Sembcorp Marine Corruption Probe

The recent market rally has been a most unusual one. Overall, most investors are still tepid about the general economy. This means while many are likely to have sat out of the rally, those who took part are looking for indications of a change in sentiments to reduce their holdings.

I picked up Sembcorp marine during the recent market correction as its price fell by 10% after news that its office in Brazil was raided by anti-corruption officers. I found it strange that such corruption considered rampant in Brazil could have implicated Keppel Corp but left Sembcorp unscathed.

While nothing has been proven at this juncture. Semb Marine will likely be facing a fine probably on the same scale as that of Keppel Corp, given that the contracts awarded to the yards by Sete Brasil are about the same in number (article). While it is still early days yet for any conclusion to be reached on this.

However, there are always two sides to a coin and the present Semb Marine has had more breathing space given its recent deleveraging exercise, provided by parent Semb Industries and Temasek. I also like the fact that the soon to be in force IMO Sulphur 2020 cap has meant more Sulphur scrubber installations and the progressive change to D2 standard for BWMS would likely increase the amount of business with semb Marine for this year, as they are more exposed to this sector than Keppel. Though in most likelihood will only cushion any impact from the fine should it be implicated.

Similar to First Reit, this is a turnaround play for me, as the heavy volume selling is likely to taper off soon while I wait for the market to recognize Semb Marine’s value. While more bad news may follow, I believe that the income reports for the coming 2 quarters will vindicate my thesis.

In the long term, while they have their own niches. On their own Sembcorp and Keppel are still small players in a very large offshore market. That said, their technical know-how and execution ability are still considered top rate in this industry. With the ongoing global trend of mergers for shipbuilders it would not be difficult to see how synergies can be form through a merger, especially when some of their yards are located in close proximity with each other.

Turning back to the portfolio, the equities part of the portfolio crossed the 50k milestone this month. Including the bonds part of the portfolio and my warchest I believe we should be in good stead to capitalize on any opportunities offered by Mr. Market.

18Q4 Portfolio Updates

Just wanted to do a quick recap of my current portion my thoughts on the market for the next few months.

Initiated

No. Counter

Mkt Price

Shares

Mkt Value

 
1 ESR-REIT

0.52

17666

9,186

 
2 SingTel

3.05

2000

6,100

Added
3 StarhillGbl Reit

0.71

7000

4,970

New
4 Straits Trading

2.06

2000

4,120

 
5 Wilmar Intl

3.32

1000

3,320

 
6 Mapletree NAC Tr

1.24

2600

3,224

New
7 Mapletree Ind Tr

2.01

1600

3,216

New
8 CapitaR China Tr

1.48

2067

3,059

 
9 Keppel Corp

6.01

500

3,005

New
10. Raffles Medical

1.1

2060

2,266

 

Total

38,493

42,466

 

 

I sold off AIMS AMP CAP REIT when the sponsor bought the REIT manger and the price shot up. At a selling price of SGD 1.36, I broke even from my buy in price, though inclusive of dividends the return has been 11%.

I added several Reits during the last quarter’s bargain. On retrospect, the fed raising rates and backtracking in Jan was just what the market needed to get some perspective.

In Q4 2019, I added MNACT, MINT, Starhill and Keppel Corp.

MNACT had stated that rental reversions were double digit positive and I believe the location of Festival walk is strong. China’s tier 1 cities and Hong Kong are both ridiculously packed and malls generally do well. I wished I was gutsier to add more CRCT, but I thought I’d hedge my bets with MNACT.

MINT’s management has a very deep moat. I don’t think there are many industrial reit management teams that can do a full spectrum of AEI’s from warehouses to datacenters. I feel that this ability sets them apart from other small time industrial reits. The Taiseng acquisition is poised to become a gamechanger, especially with the nearby new town of Bidadari.

I was waiting for either Starhill or CDL-HT to fall further before acting, but it looks like prices have raced ahead for both. At a +6% yield and a lower PE and P/B ratio Starhill was the more conservative choice. I think most investors are feeling bullish on the upcoming Toshin rental. But I have not overlooked the positive announcements in Australia. This reit does not have a very strong moat in my opinion and I hope the price will appreciate enough before the Starhill gallery AEI.

Keppel Corp is an interesting story as the price tanked almost immediately after I bought on fears of low oil prices. I don’t think that Keppel like other pure property counter plays deserves to trade below NAV. I feel that LNG projects are the way forward for Keppel and I am optimistic that it would be able to snag a few deals in the next cycle. I think a consolidation of the Sembcorp and Keppel O&M would be a bonus, but it was not a consideration.

In the next 2 months, I am looking to add more Singtel and Raffles Medical, though I am keeping an eye out for further pricing erosion and China revenues respectively. I am also looking to divest some ESR as the balance sheet looks quite stretched. Let’s see if the market provides opportunities.

Lastly, let me end of with a reminder from Warren Buffet, try not to to listen to macroeconomic calls either when making individual stock decisions: “You cannot get rich with a weather vane.”

Dividend recap 3Q2018

In total, I received $509 in dividends for the third quarter. This amount is progressively getting larger as I switch towards dividend paying stocks instead of growth stocks. In the previous year, the amount received was only $107.

Breaking the $500 per quarter mark is a good sign that the portfolio is progressing. In time, I do hope that this will grow to $750 and hopefully $1000 per quarter.

Dividends received Reit: $367.24

  • Capital Retail China Trust – $111.41
  • AIMS AMP Capital Reit – $50
  • Mapletree North Asia Commercial Trust – $29
  • ESR Reit – $176.83

Dividends received Non-Reit: $152.3

  • Singtel – $107
  • Wilmar -$35
  • Raffles Medical – $10.3

Portfolio Updates: July

Just wanted to pen a few thoughts and give a few updates on the state of the investment portfolio.

July presented a few opportunities to enter at a good price. The dual shock of a potential “trade war” and ABSD hike, sent the STI crashing to negative territory for the year. Fortunately, I have begun to rotate towards more resilient stocks.
I did not manage to average down for both Singtel and Raffles Medical. I remember thinking that prices could yet fall further and failed to act.

Notwithstanding the misses, I managed to add these to the portfolio, small nibbles, but good companies nonetheless.

Bought: Wilmar
I thought the prices were a good opportunity considering the possible listing of the China business next year. The price offered was less what ADM paid for their stake. I thought it was a knee jerk reaction to the trade war and china’s tariffs on soybean.

Bought: Mapletree North Asia Trust
I’ve always wanted to invest in this Reit, but its price has always seemed a little high, The price corrected by 10% after the acquisition of the Japan properties, which I thought was incorrect considering that the acquisition was likely to be accretive. Another upside to this counter is that while the HKD is pegged to the USD, it is also trading too low right now. I believe in the long term we should see the HKD revert to the mean.

I am hoping to save up and paydown the CPF loan taken for the house, this should mean fewer purchases in the meantime.

Till them keep saving..

Portfolio Updates: Comfortdelgro (Sell)

Sold off Comfortdelgro today.

I had it on queue since the morning and finally sold off the entire holdings at $2.5. I was contemplating not selling at all, as given my buy price I was looking at a 5% dividend yield. But at the same time, I also knew that that markets are fickle and the flavor this month can easily turn sour quickly.

For me, I decided to sell because the counter had reached its upper bound resistance level and was dithering at that level. However, this resistance was also broken today (oh well, that’s life). For now, from a momentum point of view, the counter is looking red hot. I think there is still potential for the counter till rise to $2.6, given that we have yet to see the benefits of all the recent acquisitions taken into consideration. However, I am not optimistic that it will be able to reverse its negative revenues so soon.

Comfortdelgro is definitely not the undervalued counter it was when I first bought it. Oh wells, time to move on to the next stock.

Portfolio Update: ESR Reit (BUY)

I added another 5,600 units of ESR Reit this month. Previously, I had initiated a position in January, as I had assessed that the management has made good progress in stabilizing the reit and had executed well to divest lower yielding properties for better yielding ones. My thoughts then is mentioned here.

With the price falling to 0.535, which is even lower than the recent rights issue price of 0.54. I can only guess that other investors are spooked by the falling DPU trend.

ESR.JPG
ESR DPU negative trend

The last quarters fall in DPU was more to do with the following factors.

  • Partial income received from 8 Tuas South Lane and 7000 AMK ave 5 on 13 and 14 Dec respectively
  • Divestment of properties 23 Woodlands terrace and 87 Defu Lane 10 on the 16 Nov and 7 Dec respectively
  • Issuance of 150m perpetuities at 4.6% p.a on 3 Nov 2017. The perp is semi-annual and is callable in Nov 2022

My guess is that the income received from the two new properties should offset the cost of the perpetuity issuance and two divestments. What is unknown is the effect of the dilution due to the recent rights issue.

**WARNING THE BELOW ARE JUST MY SPECULATION**

However there is one last catalyst in the bag.. Viva and ESR merger.

I compiled my observations between the Sabana-ESR deal and Viva ESR deal in the table below.

TopicSabana-ESRViva-ESR
Who initiated the deal?Potential Merger review was mooted by a Strategic Review Committee headed by Morgan Stanley for Sabana ReitESR Funds management who is the manager for ESR Reit, submitted the proposal to Viva Industrial Trust
Duration of the deal7 Aug 2017 – 25 Nov 2017 (4 Months)29 Jan 2018 – Ongoing (4 Months)
Nature of talksNo definitive legally binding agreements entered intoExclusivity agreement signed

As you can see unlike the previous talks with Sabana Reit, this deal was solicited by the ESR managers themselves. The addition of Viva’s business park properties and their higher rentals would also uplift income vis-à-vis Sabana’s industrial properties, which I reckon ESR would have sold off anyway. 

Another point is that the recent acquisition of the 7000 AMK property by ESR reit, was bought from Ho Lee Properties which  is a subsidiary of the Ho Lee Group which is also interestingly the sponsor of Viva Industrial Trust. I think Viva shareholders would have liked to have a slice of 7000 AMK, so why sell a potential asset to a competitor reit?

The fact remains, that reits are leveraged products and an injection of the property into Viva would have come at a cost to equity. The acquisition by ESR reit would also not have been possible without the sponsors backing to pick up additional rights, they eventually picked up 13.3% with Mitsui picking up 1.6%.

Lastly and most speculatively, in a departure from previous statements by both reits, the latest update by both management teams mentioned that the exclusivity would extend to 30th April or “the date of execution of a definitive implementation agreement between the parties in relation to the scheme” as opposed to previous “talks are ongoing” statements. My speculation is that the details of the merger have already being hammered out, and that now they require buy in from the majority shareholders.

ESR reit still needs some time to consolidate and strengthen. Even if the merger with Viva does not succeed, you can rest assured that the reit will find new opportunities to grow. My experiences so far shows me that for income investors, long term growth trajectory is far more important to increase the potential yield on cost. ESR does have wobbly financials and a negative DPU but its ambition is by far the greatest among other S-reits.

 

Portfolio Updates: Mar 2018

The first part of March 2018 has flown by quickly. For wealth building, this passage of time has not been as productive. Since the start of the 2018 we have witnessed 3 flash crashes and the STI has been on a roller coaster ride.

STI_Oct_Mar_2018.JPG
Three crashes in the first Quarter weighed down otherwise buoyant STI index

Portfolio wise I have only added Singtel and subscribed to the rights issue for ESR. The current cost of the portfolio is just above 30k, but the overall value is just under that figure. Yes, I am in the red. I am telling myself that this is to be expected since I entered into some contrarian play just before the markets began in 2018. One quarter is perhaps too soon to be talking about the turnaround.

With the beginning of the first quarter earning results in April, I am hopeful that some of the counters will begin to show improvements in their financial results. For the month of March, I shall attempt to write down some of my thoughts on these counters as well as comment on their performance thus far.

**On a side note, something I observed that during market crashes it affects even my contrarian counters Singtel & Comfort delgro which I find strange. One of my original thesis was that these counters are strong negative beta stocks, and would counteract against what I thought was positive market expectations at the start of the year. It might also be an indication of turnaround traders present in this counters.**

Portfolio Update: ESR Preferential Offering

ESR stated on 27 Feb that it was intending to issue 263m new shares to partially pay off debt as well as fund the purchase of the AMK property. The offer was at 199 units per 1000 existing units or 1 unit for every 5 existing.

Having previously elected to reinvest my dividends through the dividend reinvestment scheme (DRIP), this rights issue represents another opportunity to collect more shares at a reasonable price. If successful, I would be able to increase my existing holdings by 30%.

While the elephant in the room is definitely the ongoing merger talks with Viva Industrial Reit. I had to conservatively make my subscription decision based on the conservative assumption that the merger would be unsuccessful. Having said so, I am still cautiously optimistic of it being approved.

Here are some reasons why I chose to subscribe..

  1. New Management – Since ESR took over Cambridge Reit, it has executed its strategy quickly, by selling older properties and cycling them into newer plots with higher growth potential, the Reit is better poised for growth. The new manager seems also savvier in tapping the financial markets to fund growth as seen in its perp issuance. Going forward the transformation of the AMK property is an important yardstick to see how effective the management is in transforming the physical properties and in executing their strategy of obtaining higher yields
  2. Management buy in – I like the fact that the sponsors have also undertaken to subscribe up to SGD 125m in excess rights. While you can say they are scooping up shares on the cheap, (ESR trades below NAV), I am only heartened that retail investors are able to join in as well
  3. Reasonable Price – At SGD 0.54 this represents one of the lowest prices that ESR has traded at. The subscription price is 8% below NAV after preferential offering. Being able to buy in at this price would allow me to further bring down my cost per share and while growing dividend yield.  
  4. Growth potential – While the industrial Reit sector is still generally soft and the oversupply in the last few years have definitely eroded earnings. But I think that this means more space for an uptick in the future. The 2019 industrial space supply slowdown is definitely going to improve rental rates going forward. Thus this is worth waiting and observing.

I think ESR Reit is definitely a long term play on the industrial land sub-sector. The last few years since the end of the oil crash has not been kind to the industrial leasing space. However, the sector has remained resilient and is beginning to show some value. I am vested for the longer term and this preferential offering represents a good opportunity to accumulate.

Portfolio Update: Singtel

I picked up Singtel during the recent sell off, just as it reached new lows. I think the last time it was at this price was somewhere in 2013. 

Like Comfortdelgro, Singtel is a diversified business with associates across many Asian countries. Like most conglomerates, it’s hard to put down in a blog post everything about its business. However, what I like about it is are changes in its core business. From one of being a vanilla telco to offering more digital business solutions. As with Singpost, their pivot to the new economy is a positive step and has the potential to be a large driver of its earnings in the future.

Where I differ

While I do agree that the entry of a fourth telco has the potential to erode earnings of Singtel, I think it is premature to over anticipate the extent of the impact. In fact, I would be more worried if MyRepublic had gotten the license instead as foreign mobile operators have thrown in the towel before.

Initially, I had wanted to wait for the entry of TPG this coming December. I have a feeling that the market would place it at a discount then as telco price wars are a slugfest to nowhere. But as Singtel’s strategy is more towards providing a premium connection for businesses and consumers who value low downtime, I think it would be tough for TPG to erode its margin.

What helped

The announcement to increase its stake in Bharti Telecom the parent company of Bharti Airtel also coincided with the market correction, which I think played a role in the sell off. As with others, I did not like that the funds were being used to pay off debt, however the more than 5% drop in share price since last week was also unwarranted.

It’s divestment of Netlink trust means its sitting on cash at the moment, undeployed cash is a non-accretive asset and the stock price has reflected this by not rising after the Netlink IPO. Singtel has mentioned that the bulk of the cash would be used to acquire spectrum rights. This I hope refers to the future 5G network, that would be a gamechanger to how we think of and use the internet.

Portfolio sizing and future thoughts

Like Comfortdelgro, Singtel is an old economy stock but pays a meaningful dividend. Sensing an opportunity, i queued at SGD 3.42. At this price, based on a 20% discount on its past dividend, I think I would still get north of 5% yield at least for this year.

I also made it a point to allocate only a small position in the stock to hedge against future price fluctuations. Given the current exuberant climate, these defensive stocks are more likely to be cast aside, then placed on a pedestal. Will continue to monitor.

Portfolio Update: ESR (Buy)

As always I always recommend putting down your investment thesis in point form when buying, as it makes the selling decisions more rational and less emotional. Here is my investment thesis on ESR E-Shang Redwood Reit.

Things I like:

  1. Decreasing number of masterleases that require renegotiation, this could mean a bottoming of the rental reversions. Noted that rental reversions has been slowing in the last 3 quarters.
  2. Trading below NAV, P/B is currently 0.8 which is probably quite low considering that last year’s valuations were already made given the weak leasing market.
  3. New management – Much has been said about the new management and I believe this is one of the key reasons why it is one of the few industrial Reits not trading at a higher yield. I think that management with good drive and ambition are important to a Reits long term success.
  4. The recent acquisitions and divestments have been positive. I thought that swapping two industrial plots for a high tech space and master leasing a new space to hyflux means better better and more resilient returns . Hope the trend continues.
  5. Recent negotiations with SS Reit was a failure and I think was a positive move for the unitholders given that the properties that SS Reit is holding are also under siege. This signals to me that the manager is not purely in to raise AUM at the cost of yield.
  6. Weak industrial leasing sentiment – As a somewhat contrarian investor,I think price reflects this well enough.

Things that could be better:

  1. Lack of business spaces & high tech business spaces. This means that the Reit is unable to participate in the upturn of leasing in this space.
  2. The management seems to be more savvy in financing with the issuance of a SGD 150 mil Perp in (26/10/17) at 4.6%. I have blogged before on what I felt about mezzanine financing here. I think Reit unitholders need to be more savvy on reading on financing costs rather than focusing on gearing ratios. However, with the gearing at 39.6% there might not be much room for debt financing

Overall,  At a 52 week low of SGD 0.555, the market seems to not have priced this stock too low. If buying in at SGD 0.57 means a dividend yield of 6.7%, I would be happy to sit and wait for points (1) &(5) to help with the turnaround.