting play on Singapore’s property and infrastructure boom. And, its dividend of two cents per share provides investors with a steady dividend yield of about 6%. Its market value of just $123.8 million is currently a 28% discount to its book value of $173.2 million. The company also has a liquid balance sheet, with a net cash position of $33 million as at end-2012.

Much like other contractors, Lum Chang has taken stakes in property development projects. For instance, it has a 30% stake in Twin Fountains, an executive condominium (EC) development in Woodlands. The remaining stake is held by Frasers Centrepoint. The project was sold out swiftly earlier this month. The company also has a 20% stake in another joint venture with Frasers Centrepoint to develop Esparina Residences, an EC located in Sengkang that is due to receive its temporary occupation permit (TOP) at end-2013.

The company’s forte lies in the construction of commercial buildings. They do a lot for companies such as Ascendas and LaSalle [Investment Management]. LaSalle was the partner in some projects such as Twenty Anson which was a joint venture. Lum Chang took a minority stake in Twenty Anson and constructed the building. In March last year, LaSalle and Lum Chang sold Twenty Anson to CapitaCommercial Trust for $430 million.

Lum Chang’s share of the profit was $6.3 million. Lum Chang was also the contractor for Crowne Plaza hotel at Changi Airport, a development that was owned by LC Development and a fund managed by La- Salle. LC Development is linked to the family that controls Lum Chang. The hotel was sold to Overseas Union Enterprisefor $299.5 million in 2011.

Lum Chang’s construction order book stood at about $600 million as at Dec 31. Its ongoing property development-related construction work comprises six projects. Two of these projects are for Ascendas: Nucleos in Biopolis Road and a business park development in Science Park Drive. Lum Chang is also building The Metropolis for Ho Bee Investment at Biopolis, Ripple Bay Condominium for MCL Land in Pasir Ris, and Esparina Residences.

RIDING THE MRT EXPANSION
Lum Chang’s largest project is the $450 million contract (officially named C912) to build an MRT station and a 1.8km cut-and-cover tunnel for Downtown Line Phase 2 in the Bukit Panjang area. The station will be largely underground with two basement levels and provisions for future underground pedestrian walkways to adjacent developments.

Lum Chang is trying to secure more MRT-related work but competition is stiff. Notably, the company tendered for a few projects for Downtown Line Phase 3 (DTL3), but failed to secure any work. “We found that if we tendered for standard stations, we were competing with a lot of players who could do it for less,” Fong admits.

In the meantime, Lum Chang is also looking into bidding for other types of infrastructure-related work, such as roads and highways. “We did the water reclamation plant at Changi. That is the deepest tunnel we have done,” Fong adds.

MALAYSIAN PROPERTY ARM

Credit: Bloomberg

Lum Chang also has a foothold in Malaysia, where it develops property. They are exploring the KL MRT project at the moment. The company’s main project in Malaysia is a 125-acre plot of land in Cheras on which it is developing landed property in phases. It’s about 600 units and just over RM1 billion [$407.7 million] worth of development.

The company also owns 30 acres in an area called Kemensah, just north of Zoo Negara, which is being developed into luxury bungalows.

Interestingly, Fong, executive director of Lum Chang, says profit margins for property development projects in Malaysia are higher than in Singapore. “Land is much cheaper; construction is cheaper in Malaysia than in Singapore,” Fong says. However, under its accounting policy, the company does not recognise revenue and earnings from its property development interests in Malaysia and its EC developments in Singapore. “We’ve got to wait till TOP,” Fong says.

Hence, Lum Chang’s reported revenue and earnings tend to be lumpy. For 1HFY2013 (the company has a June year-end), it reported a 202% rise in revenue to $67 million and a 220% jump in earnings to $12.1 million. Fong says this was because of the completion of certain phases of its projects, but warns that the same level of revenue and earnings might not be achieved in 2HFY2013.

“The nature of our business is project-based, so profits and revenue have a lot do with accounting policy,” Fong says. “And, it’s a bit lumpy in terms of profits because it depends on when projects finish.” Another uncertainty for investors is labour costs as the government tries to scale down the import of foreign workers, he adds.

LONDON INVESTMENT
To improve stability of income, Lum Chang made a property investment earlier this year. In February, it said it had bought property located at 42-60 Kensington High Street, London for £40.19 million ($76.8 million). “Our income will be mainly from the ground floor, achieving rental income from shops such as Zara, Topshop and Miss Sixty. The leases there are very long, 10-year leases and these will provide a good steady income,” Fong says.

The yield of the London property works out to 4.5%, giving an annual income of $3.4 million, according to a report by UOB Kay Hian. That is about 15% of the company’s earnings for FY2012. “We’ve always been project-based, either property development or construction,” Fong says. “We felt we should go for another line of business that could generate sustainable income.

Fong says Lum Chang is now looking for more ways to expand its recurring earnings base. “We are open to diversifying,” he says, adding that the company is already looking at one interesting project. “The operations would allow us to receive sustainable income for decades,” he says, declining to provide more details. Another opportunity Fong sees for Lum Chang is the refurbishment of old commercial buildings.

“A lot of old commercial buildings are looking tired. Instead of tearing them down, landlords are building extensions. We could be involved in doing that,” he says.

Lum Chang has paid a dividend of two cents per share for the last three financial years. “Our shareholders are usually the older generation who have been holding [our shares] for years and they want regular income,” Fong says. In fact, the dividend payout was raised from 1.5 cents per share to two cents in FY2010. “We felt our profits had stabilised and two cents is something which is quite achievable and sustainable over the medium term,” Fong says.

Lum Chang does not have much of a following among analysts, though. However, UOB Kay Hian notes that the stock appears to be inexpensive. “Trading at 0.8 times price to book looks reasonable when compared with peers’ average of one time,” the brokerage states in a report. “Since FY2010, Lum Chang has maintained a net cash position. Its stock price is underpinned by cash reserves of $77 million as at Dec 31, which accounts for 62% of its market cap.”

Amid the hunt for yield, Lum Chang seems a good alternative to real estate investment trusts and consumer-oriented stocks that have run up sharply over the last couple of years. The company has maintained its dividend payment of 2 cents over the last 3 years and it has increased its revenue and profit

Based on the S&P report on Lum Chang, LCH’s order book currently stands at SGD474 mln. Construction sector outlook remains sanguine as the Government continues to accelerate infrastructure spending to keep in line with population expansion. This is a stock with good dividends and at the same time allow investor to participate in the growth of the construction sector

Finding Undervalued Singapore Stock: Ocean Sky - update

Ocean Sky was first featured on this blog 6 months back as an undervalued stock (refer to article). Apparently, I am not the only one who thinks that Ocean Sky is undervalued, Ezion (a hot stock considered by many local investor) announced that they are proposing to inject its marine supply base asset into Ocean Sky at cost via a share swap. Post exercise, Ezion will hold 45.15% in Ocean Sky while the latter will have a 2% stake in Ezion. This is a strategic move to enable Ezion to tap into the growth potential of the marine supply base business in Australia without stretching its balance sheet and resources further, while allowing the company to stay focused on its core liftboat and service rigs business.

Ezion will issue 20.2m new shares @ S$2.351 per share in exchange for 440m new shares in Ocean Sky @
S$0.108 per share. In addition, Ezion will have the right to subscribe for an additional 165m shares @ S$0.108, which would raise its stake in Ocean Sky to c.50%.

Upon conclusion of the deal, the existing Chief Operating Officer (COO) of Ezion – Captain Larry Glenn Johnson - will join Ocean Sky as Chief Executive Officer (CEO) to spearhead the marine supply
base business.

Read more details of the deal by downloading report here

Five best performing S-REITS in 2013

The five best performing REITs since the end of 2012 have included two REITs that invest mostly in properties in Singapore, one that invests in properties in Hong Kong, one that invests in properties in Japan and one that invests mostly in properties in Indonesia, according to an My Gateway email update by the Singapore Exchange.

Total returns (including dividends) of the REITs in 2013 YTD have ranged from -11.1% for CapitaRetail China Trust to + 13.3% for Parkway Life REIT.

Real Estate Investment Trusts (REITs) invest in professionally managed real estate assets. With three new listings this year, SGX now lists 25 REITs that are governed by the Collective Investment Scheme. The 25 REITs listed on SGX are varied by the type of properties in the portfolio in addition to the location of those properties. Five invest solely in international properties while nine hold both international and Singapore real estate. There are 11 REITs that have their entire portfolio currently made of Singapore properties.

In the 2013 year thus far, the FTSE ST REIT Index has declined 1.5% on a total return basis which takes into account weighted price appreciation and dividend distributions. This has followed on from a total return of 46.2% for the 2012 year.

Attuned with the status of an Asian REITs hub, just two of the five best performing REITs since 2012 are investing mostly in Singapore properties. The five best performing REITs since 2012 include Fortune REIT which invests in residential-related properties in Hong Kong, Saizen REIT which invests in residential-related properties in Japan and First REIT that invests mostly in health care related properties in Indonesia.

Value Investing Presentation by Aggregate Asset Management

I recently watched this presentation by Aggregate Asset Management on "The Scientific Approach to Achieving Double Digit Returns Using Value Investing" that was posted on the "InvestmentMoats" blog. In the presentation, they showed how buying a basket of low PE and P/B stocks would return an annual return of 14% - 15%. They also shared some common investment knowledge. For readers who have been investing for quite a while might not pick up any new investing knowledge or stock tips however I still think that this video is a good watch (especially since it is coming from local fund manager that has recruited Business Times editor Teh Hooi Ling)

Singapore Stocks Investing Strategy: DBS Vickers

This is a report issued by DBS Vickers on 26th August when the market sell down due to anticipation of QE tapering (now that we know that there is no QE tapering, we probably can expect a rebound in the STI)
In this report, they had recommended the following stocks:

1. Technology stocks are early recovery plays – CSE and Venture have significant exposure to US/Europe and offer attractive yields of 4.7% and 6.7% respectively. CSE’s proposed listing of its UK subsidiary could lead to a dividend bonanza on successful listing.
2. Selected industrials – Ezion and Goodpack will leverage on their niche positions in the global arena.
3. Stocks with earnings visibility supported by yield such as SingPost, Comfort Delgro,.ST Engineering and Hutchison Port

Click here to access the report

Other articles on SG stocks investing strategy
Hunting for Value In Singapore Stocks
SG Stock Investing Strategy: UOB Kay Hian
Invest Like Benjamin Graham in Singapore Stocks

Jim Rogers Take Initial Stake in Geo Energy Resources

Jim Rogers is a renowned international investor and his stocks picks are scrutinized by retail investors. He has authored many top seller books such as Street Smarts: Adventures on the Road and in the Market and Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market

It was reported in The Edge that International investor James Beeland Rogers Jr, better known as Jim Rogers, has started building his direct stake in Geo Energy Resources. On Aug 22, Rogers acquired 1.7 million shares in the coal mining and trading company at 35.5 cents each. The acquisition was Rogers’ first direct investment in Geo Energy, bringing his direct interest in it to 0.15%.

He is also deemed interested in another 0.17% of the company, owing to an agreement with executive chairman Charles Antonny Melati, granting Rogers a call option over two million of Geo Energy shares belonging to Melati. The call option’s exercise price is 35 cents a share, with an exercise period of 10 years, starting from Jan 1, 2015. Rogers was appointed a non-executive director of Geo Energy in December 2012.

For 2QFY2013, Geo Energy reported a 7% increase in earnings to US$5.1 million ($6.51 million) from a year ago on the back of a 25% increase in revenue to US$32.2 million. Group revenue rose from the increase in coal production and sales from its mining concessions in Kutai Barat in East Kalimantan, increase in equipment rental income, and additional revenue from mining services and coal trading, despite lower average selling prices of the coal it produced at its mining concession.

Gross profit margins fell 8 percentage points to 30% on the back of lower margins commanded by its coal trading and mining services business, compared to the coal sales from its cooperation contracts, which were terminated in September 2012, and its East Kalimantan mining concession.

Jakarta-headquartered Geo Energy, listed on the SGX Mainboard in October 2012, raised about US$63.7 million in net proceeds. It planned to use the proceeds for the acquisition of additional mining equipment and machinery, the construction of a jetty and barge loading facilities for the mining licences it has already obtained, potential M&A, and working capital. On the first day of trading, more than 323.2 million of its shares changed hands, and it closed at 43.5 cents, more than 33.8% above its offer price of 32.5 cents. The stock closed at 36.5 cents on Aug 28.

Click here for other articles related to Jim Rogers:

Jim Rogers will buy Gold Aggressively at $1200 per Ounce

Top 30 Singapore Stocks for 2nd Half of 2013

With the recent sell-down in STI, it is a good time for bargain hunters to shop for stocks with good fundamentals and growth. OSK-DMG has recently released its 2013 edition for institutional clients (and it's not for sale).This is the third compilation of their top 30 picks since 2011. The 2012 edition of our Small Cap Jewels made quite a splash. According to Terence Wong, head of Research, "Over 70% of the stocks we picked made money, with the biggest companies making the most." Hence readers can reference their picks for 2013. They include companies that have consistently done well over the past few years (OSIM and Ezion), turnaround plays (Midas Holdings and Eu Yan Sang), established players in their own fields but not covered by any analysts (Sinarmas Land), and yield plays (UMS Holdings).

In terms of sectors, oil and gas, construction, and consumer feature prominently, with five to six companies from each sector making the list. Overall, about half of the counters are new entries. OSK-DMG has no rating on five of the companies —Mencast Holdings, Pan-United Corp, Sinarmas Land, Tiong Woon Corp andYongnam Holdings. Ezion, which is on the list for the third year, is the biggest of the 30 by market value, at about $2.3 billion. BBR Holdings is at the opposite end, with a market cap of about $80 million.


OSIM, another repeat entry, should continue to shine even after a strong run-up in the last couple of years, according to Wong. “Some people say ‘Nobody goes to their shops. How can they make money?’ But OSIM has managed its expenses so well that as long as they sell one massage chair a day per store, they will make money, and these guys have been doing it.”


In particular, sales in the China market are expected to continue increasing, he adds. “[OSIM CEO] Ron Sim believes so much in brands. He is bringing TWG Tea to China. That’s why he set up a very posh outlet in IFC Mall [in Hong Kong], which is a springboard for OSIM to China. I think that’s going to yield dividends for the company.” OSIM owns 45% of TWG.

TURNAROUND PLAYS
As for stocks with a recovery theme, Wong tips Eu Yan Sang as one to watch. A company in Australia it invested in two years ago ran into cash-flow problems and eventually came under receivership. Eu Yan Sang took it over but has lost more than $8 million trying to turn the business around. As part of efforts to get it back on its feet, the traditional Chinese medicine maker expects to run more outlets on its own in Australia than award franchises to third parties. Of its 82 stores Down Under, 51 are run by franchisees.


Eu Yan Sang’s chief financial officer Lam Chee Weng expects the Australian operation to break even in 2015. In the meantime, the group is looking to boost sales by introducing products with some elements of Western medicine. “The first wave of TCM products with an infusion of Western medicine will be introduced by early next year. At the same time, we will introduce some of the products we already have in Australia to markets in Singapore, Malaysia and Hong Kong,” Lam says.

Another recovery play OSK-DMG recommends is Midas Holdings. Its current share price is less than half of its 2010 peak of $1.16, plagued by poor global investor sentiment towards China’s rail sector as a result of fatal train collisions and corruption by senior government officials in recent years. Orders have started to pick up, though, and Midas CEO Patrick Chew is prepping up the company for new avenues of growth.

“We are still very much single-sector-focused, but we have formed a joint venture that manufactures aluminium alloy plates and sheets. We target to supply these products to Indonesia and to the whole transport spectrum, including aviation, automobile, railway and other engineering purposes,” says Chew.

Notably, prospects for the automotive market are promising, he adds. “Right now, cars in China are all made of steel. As part of the government’s initiatives to reduce emission, cars will change to aluminium bodies. This new plant is catered to the entire transportation segment. We do this to mitigate the risk of over-reliance on a single segment.”

Meanwhile, amid growing concerns about the health of China’s financial system, investors need not worry about how the country will fund its massive rail expansion, Chew adds. “We know investors are worried about funding. The former Ministry of Railways had debts of RMB2.8 trillion [$560 billion] on its books. It’s a big sum. We believe the Chinese government may take over all or part of the debt that is carried in the books of China Railway Corp so as to allow them to start from ground zero. CRC may also float its assets to raise funds from the market.” Previously part of the now-defunct Ministry of Railways, CRC is the country’s national railway operator.

NAM CHEONG, SINARMAS LAND

Besides Ezion, another one of OSK-DMG’s favourite stocks in the oil and gas space is Nam Cheong, which builds offshore support vessels. “Before I hooked up with Nam Cheong, I had this really, really bad impression of the sector because what they do, to me, is speculative buying,” says Wong. “But after checking out the company, I realised that it’s actually something different. They know their clients so well that they’ve managed to preempt their orders.

“Half of Nam Cheong’s orders come from Petronas. When Petronas requires vessels, they will knock on their door asking if they have any and [Nam Cheong] will go ‘Of course, but I’ll just charge you a higher fee.’ This is what Nam Cheong has been doing and their margins are getting richer.”


Among the non-rated companies in the top- 30 list, Sinarmas Land could be worth watching, according to Wong. With a market value of about $2 billion, the company is the largest Singapore-listed property group that has no analyst coverage.

Sinarmas Land, formerly known as Asia Food & Properties, is a major property developer in Indonesia, which accounts for up to 90% of its revenue. Controlled by the Widjaya family, the company is involved in all segments of real estate — residential, townships, commercial, retail, industrial and hospitality, including golf resorts. The bulk of its assets in Indonesia are held by its 50%-owned Bumi Serpong Damai, which is listed in Jakarta, with a market value equivalent to about $3.5 billion.

Sinarmas Land also owns commercial, residential and hospitality properties in Singapore, Johor, Chengdu and Shenyang in China, as well as London. In Singapore, it owns about 21% of Orchard Towers, a strata-titled commercial building. It attempted to sell its stake in Orchard Towers early this year through a tender, but did not proceed as the bids did not meet its expectations.

“We will try to unlock value when the opportunity comes,” says Robin Ng, executive director at Sinarmas Land. “It’s almost 100% leased at the moment. We enjoy good rental income from Orchard Towers, so we are not in a rush to dispose of it.”

The group also intends to generate more recurring income and expand its presence outside Indonesia. “That means we will look at investment properties in international markets,” says Ng. Property development makes up 80% to 85% of overall revenue at present. The company plans to lower this to 75%, with the rest of its revenue coming from investment properties, he says.

“London isn’t the only location we are looking at. Countries that we think could offer opportunities include Australia and the US,” says Ng. “What’s important is that the property has to generate cash flows and offer a good yield. There must also be good liquidity in the market. That gives us an exit plan if we decide to rebalance our portfolio.” Sinarmas Land is in a net cash position, with $811 million in cash as at end-June.

This blog has also previously featured Sinarmas Land Warrants which could be another way to invest in Sinarmas Land.

OUE Hospitality Trust: Banking on Singapore Tourism Growth

This is a report from UOB Kay Hian on the upcoming listing OUE Hospitality Trust. It gives an overall view of the assets in the trust and the distribution yield. This should be useful for investors interested in the IPO

Popular Holdings: Value stock trading below book value

In my search for investment ideas, I read extensively on investment website, blogs and publications. I recently come across an investment thesis for Popular Holdings from beyondproxy that I would like to share with readers. Most readers of this blog will be familiar with Popular. Popular has 64 stores in Singapore and is well known among Singaporean as a bookstore that sells storybooks and assessment books. Retailing and distribution of books, stationery and magazine is considered a boring and non-growth business. Besides books business, it is also involved in property business and publishing business. In the investment thesis outline, Popular Holdings is trading at below estimated book value of $0.29 and is estimated to be worth at least 35 cents

Below is the investment thesis for Popular Holdings from beyondproxy.com

Popular Group started in 1924 as World Book Company which was engaged in distribution & publishing of Chinese books in Singapore. In 1936 Group started retailing Books & Stationery in Singapore. Group started expanding regionally by setting up a bookstore in Malaysia. In 1949 Group established Publishing Business in Hong Kong to publish magazines & books in region. The company got listed on Singapore Exchange in 1997. In 2007 Group decided to diversify into Property Development Business. The reason for them to diversify into Property Development Business was that they wanted to mitigate risk in their portfolio by moving away from the sunset industry of Book Selling/Publishing to a Business where they can recycle their capital & generate cash flows. Over the last 6 years the Property Development Business launched 3 Projects : One of them is completely sold, 90% of another project has been sold & the 3rd project is recently launched. On retail front, Popular has 156 stores : 75 in Malaysia, 64 in Singapore & 17 in Hong Kong. It also has Publishing Business in Singapore, Malaysia, Hong Kong , Taiwan, China & Canada.

To sum up Popular Business can be divided into the following 3 categories:

• Retailing & Distribution : ( Books, Stationery, Magazines etc.)

• Publishing ( Publishing Books, Magazines etc.)

• Property Development ( Residential Property Developer)

Valuation
Concerns

• Selling Assessment & School Books: These are the books which are required by school children ( Singaporean have to study in local schools) & assessment books are the one which students read to complement their existing school material. This to me is stable ex-growth business in Singapore & Hong Kong while growing in Malaysia as Popular expands its presence across smaller towns in Malaysia.

• Selling Stationery: Again this is a stable business & on SSS basis revenue seems to be flat. Last year Popular has started getting into Office Stationery Business (which has bigger potential than Stationery Retailing).

• Selling Books : This business faces the greatest risk from Digitalisation as people move towards e-books. It set up stand alone book stores under brand name of Harris, Prologue etc. ( following concept of Kinokuniya, Borders). This business has not been successful & though company does not disclose it; these stores are loosing money. As a strategy Popular has been reducing the number of these stores & has been using existing book stores ( where it sells school books & stationery) to sell the books. Popular does not have a wide range of selection which e.g. Kinokuniya has but what it has is reasonable collection of best seller – so when the customers will visit shops for stationery, printer inks, assessment books etc. – they buy the books which are best sellers, children book etc. To attract customers to Buy books & stationery – the company has Popular Loyalty Card where membership is priced very attractive S$ 12 for 1 year & S$ 30 for 3 year. This card enables the customer 10% discount on all Popular Bookstores. This way if I have a Popular Card – I am able to Buy books at price lower than Kinokuniya – though I get less choice At Popular Bookstore.

Catalysts

Popular’s outstanding shares adjusted for Treasury shares are 819.25 mn shares. This means that the Market Cap is S$222 mn, long term debt S$16 mn (loan against property development), Cash S$125 mn; giving it EV of S$ 113 mn. Against this, it has Development Properties & Properties held for sale worth S$ 79 mn & S$ 12 mn. This means one is paying S$ 22 mn for its core Book Selling & Publishing Business. Please note that these properties are valued at lower of cost or realisable value. These properties realizable value according to our estimates is above Popular’s costs so value of property shown in Balance Sheet is on lower side than their market value. As a prudent approach, we assume that these Properties should be valued at cost.Though a lot of cash is required to run the Retail & Publishing business this cash still belongs to the company. So essentially we are buying Retail & Publishing for S$ 22mn.

Lets look into the so called sunset industry: Retail & Publishing. If you live in Singapore you can see Popular shops in all the malls. One has to look essentially at the kind of books sold in these stores which are books prescribed by school, assessment books and other such books with mainly academic content, popular titles for children’s literature at prices less than other leading stores and stationery. with emphasis on academics being an upward rather than downward trend the demand for such material is steady. It is a stable business with low margins, retail revenues being flat in FY09 (year of Global Financial Crisis) with profitability down in retail, while revenues & profitability being stable in Publishing business. These businesses generate both operating & free cash flow. These businesses have generated on an average S$ 23.8 mn PBT in the last 6 years & worse year being FY09 when they generated PBT of S$ 9.5 mn (Exhibit 1). Assuming tax rate of 22% in a worse year they would have made PAT of S$ 7.4 mn or on over 6 year average PAT of S$18.5 mn. We value it at 5x multiple to average 6 year Profits & fair Value for stock comes to S$ .355 cents. This gives investors upside of 35%. Please note at current prices market is valuing its Retailing & Publishing Business at less than 1x Cash Flows which consistently makes both Operating & Free Cash Flows. Digitalisation has been happening for sometime & this business has survived – so we believe it will last at least more than one year.

Popular Holdings — Segment Profit and Loss

The key question which potential investor may have is whether the profits are sustainable in the above two businesses. Digitalisation/e-book means that these businesses will have low growth & always raise concerns whether these businesses will survive. The company does not disclose the exact numbers product wise & following are my analysis. I reckon Publishing Business is already an ex-growth business & it complements Retailing Business. I assume revenues & profit will be flat from this business. The key debate in my mind is Retailing & Distribution which is a bigger business. This business can be divided into 3 parts which my understanding are almost equal revenue & profit-wise :

If Popular starts selling its Property (which are launched) then Cash further increases on its books & fair value goes up as company will be able to book profit. In addition Popular has never revalued its retail shops. If we start revaluing its 3 owned stores in Singapore ( Book Value will go up by 1.5 cents).

Stock trades at S$ 27 cents & on our numbers its Book Value as of April end, 2013 is 28 cents. The company has been Buying Back shares after it got approval to do Share Buy Back in August 2012. Till today the company has bought back 21.8 mn shares (2.6% of issued capital) & its last purchase was 1.1 mn share as of 27th May 2013 @ 28 cents. In addition Mr. Chou – controlling Shareholder of the company has been Buying shares nearly for year. He has bought 14 mn shares since publication of last Annual Report & his Holding has now increased from 58% to 60% of the issued capital. Mr. Chou last purchase was on 8th April 2013 for 489000 shares @ 29 cents.

For other undervalued stocks featured in this blog as shown below,
Hunting for value in Singapore stocks
Ocean sky
Value Mining for SG stocks below book value
Goodpack
Singapore stocks that meets Benjamin Graham criteria

Suntec REIT - Reward Awaits The Patient Investor

Kim Eng release the latest report on Suntec Reit. It believes that Suntec’s 2Q13 DPU is likely to be lackluster, dragged down by Suntec City Mall’s (SCM) ongoing renovation works. The upside that it see is that the average passing rents for SCM post-AEI may be secured at SGD13.50 psf/mth. It also think this is still conservative, given that passing rents at nearby Raffles City Mall are contracted at ~SGD18-19 psf/mth. We also believe that the South Beach development and the SGD95m Marina Square expansion (first phase of 50k sqft gourmet precinct and second phase of 200k retail wing) will further add vibrancy to the Marina area.

To read report on Suntec Reit, click here

SPH REIT - Yield Comparison with Industry Peers

MEDIA group Singapore Press Holdings (SPH) filed its preliminary prospectus for its retail mall real estate investment trust (Reit). The IPO is expected to raise between $523 million and $554 million, with an offer of 308.9 million units at between 85 and 90 cents each.

SPH will inject Paragon and Clementi Mall into the Reit for $2.5 billion and $570.5 million respectively. The IPO proceeds will be mainly used to acquire the properties, and for transaction costs and property-related expense

Below is a comparison of SPH REIT vs other Reits that is already in the market

SPH REIT Quick Facts

Sponsor:                         Singapore Press Holdings

Sponsor stake post IPO:         70%, Free float 30%

REIT manager:                 SPH REIT Management

Leverage:                         27.3 - 31.3%

Revenue breakdown:         97% of gross retail rent linked to contracted base rent, 3% tied to retail sales

Yield Comparison with Industry Peers

SPH REIT's indicative yield stands at 5.58%-5.79%, which is largely in line with its retail S-REITs peers, as illustrated in the following chart:

REITs offer value after selloff

The Edge July 5: REITs offer value after selloff

SINGAPORE REITs HAVE surrendered about a third of their gains in just six weeks after a spectacular 55% rally since the start of 2012 powered by the hunt for yield.

Following Fed chairman Ben Bernanke’s announcement last month that the US central bank will start to wind down its monetary stimulus programme later this year, REITs have been hammered as investors cashed out of what had been one of the best-performing sectors for several quarters in the Singapore market.

The expected tapering of the Fed’s quantitative easing programme led investors to believe interest rates will rise in the foreseeable future. Higher rates could mean increased risks for REITs as they require funds to pay for acquisitions or refinance existing debt.

Yields on 10-year Singapore government securities (SGS) jumped from about 1.4% in early May to a two-year high of 2.8% late last month. They are now holding around their long-term average of 2.6%.

The FTSE ST Real Estate Investment Index fell almost 19% in June from its 5-year high of 890.16 in mid-May. It is now holding just above 750.

With the selloff, REITs appear to be back in favour – at least among some analysts.

David Lum of Daiwa, in a report dated July 3, upgraded the sector to “positive” from “neutral”, noting that value has emerged. The sector’s weighted average price-to-book ratio had come off from 1.25 times at end-April to 1.05 times at end-June, he said.

“Although we cannot rule out further unit-price downside risks for S-REITs (triggered by rises in the 10-year SGS yield), we can now declare with some confidence that we believe the overall S-REITs sector is no longer overvalued,” he said.

A notable feature of the recent weakness in REITs, according to Lum, was that the spread between their weighted-average dividend yield and the yield on so-called risk-free 10-year SGS did not change much, hovering between 3.4% and 3.7%.

That was because the increase in the SGS yield was largely offset by the higher dividend yield from REITs arising from their selloff.

“Yield spreads usually narrow when the market’s perception of S-REIT risk recedes and investors become more comfortable with their fundamentals and willing to accept lower yields (relative to risk-free rates),” said Lum.

“Although the Fed’s recent pronouncements – that it would begin tapering if the gradual improvement in economic conditions supports such a move – have effectively eliminated any prospects for yield-spread compression, we see little justification for yield spreads to widen.”

Yield spreads typically expand when investors expect fundamentals to turn for the worse. In effect, Lum expects spreads to remain stable for the next one to two quarters.

Daiwa’s top pick is Suntec REIT, on which it has a price target of $2.01. The broking house also recommends CapitaCommercial Trust ($1.65 price target), Ascott Residence Trust ($1.42) and CDL Hospitality Trusts ($1.85).

UOB KayHian has a different opinion on REITs. On July 3, it downgraded the sector to “market-weight” from “overweight”, mainly on the view that borrowing costs will rise. An increase of 100 basis points in interest rates will reduce the price targets of the REITs under its coverage by about 8.1%, it said.

Even so, as economies recover, REITs will evolve from being “yield vehicles” to “growth vehicles”, UOB said. This should help mitigate the impact of higher interest rates on their income.

UOB’s preference is office and industrial REITs, which it expects will benefit from a pickup in rentals. Suntec REIT, CapitaCommercial Trust and Ascendas REIT are its top picks.

This blog previously also highlighted deep value REIT in previous entry. For fundamentals to consider when investing in S-Reits, click here. To read gain more knowledge on investing in Reits, i recommend reading "Investing in REITs: Real Estate Investment Trusts"

Hunting for value in Singapore Stocks

This is a post from The Edge June 14 edition. With worry on QE3 tapering, stock markets around the world has been volatile and been falling. Singapore stock market has also felt the impact with STI falling back to where it started in beginning of 2013. In this report, Citi Research points out a handful of stocks in various sectors to look for value in.

IN A REPORT dated June 13, Citi Research points out that the STI is back to where it started in the beginning of the year after having lost some 10% in a month. Meanwhile, Singapore's 10-year government bond yields have risen to five-year average of 2.1%. While talk of the US Federal Reserve tapering its QE programme and a stronger US dollar are the main reasons for the rise in yields here, Citi’s economists have also raised GDP growth for Singapore to 2.3% from 2% previously.

Still, the market’s decline should not be blamed entirely on QE tapering. “Recent concerns about the current-account deficit in Indonesia have increased worries. Singapore’s economy is linked to Indonesia’s via exports, banking (trade finance, wealth management), property ownership, tourism as well as the medical tourism segment,” says Citi Research.

Whatever the case, STI’s valuation based on its price-earnings ratio (PER) is back at 15 times. Citi expects support at a PER 14.2 times, which is the equivalent of 3,000 on the index. The Euro crisis low was at a PER 13 times, or 2,700.

But the problem is that earnings growth in Singapore is likely to be modest. “Within our coverage universe, flat aggregate EPS trends are expected for 2013, growing into a modest 8% in aggregate EPS growth for 2014E,” Citi states. “Our Earnings Revisions Count ratio (ERC or the upgrade versus downgrade count) is in mildly negative zone at –10% versus –16% at end-Feb post 2012 results.”

Citi has a handful of stock picks for when the market settles and investors return to hunting mode. They are Keppel Corp for capital goods, Hongkong Land on valuation basis, ST Engineering and Venture Corp to play the stronger US$, and United Overseas Bank as the most defensive of the local banks.

Keppel Corp is still the world’s largest rig builder despite the rise of Chinese yards. “Our view remains that the rig cycle remains intact despite volatility in oil prices and we believe orderbook momentum can continue in 2H13, with margin resilience,” Citi reckons. The broker has a $13.45 target price based on a marginal discount to its RNAV estimate of $13.58, applying a 20% discount to the value of Keppel's investments in M1, K1 Ventures, Dyna-Mac and K-Green Trust, its 55% stake in Keppel Land at market price. An average PER of 17 times FY13-15 earnings is applied for the offshore and marine business.

UOB has retraced by around 10%. Citi likes UOB for its Asean footprint and growing fee income. Its target for UOB is $20.30 using a dividend discount model assuming EPS of $1.67, dividend per share of 63 cents and 7.1% long-term growth rate.

Hongkong Land is trading at a discount to RNAV of 40% compared to an average of 20% elsewhere.“While there is risk of rising interest rates impacting cap rate valuations, we are already using a cap rate of 5.0% versus the firm’s 4.25%,” Citi says.

Venture Corp too benefits from a stronger US$, and Citi believes it can sustain its dividend yield of 7%. Moreover, its 12-month target of $8.12 is based on modest valuations, of 13.7 times PER for this year’s earnings.


To read other undervalued SG stocks and investing strategy highlighted in previous blog entries, click the following:
SG stock investing strategy
Undervalued stock: Goodpack

SG Stocks Investing Strategy: UOB Kay Hian

This post is on SG stocks investing strategy recommended by UOB Kay Hian which might provide some investment ideas for those of you reading the post

For 2013's remainder, UOB KayHian tips being selective on blue-chips and seeking alpha in undervalued mid-caps. With the top-15 STI stocks at an only 3.3% average discount to long-term P/B means, stocks with capitalisations below $1.5 billion may offer deeper value, it says, with its top-five segment picks Silverlake (5CP.SG), Kreuz(5RK.SG), Triyards (RC5.SG), Ying Li (5DM.SG) and Sino Grandness (JS5.SG).

Its large-cap buy list includes DBS (D05.SG), M1 (B2F.SG), Keppel (BN4.SG), OUE(LJ3.SG) and SIA Engineering (S59.SG). Singapore's overall market valuation is inexpensive at 15.1x 2013 P/E, a 7.5% discount to long-term means, it says; "The next one to two quarters could see a mixed performance given uninspiring macro data points such as a weak 1Q13 GDP and uncertainties in the eurozone. Nevertheless, we see the recovery picking up momentum in 2H13 and for the market to head towards our 3500 year-end (STI) target."

 It tips several potential themes for outperformance, including rotation within S-REITs to office and hospitality segments, strong cash generators such as SIA Engineering,Super Group (S10.SG) and Silverlake, deep-value stocks with potential catalysts, such as Ying Li and Guocoleisure (B16.SG), and mid-cap consumer and oil-services companies.

Undervalued SG stock: Goodpack update

I first wrote about Goodpack as an undervalued stock when I started the blog 3 years ago. Three years on, I still feel that Goodpack is a good stock and is one of the undervalued stocks listed on the SGX. The following blog post is a brokerage report on Goodpack issued by DBS Vickers on 19th March.

In the report, they had recommended investing in Goodpack. Below is the excerpt from the report on the investment thesis on Goodpack:

•        Russian market and new Lanxess plant in Singapore to drive stronger growth from 2Q13
•        Gaining traction in autoparts segment
•        Recent price weakness is a buying opportunity


Shifting to faster gear. Goodpack should see stronger growth from 4QFY13 (FYE June) with new contracts from the Russian market and Lanxess’ new plant in Singapore. Momentum should continue into FY14 with the pickup in rubber trade volume on the back of pent up demand in the replacement tyre market, which constitutes c.53% of total rubber demand, following 20 months of weakness. In addition, cost savings from the global tender exercise will help to improve net margins by an estimated 1ppt. We expect these to fuel FY14/15F net profit growth of 25%/16%.

Gaining traction in autoparts segment.  Goodpack has been knocking hard on the doors of GM’s OEMs and suppliers as well as a few other automakers. Hundreds of samples have been sent for testing and we understand that the company is making progress with a few suppliers in Europe. Future announcements of autopart contracts should be a share price catalyst. 

To read more on Goodpack, please click here 

Finding Undervalued Singapore Stock: Ocean Sky

This is a stock that I came across while reading a stock report recommendation from OSK-DMG. The stock is called Ocean Sky. Ocean Sky International Limited and its subsidiaries is a one-stop fully integrated apparel service provider with global end-to-end supply chain management capabilities from design to distribution. The Company’s divisions include Corporate Services, Apparel Agency and Apparel Production Services divisions. The Company's subsidiaries include Ocean Sky Marketing (HK) Ltd, Suntex Pte Ltd, Bright Sky Pte Ltd, Suntex Investment Co. Ltd, Bloom Time Embroidery Pte Ltd and Ocean Star Apparel (Guangzhou) Pte Ltd. 

Why is Ocean Sky undervalued?
The stock is currently trading below cash and offers a dividend yield of more than 11%. The company recently sold off its core apparel business together with two properties in Hong Kong which left the company flush with cash. OSK-DMG estimated the cash to be 30-
40% higher than the entire market cap of the company. With the huge amount of cash on hand, management will be expected to be dishing out some SGD0.016 of special dividend. Together with the final dividend of SGD0.008, this would mean that the yield on the company comes up to just over 11%. OSK-DMG estimates the intrinsic value of the stock to be about SGD0.29, which represents an upside of close to 40%. 

Valuation of Ocean Sky
Below is the valuation done by OSK-DMG. 

Risk of investing in Ocean Sky
In value investing, we are always focused on the risk of losing money; the downside. The risk of investing in Ocean Sky is that management might not be able to find a good business to reinvest the excess cash. 

An update was posted on Ocean Sky in October 2013. Check out the update here

Disclaimer: This is not a buy or sell stock tip. Please do your own research. 

Investing in Reits and Property Developers

Following my previous post on Capitamall Trust, I came across an article in the Business Times by Ronald Sim that provides required information for investors who are interested in investing in S-REITS. This is a good resource and thus I am sharing this article below and hope that those who missed out on this article can learn and benefit!

Click here to read the article!

Singapore Stocks Near 52 Week Low

A good source of value will be to look for stocks that are near the 52 week low. Below is a list of Singapore listed stocks that are trading near their 52 week low, based on last Friday (5th April 2013) closing price

Broker's Recommendation (May 2010)

This is a compilation of all broker's recommendation in the month of May. These are 10 counters which were favoured by research houses in May. Brokerage house do not publish stock research reports on a stock frequently. Hence the coverage and opinions on these 10 stocks will be valid for this year until they initiate updated coverage. I hope that through this compilation, it serves to provide readers with some ideas on good tickers which are favoured by research houses