Pitfalls of using Price to Book Ratio.

This is something about using price to book to value a stock and and I just feel like writing it down. It is also to share with my personal friends.

I have been seeing a lot of people using price to book ratio to value a stock and the problem with such a ratio has many deficiencies.  In accounting, a constant issue is always the difficulty in relevance vs reliability. I will give a few examples here.

Relevance vs Reliability

Your parent bought a HDB flat for 50k 30 years ago, the current value now is 300k. How much should we record the value of the flat. 50k is the more reliable figure as that was indeed the cost paid and supported by all the transaction documents. 300k is the current valuation report. However, valuation can be determined by the current market sentiment, replacement cost (price to buy a similar unit) or the cost to build an exactly same flat. These costs change from time to time which brings about a range of value to an asset during different period. Hence you always hear people say valuation is an art, not a science. There is nothing precise about it.

Different financing Cost

In accounting, you are allowed to capitalise the cost to build the asset including the finance cost until the asset is ready for use. This means someone with a financing cost of 5% will have an higher asset value than someone with 3% borrowing cost. In essence both are the same thing. Capitalisation is purely classification of expense as an asset and allocating the expense in the period you expect the benefit to be consumed. An example will be renovation of your house which maybe cost 50k and you capitalised it and depreciate 5k a year for 10 years due to your estimation that you need another renovation 10 years down the road.

Depreciation

Depreciation itself is an arbitrary cost allocation exercise. If a company choose to depreciate their asset over 5 years vs another company who does it over 3 years, the former will show higher profit margin and higher net asset value. The question here to ask is whether the former is too conservative or the latter too aggressive. The tell tale is whenever the company make a disposal, check the gain/loss on disposal. A huge gain indicate that there is the likelihood that management is too conservative. The actual profit margin of the company could be higher.

Capital intensive vs capital light business model

Generally, manufacturing businesses are considered capital intensive and hence their book value is always higher vs service industry business. That is due to the raw material, plant and machinery that are involved in the business. You cannot use book value to value business such as Raffles Medical. It is like telling RMG management I will pay for your hospitals and equipments and I get your branding, doctors and nurses skills for free. I have seen some posts who measure RMG using book value and it made my day. Thanks.

Stuffs not capitalised

Stuff such as branding, your distribution network, technical know how etc are all stuff which are esssential to a business and considered important. However, they are all not capitalised. For example, I don’t think Apple put a value on Steve Jobs on their balance sheet. And companies always say people is our greatest asset. The irony of it. Time to knock on management door and tell them to “value” and capitalise you. LOL.

The list is not exhaustive but these are the more common one i can think of. Thanks for reading.

 

 

 

Dutech Holding part 2

I know I talk about wanting to write about Dutech part 2 in my previous post. However, CIMB released the initiation report and I thought there is no point writing about it since a lot of information can be derived from it. However, it has come to my attention that they have recently ceased coverage.

Q1 2017 Results

Net profit was down due to steel price increasing for high security segment, higher administrative and selling expense incurred by Metrics and increase in R&D expense. But I would think this is a decent set of result as increase in R&D expense is setting the sight on future revenue growth and improving on future competitive position. In the latest annual report, 22 new patents were awarded to Dutech. I look forward to more new patents in the coming years.

Metrics	RMB – Mil
Revenue	77.20
COGS – Estimated to be at 70% to have a GPM of 30%	(54.04)
Selling and Distribution Expense	(5.30)
Administrative Expense	(17.30)
Research Expense	(1.40)
Loss before Tax	(0.84)

Based on the disclosure in Q1 2017, I did a rough computation on the drag on bottomline by Metrics. I used a GPM estimate of 30% as the GPM for business solution improved from 25% to 28% due to change in product mix. As Metrics revenue is approximately half of the business solution segment, 30% should be a good estimate. Even without taking into consideration finance cost, other expense and taxes, you can see that Metrics is loss making and dragging the bottomline. That is the reason why Dutech is able to acquire companies cheap. The strategy of Dutech is outlined clearly on Droege Group website. Droege is a substantial shareholder of Dutech with 8% share. They were the company who sold Format to Dutech.

This is a table which I compute myself based on annual report disclosure. It further confirms the acquisition drag down the bottom line a lot. You can compare the margin against the acquisition timing for an idea.

What’s next?

The question to ask is really what does Dutech intends to do with all these acquisitons. A lot has been said about the death of cash but I do not agree with it. People behaviour do not change overnight and cash still has a place in society. However, the usage of cash might be reduced and hence this will impact on ATM replacement cycle. The replacement cycle might be extend to 4 or 5 years instead of 2 to 3 years due to lower usage. This will affect Dutech business. They are seeking to grow a new segment of revenue through business solution. The focus is on transport ticketing specifically. If you look at this link, there are 25 suppliers of transport ticketing and Dutech acquired 2 of them. Metrics and Krauth. These 2 acquisition immediately propel them to become the no 2 in the industry with 20% market share. The market leader is Scheidt & Bachmann GmbH. This is the same as high security segment where they are the no 2 and Gunnebo is the no1. A search reveal that the Smart Transportation Market is going to grow at a CAGR of 25% from the period of 2016 to 2021. This is definitely a high growth market.

I recently added to my position as I feel the valuation is still cheap. While the share price has gone down after i added, I am not too concerned as I feel most of the bad news has been factored in but positive has not. Hence I will be sitting on my butt for the next 2 to 3 years and watch the result. I am cutting short my post here as I am extremely lazy and would not have blog if not due to the request of one of my group chat mate. You know who you are. LOL. Thanks for reading.

 

Year End Review of 2016

Today is the last day of 2016. Just thought I should write a short review of the year. It seems yesterday that we experience the black monday in August 2015 and today we are ending 2016. This has been a great year for me personally as I managed to be positive despite the challenging environment.

Current Portfolio

1. DBS
2. OCBC
3. Singtel
4. Ascendas REIT
5. Fraser Logistic Trust
6. Straco
7. Boustead Singapore Limited
8. Vicom
9. Dutech
10. First REIT

You can see from the way I picked my stocks they are a mixture of blue chips, REITs and small/mid capped. The rationale behind my stock selection was to buy undervalued and companies with moat. I believe the best return is achieved through long term investment. A part of my strategy was also to cherry pick certain stocks from the STI components to mirror the ETF. So far this strategy has been working well but more time will be needed to fine tune the process and see if the strategy is a sound one.

Stuff I added this year

I add more to my Singtel position due to the 4th telco effect. My take is that we focus on the 4th telco without considering that Singtel is a regional player with the financial muscle to compete against their smaller competitors. Furthermore the acquisition of Trust Wave indicates that this is a forward looking company looking for new area of growth to replace legacy revenue such as sms and overseas calling. Given time I believe new source of revenue will emerge. There should also be some upside with the IPO of Net Link Trust next year.

I also added Straco, BSL and FLT as I think they are solid companies with cheap valuation. I do not wish to discuss them in greater details as I don’t think I will do a good job.

Stocks I sold and lessons learn

1. Accordia Golf Trust
2. Transit Mixed Concrete
3. Lum Chang
4. AIMS AMP Capital

I sold Accordia Golf Trust as after studying it, there are certain risks which is too much to be stomach. I believe these risks are the reasons why the trust is trading at a 10% yield. I would not like to elaborate but if you are interested please look at how fee paying members are classified and how long it takes for them to be removed if they stop paying the yearly fee. There are also a few other factors and after attending the AGM I did not come away with satisfied answers from the management and hence I decided to divest it. While I lose a 10% yield stock, the key objective of my portfolio is to ensure no single event will heavily affect the portfolio. Hence the focus is reducing risk.

Transit Mixed was another stock which is sold for 15% gain in 3 or 4 months period. It was a mistake as I bought it as a growth stock with decent dividend yield. My research told me that there are 4 concrete pumps company listed in Green Book and Transit was the biggest. Furthermore this was supposed to be an infrastructure play. After attending the AGM and finding out from the CEO the plans for Indonesia and the number of new entrants, it is obviously there is no moat for such a company and growth is not going to be what was expected and Indonesia is not going to grow as fast as Singapore and Malaysia market like what we seen in prior years. The result shown in the 2nd half also indicates the market has slow down. I bought it for 60 cents and sold at 69cents. This was a case of a mistake but i made a nice profit. I would say I am lucky and not because I am good. Result does not determine the quality of decision making.

I have also sold Lum Chang as the gearing was getting higher and they were starting to get involved with more property development. Initially when I bought it, it was more of infrastructure play but things did not pan out as what I think it’s going to be. The latest set of result shows the margin has been shrinking for construction and the tender price index released by BCA does not help. This was the first time I bought a company because it is cheap. From this mistake, I discovered that it is far more better to pay more for a solid business with moat as you are more likely to stay sane during testing time. For example, would an investor panic if Vicom were to report a poor set of results due to COE cycle? No. Hence it is more important that we invest in solid companies as our faith in them is less likely to be shaken. Investing returns are more likely to be affected by the stomach to tolerate volatility as compared to brain power for analysis. Over analysis might lead to hallucination and far fetched conclusion.

2016 Results

In terms of result wise, 2016 has been my best year ever. In my earlier days in 2013 and 2014, I was not active in investing. I had only Ascendas REIT and First REIT and that was it. I have no idea how my results will be in 2017 as I am not expecting any fantastic result from most of the companies in my portfolio. On a more optimistic note, market might rerate them and I get a nice surprise. But whatever it is, I will certainly enjoy the dividend. My new year resolution in 2017 is to continue to addon to my portfolio and hopefully improve as an investor. Thank you and Happy New Year to all my readers.

 

 

 

Why conventional wisdom might not be wise.

Many times we received good or bad intentional advice from our family, friends or colleagues which are peppered with conventional wisdom. Advice such as what course to study, how to study, career advice etc will always be given irregardless if you asked for it or not. The strong willed person (some say stubborn) will not be easily swayed and be able to stand up for themselves but the more easily persuaded person will tend to go with the crowd. I would like to point out certain conventional wisdom that is not so wise in investing or personal finance.

High Risk High Return

This is probably one of the most often quoted sentence in investment. In order to earn a higher return, you need to take on more risk. Even CAPM is based on beta which is the amount of systemic risk which cannot be reduced through diversification. Nothing can be further away from the truth because the more risk you take, it is more likely you lose all your money. This is one of those things people try to brainwash you to part with your money by saying you need to take higher risk to make higher return. If you have been told/taught this from young, there is very high tendency you will end up losing your money due to wrong concept application. The correct way is to approach it is low risk high return. The risk definition here is loss of capital (your money). Irregardless of stocks or properties, if the price you paid is so low, the likelihood of a good return is higher and capital impairment is lower (i.e buying a dividend stock of 10c dividend yield at S$1 vs S$2 is 10% or 5% dividend and likelihood of loss is lower at S$1).

For example, have you ever wonder why your mortgage interest rate is around 2 to 3% while your credit card debt is 24% per annum. That’s due to the risk factor involved. A mortgage is a formed of secured debt where you need to pay 10 to 20% of your house value and the bank owns the title deed. This loan is further backed up by your earning power hence in the event of default, there is a cushion of 10 to 20% to absorb the first loss. However, credit card debt is unsecured and only backed by your promise to return. Not back by hard asset. Hence the risk of default is so high that the bank has to charge a higher interest rate. This punitive interest rate is to ensure there is incentive for you to pay and the high interest rate cover the default of other borrowers. That’s why despite the more you borrowed, the lesser the interest rate! I know this sentence sounds stupid by itself.

This company sure won’t go burst

This is another favourite I hear when I discuss stocks or investments with my wife, friends or other investors. They will tell me companies such as Singtel, DBS, OCBC, NOL, Ascendas Reit etc sure won’t go bust due to their blue chip status. The singapore government (through Temasek Holding) have a stake in it so it is safe. This couldn’t be further away from the truth. Even if the company does not fold, it is still a drag on your return. Worse still you might lose money. For example, NOL which was a blue chip was sold to CMA. Long time investors might not be too happy as the price might be below the price they bought the stock. SMRT was another one. Hence even if the company don’t fail, it is still a poor investment.

One fellow even told me to buy Bank of China because even if the loan fail the China government will bail it out. I told him no thanks. If you buy with the idea that the government will bail it out, I will wait for that time to happen before I buy. LOL.

Dollar Cost Averaging the STI ETF

This is another example of conventional wisdom which might not be so wise. Many people adopt this because Warren Buffett suggested that if the wife is to invest, she ought to invest in a low cost index fund (I think is the S&P 500 ETF). So they also DCA the STI ETF since that’s the Singapore Equivalent.

The above is based on the the STI indicative weight in June. If you notice the weightage, the top 10 components are actually 68% of the STI. This means 20 counters made up the remaining 32%. Our index is heavily tilted towards banking and properties. The index components are revised frequently and companies which are not performing well will be taken out of the index and replaced with another higher market capped company. This selection basis almost guaranteed you will always buy companies expensive and not cheaply. Companies such as SMM, NOL and Noble have all been removed because of business facing issues and market capitalization dropping. A value investor will want to buy a good company in crisis and not when it goes up in price. Hence the STI ETF is inherently bias towards companies who are trading at high prices. Talk about buying stuff cheap and protecting your capital.

Secondly, the S&P 500 consists of 500 companies which are of different industries with a global footprint. I am not sure if the STI components are considered global. Regional yes. Hence when Buffett suggested that, he was not referring to STI ETF. He is confident in the growth of the US economy and not telling everyone to go buy their home index. One must take into consideration the context he was referring to before we misinterpret and apply it. It will end up being a good advice for the wrong result. The STI might not achieve the wide diversification and growth of the S&P 500 ETF so think twice before DCA the STI ETF blindly.

Looking at this chart, you notice that bear period are generally not long whereas the bull period is longer. If you use a monthly DCA method, it is very likely your average cost of the STI ETF will be higher and not lower. Capital allocation has to be active and conscious and not passive without consideration.  The Singapore Economy is a matured economy with low growth expected for the short term. I did not say it will be the same for the long term as technology factors might improve our GDP in the future since factors of production such as human labour and land are limited. My friend Derek from thefinance.sg also blog something about the STI ETF too.

Transferring OA to SA while you are young.

This is also a case of looking at profit and loss statement and neglecting the cashflow statement. The company who is reporting huge profit but has no cash will be in a serious condition. This is akin to someone who has a huge amount in his SA and not much cash in his OA to meet his mortgage or daily needs. One must always take care of the short term before thinking long term because Keynes once said this:

Conclusion

My point for writing this article is to bring up some thoughts to conventional advice we read or receive. If we want to be successful like Buffett, we will ask Buffett. Advice should be taken from the person who has walk the path you chooses (mentor) and not because others tell you so. We need to be able to independently assess advice and adopt or reject accordingly to our needs and the context it is applied to. Just because someone did it does not mean you should. Thank you for reading and hope this article trigger something for you to think about on a lazy Sunday.

 

Why is it so tough to be a value investor

Many times we have heard investors describe themselves as a value investors but how many of them are actual value investor? Value investor has to be one of the most over used and abused description used by retail investor to describe oneself. According to Investopedia, value investing is an investment strategy where stocks are selected that trade for less than their intrinsic values. The concept is basically buying a stock you believe to be undervalued and applying a margin of safety to what you believe is the intrinsic value. This ensure that in the event of a mistake, your capital is protected. The key focus is protection of capital and not swinging for the home run for every pitch. Why is being a value investor hard?

Difficulty in measuring intrinsic value

Measuring the value of a company can be a very tricky business. One has to understand accounting before even attempting to pick stocks because you need to understand the benefits of accounting and the limitation it brings. Accounting is not the most exciting subject to be taught in school and hence most people do not maintain the interest to study the subject in detail. Being an accountant by training myself, I admit that there are also companies which are beyond me as I do not understand. For example FRS 41 which is the standard used for Agriculture. I have totally no idea of the subject.

Measuring the value of an asset is also a very complicated task due to the different measurement method you can adopt. Below are the few methods used:

Historical Cost – This is the cost which the asset was bought at. For example the HDB flat bought 30 years ago for S$70k which costs S$300k today. Historical cost is the most reliable as supporting documents can be produced to verify the accuracy of the value.

Fair value – This is the value derived between both willing and knowledgeable buyer and seller. For example when there is M&A the assets and liabilities of the company are fair valued and any short fall/excess of the buying price above the fair value of the company will be recorded as goodwill or bargain on purchase. The problem with such an approach is the assumption both parties are knowledgeable.

Value in use – This is the value of putting the asset into use. For example, the house you are living in. If you do not own the house you got to pay rent on it. Hence the idea is to purchase the asset and put it into use and generate profit. Profit can be derive from increasing revenue or decreasing expense. That’s why the tendency to automate to reduce labour cost and increase revenue through efficiency. Most of the Property, plant and equipment of the company falls into this category. However, if the PPE was internally constructed or created, it may allows for financing cost to be capitalised resulting in a higher asset value. An example will be Company A and B building the same plant but due to higher construction cost and financing cost, Company A may end up with a higher value asset than Company B but seriously this is due to higher cost and not due to different in specification. Overpaying suddenly looks good.

Replacement cost – Replacement cost simply refer to the cost company has to incur to replace the same asset.

Net Present Value – This is basically discounting the future cashflow to today’s value. Example of it are annuities and stock. The price of the stock is basically the future cashflow and residual value of it. The discount rate used and assumption matters on the value you derived at.

Based on the more common and easier methods I describe above, they are all correct and can be used to measure an asset. However they all derived different value hence intrinsic value is tough to gauge. Let me use a HDB flat as an example as it is easy to understand. The flat was bought 30 years ago at S$70k (historical cost). Today similar flat is sold on resale market at S$300k (fair value). Because I stay in it, I save S$2k a month (value in use). If I rent it out at S$2.2k a month and with 2% rent escalation a year to account for inflation (NPV), I get a different value. The cost to build a similar flat today (maybe S$200k) will be higher than 30 years ago due to construction cost increase and land cost and inflation etc (Replacement Cost). The typical issue in measurement/accounting is reliability vs relevance. Hence without the proper training, it is very tough to determine intrinsic value in practice.

Temperament

The return of an investor is also largely determine by his personality. This is not something that can be taught unless some life altering event happen to him. Our good friend above has the following advice for people but while the concept is simple, it is not easily followed. There is no comfort in being a contrarian in a bear market. You do not contra just to be different. You have to be contrarian because your analysis tells you so and not because people/market tells you. You can observe in young kids when they are feeling fearful or uncomfortable they will seek the assurance of their parents. It is the same for investor seeking assurance by selling their holdings because everyone is doing it when they should be buying. How many times have you read in forum people advising for the dust to settle before buying or you will end up catching a falling knife. If you wait for the dust to settle you might end up missing the boat. Profit are made when market is confused, not when it is certain. You might have the best laid out plan for a crisis but it might not be executed properly due to your emotions. This require the investor to keep a cool head and always apply second or third degree thinking. For example, everyone knows IDA is looking to introduce a fourth telco. Hence everyone say due to increased competition, it is better to sell as margin will be affected. The level headed investor will seek to determine how much of the revenue will be affected, any mitigating factors (new revenue stream such as cyber security? look at myrepublic internet take up rate? associate growing? Lower future capex spending due to technology improvement?) and if the market oversold, value might appear. You buy not because of reverting to the mean because if the market has changed, the mean might not revert. You buy because your analysis say so.

The value investor also require a lot of patience to sit on his butt and do nothing if there is nothing to buy. Sitting down and doing nothing while observing the market is one of the toughest thing to master. If you read a few investment books, you will notice they mentioned that the biggest loss and gain are normally made over a few days in a year or few. Hence it is very hard to time the market to buy or sell. The value investor needs patience to wait for opportunity to appear to get in with margin of safety and to sell when his analysis is wrong or valuation is bubbly.

Reading widely and thinking deep

The value investor also needs to read widely and think about changes happening and how it will affect his business. The changes/competition might not be coming from the industry but from another industry. You need to be aware of such changes. I observed that there is a certain state of mind which one needs to require to be ideal for investing but it is kind of oxymoron. An individual needs to keep an open mind in order to absorb new ideas into his thinking but staying firm on decision based on this investing analysis. This is very very hard to achieve as if the company you have bought is facing headwind, everyone will be telling you to reconsider or to pare down the position. However your analysis tell you this is temporary set back before it will continue to scale new height. Families and friends will be thinking you are a stubborn old mule but in your mind you are sticking to your decision because your analysis tell you this is temporary and over reaction by the market. This will be very trying times for the value investor and hence how he reacts to such situation will determine his return.

Conclusion

The value investor requires a wide set of  technical skills and correct temperament in order to be successful. Not many investor fulfills the criteria and the next time you hear someone describe themselves as a value investor, observe them for a period of time and you will know which one is the charlatan. I could go on and on but you get the idea. Thanks for reading.

Dutech Group Holding – Part 1

Today I want to talk about this little known stock in my portfolio, Dutech Group Holding. The company was incorporated in 2000 and listed on the Mainboard of Singapore Exchange in August 2007. The Group is mainly involved in the manufacturing of ATM safes, gun safes ( High Security Products) and precision engineering products for semi conductors and automotive industries (Semiconductors). They are the largest in Asia in terms of sales volume and production capacity. More details on the products offered can be found in this link. Dutech Holding

Major Customers

The company is a original design manufacturer (ODM) of high security products and count some of the following companies as their customers

• Wincor Nixdorf
• Diebold
• Liberty Safe
• FoxConn
• Scientific Games

They supply ATM manufacturing and assembling to Wincor and Diebold, Gun safe and personal safe to Liberty Safe and gaming machines to Scientific Games.

Major Awards

• 200 Best Companies under US$1 Billion in Sales by Forbes Asia Magazine in 2008,
• Best 50 Chinese Companies in the next 30 Years by Founder Magazine in 2008,
• Best Suppliers by Wincor Nixdorf
• Excellent Suppliers by Ferrotec respectively.
• Special Process Vendor from Applied Materials enable Dutech to supply semiconductor parts to a broader customer base.

The awards given by their customers shows Dutech provide excellent service and quality to them and more recurring sales can be expected. According to the prospectus, the contracts from customers normally range from 1 to 5 years with a minimum order quantity. There is no fixed price so raw material price increase can be pass on. As Wincor is a major customer, it is exposed to customer concentration risk and the question was posed to the CEO during the AGM. He mentioned that they need to give Wincor a 5 years notice if they were to drop them and vice versa. The supply chain is complex and Wincor is dependent on them for majority of their parts. Hence the likelihood of them being dropped is very low and they are very comfortable with the current arrangement. In the prospectus, it was mentioned that Format is their main competitor in the ATM safe business as they are located near Wincor HQ in Germany. Dutech was able to compete due to being more efficient by having a lower production cost. In fact as a testament to Dutech efficiency, they acquired FORMAT in 2011!  They took out their competitor. It was mentioned by the CEO that their main competitor is now Gunnebo who is listed Sweden and they are six times larger.

ATM Industry 

The ATM industry is currently dominated by NCR, Wincor Nixdorf and Diebold. Based on an article by Bloomberg recently, Diebold is offering a cash and share offer for Wincor Nixdorf which will create a new ATM giant. The newly formed company will be the market leader with 35% market share and NCR having 25%. I spoke to the CEO during the last agm and he mentioned that this move has both good news and bad news for the company. The good news is Wincor and Diebold are both customers of Dutech and with their new strategy to focus on software, the large bulk of manufacturing will be outsourced to Dutech. However, as Dutech sold the same parts to both companies at different price, there will new negotiation on the pricing. ATM is  a lower margin business compared to self-serve machines because they are recurring in nature. I was pleasantly surprised when the CEO mentioned that the life span of a ATM is 2 to 10 years depending on usage. For developed cities such as New York or London where usage, the replacement takes place every 2 to 3 years. The ATM itself is like a personal computer which requires upgrade/replacement. For ATM that is in less populated, the maximum it can last is maybe 10 years.

Certifications

Safes produced are certified by the following 3 certifications

1. Underwriter Laboratories (UL) – An American worldwide safety consulting and certification company headquartered in Northbrook, Illinois.
2. CEN – European Committee for Standardization, is an association that brings together the National Standardization Bodies of 33 European countries. Dutech ATMS are verified by organisations such as CNPP of France and VdS of Germany.
3. CCC – China Compulsory Certificate certification

The company has to fulfill certain criteria in order to continue holding the UL certification. This certification is renewable every 7 years and subject to periodic verification by UL. In the event of non compliance, the certification will revoked. Per the prospectus, a manufacturer has to meet pre admission criteria such as high standards of manufacturing know-how technology, suitability of equipment, skilled engineering, specially trained labour and stringent quality process controls including ISO qualifications. This certification process will take approximately 3 years to obtain. It was further disclosed that in FY2012 annual report that Dutech products are in the fifth generation of CEN certification while the rest of the manufacturers are in the process of getting certification. This shows Dutech is years ahead of its competitor. The importance of this certification is that it creates a moat to entry for potential competitors as there is a lot of know how involved and long and tedious process to get certification. The first mover has huge advantage as they are not likely to be taken overnight as certification itself is 3 years! Furthermore in a manufacturing business, economy of scale does matter in procurement as they are probably able to obtain better prices. This cost leadership ensure better margin which will also protect the business moat. Assuming competitor and Dutech were to sell at the same price, it means Dutech will earn better profit and in the long run with a stronger balance sheet, Dutech will be in the position to acquire weaker competitors to further entrench their position in down times. If we are to be invested for the long term, we should look for a company with moat so that margins and market share can grow or be protected.  CEN certified safe has better margin than UL and certification is required for insurance purpose so these regulatory moat are definitely easily identified. Vicom is the typical case of a company where moat is created due to regulations.

I will proceed to look at the financials and competitor in the next posting. Thanks for reading.

 

 

 

 

 

 

 

 

Q3 2015 Accordia Golf Trust update

I haven’t been blogging often as I am quite lazy by nature and not a very good writer. I would like to provide an update to the Q3 result of Accordia Golf Trust which I am vested in. As we can see in their QvQ result, nothing much has changed except for Golf Course Revenue which has increased significantly due to better weather. Restaurant revenue is pretty consistent QvQ and membership revenue are collect in Q4 and recognised monthly hence there should not be huge fluctuation. One of the strong point about AGT is the ability to manage cost well. You do not see huge swing in their operating expense unlike some other companies which is something I greatly appreciate.

The biggest change this quarter is Golf Course Revenue due to seasonality. After the previous announcement in Q2, the share price plunged from 64 cents to a low of 48 cents as the DPU was a a paltry 0.74 cents. Q3 DPU is 2.16 cents which brings YTD DPU to 4.66 cents. At 48 cents, this is a 9 months 9.7% yield!!!

If you were to look at the above table I computed, what happened was the total number of visitors went up and average golf revenue per visitors increased about 15%. This is significant as I mentioned in my previous blog post that it takes approximately 1.15 millions visitors to breakeven. An increase of 15% in average golf revenue per visitor means that it takes lesser visitors to breakeven. All incremental visitors revenue are taken straight to the bottom line as operating costs are quite consistent. My guess is play fee was lower in Q2 to encourage more visitors during bad weather hence that is good stewardship of the company by the management.

This slide by the sponsor further shows the difficulty in trying to forecast revenue as the play fee between weekday and weekend is quite huge hence visitors number by itself does not provide a complete picture of the result we can expect quarterly.

Refund of distribution income witheld

I did not like the decision to withold 10% of earning in Q2 during a bad quarter and there was no acquisition or unit buyback. This really creates a lot of uncertainty which is something unitholders and market dislike. Do note that management will be paying out the 10% withheld in the coming 2H distribution.

Forecast for Q4 15/16

The normalised DPU for FY2015 is 6.5 cents and YTD 2016 is 4.66 cents which means we require 1.84 cents to reach 6.5 cents. If we were to use the quarterly distribution forecast disclosed, Q4 should see a similar payout to Q3. However, membership revenue for whole year should be only JPY4.8bil (JPY1.2 bil quarterly per financial statements)

I did a computation using some estimates from Q4 14/15 and we should be able to see 1.63 cents for Q4 FY15/16 bringing whole year DPU to S$6.29 cents. This is still below the normalised FY14/15 of S$6.5 cents. I have to emphasis there are some uncertainty here being revenue (impossible to forecast!), income tax (not sure if there are any 1 off affecting prior year figure and how much) and other capex needs. The upside is the foreign exchange rate. Now SGD /JPY is approximately 80 so this may surprise on the upside as we are using JPY 85. If I were being prudent, I will only assume 5.5 cents for the FY to look at this investment (payout ratio of 90% and downside risk for JPY in the long run).

Conclusion

On the whole my investment in Accordia was a learning experience and I made a few mistake.

Anchoring Bias – My entry price was based on how much the share price has fallen from IPO and the discount to NAV.

Lack of long term track record of the company – As this is a newly IPO company, they lack the long term track record required to even out the seasonality and to be able to judge the track record of the management. What is a value buy can turn out to be a value due to management destroying shareholder value. I am sure seasoned investors have their fair share of experience with such companies.

Understanding of the business – I had no idea that weather play such a huge role in the nature of this business and the revenue swing it brings. While I understand that the golf industry in Japan is declining (the population declined 1 mil in a recent news article!), I am of the belief that there is also money to be made in sunset industry. Especially since the industry is fragmented so there will be consolidation opportunities. In sunset industry, you are more likely to find mispriced asset rather than growth industry, where the entry price is so high that it does not afford us a margin of safety in our investment. This seasonality issue would have been resolved if the company has a long track record as we can average it out over the long run.

Going forward, I will continue to make more newbie mistake but I hope none will be costly. Thank you and have a great weekend.

Accordia Golf Trust Q2 results

Recently Accordia Golf trust announced their Q2 result which has create quite a shock among the investing community. The share price has been hovering around 63 to 65 cents and many people bought it for the attractive dividend yield believe to be in the 9 to 10% region.(Based on 6c DPU at 64 cents). In Q1, the dpu came in at 1.76 cents per unit which was wonderful but Q2 dpu was a measly 0.74 cents. That’s a decrease of 58% from Q1. To make things worse, they decide to withhold 10% of total income available for distribution. No wonder the share price drop to 59 cents the next morning following the announcement.

Immediately ASSI AK blog (See Link) about it talking about the bad weather in Japan and I did not think too much about it as weather is unpredictable.  I am in it for the long term and at an average cost of 66 cents, I can still live with the close to 10% unrealised loss as we all know Mr Market is throwing a tantrum. (FYI they are like PMS, don’t try to reason with it).

Lo and behold, the share price suddenly hit a bottom of 55 cents on 1st December. So I took it upon myself to do some research to understand why the price keep on dropping like there is no end to it.

Visitors Numbers

Based on my computation, visitors number decreased by 7% QvQ. As you can see from the figures, May was an exceptionally good month. Visitors almost hit 600k. The rest of the months came in approximately at 500k visitors each. Plus August and September are the peak of the typhoon season, so the numbers are really respectable. (Japan Weather Guide)

Golf Course Revenue

You can see from my computation that Golf Course Revenue per visitor has drop 8% quarter on quarter. My suspicion here is discount could be given to attract more people to play during the typhoon peak season in August and September. Hence visitors maintained at approximately 500k every month. So the exceptional good month in May and drop in golf revenue per visitor contributed to the poor result. My suspicion leads me to think that there is a certain number of visitors Accordia needs to hit to break even and any slight increase in visitors after this breakeven point contribute significantly to the bottomline.

Q2 vs Q1 results

Based on the 2 Quarters result comparison, I would like to highlight somethings that catches my attention. Restaurant and Membership revenue are quite resilient and consistent despite the typhoon and visitors number decrease. Operating expense was very consistent quarter on quarter too. However repayment of membership deposits increase by JPY 415 Mil. We need to investigate further whether the interest in golf is waning or due to the underperformance of the Japanese economy consumers are cutting back on entertainment expense. The first is of utmost important as recession is of temporary nature and the economy will bounce back but loss in interest of golf is harder to recover. Perhaps we should email the IR and ask them to explain this.

Breakeven analysis

Since my observation that operating expense, restaurant, membership revenue and other operating income are quite consistent, I think it will useful to do a breakeven analysis. You can see from my computation at average of JPY5,665, it requires approximately 1.14 mil visitors to breakeven. The additional number after this all goes directly to the bottomline. We can even go a step further to say that based on 500k visitor a month, your yield almost depend entirely on the last month of the quarter. The prior 2 months are to cover the fixed cost.

All doom and gloom

Based on this slide by AGT, distribution is likely to be higher in 2nd half despite lower profit as we enter the winter season. October visitors number also came in at the second highest this year too. I will be watching the November figure closely to get a better idea.

Conclusion

While the share price has been dropping, there is no major cause to be alarm as Accordia has alway been cash flow positive. You can even trace back to the sponsor past year results to have an idea on the resiliency of Golf. Hence I am not doing any analysis on their loan schedule and interest cover ratio. The chances of Bank of Japan going on another round of easing is very high hence it is likely we will see some acquisitions soon due to cheap funding. If you were to ask me, the holding back of 10% income for distribution by management couldn’t have come at a worse timing. I have my doubt on why they choose to withold it when bottomline is hit. It seems like they are not concern that the share price slide down from IPO price of 97 cents to 55 cents. Almost a 50% loss for those who subscribe to the IPO. As they are newly listed, we lack sufficient info to adjust for the seasonality of the earning and to observe the management behaviour. This could turn out to be a great income investment in the long run or value trap due to the poor management. The jury is still out but meanwhile I certainly won’t be adding anymore to AGT.

Dividend Q4 2015

Hi all,

This will be a short post as today is my birthday and I have been busy driving my in laws around. Basically this post is to force me to keep track of my dividend received. As I have trust such as Ascendas and Accordia which pay every 6 months, this quarter dividend will be higher than other quarter. Please see below result.

Total dividend I will be receiving for this quarter is S$1,094.62. Thanks for reading and hope everyone has a great weekend too.

 

Blog name inspiration – If I had a million dollars

Hi,

I would just like to share the inspiration for my blog name. I draw my inspiration from the hokkien song 一百万 which means If I had a million dollars. Singapore is a great place to stay in but everything great comes at a great cost too. To enjoy a carefree life, basic needs such as housing and healthcare have to be taken care of. I hope to generate sufficient passive income (rental/dividend) income to cover them. This frees me to take on less stressful/lesser hour job which are likely to be less well paid in order to find the balance in life. Frequently, I have seen extremely hardworking people who worked so hard to the detriment of their health or people who enjoys the moment that they don’t plan for their future. Dalai Lama has this to say and it resonate deeply with me.

We are human being, therefore we need to take a rest every once in a while. However money being an object does not need to rest, we must put it to work harder. The harder money works, the more relax we will be. When we are young, we need to work hard to accumulate enough money capital to make them work harder for us so we can work less. Hope everyone enjoys the song as much as I do.

 https://www.youtube.com/watch?v=HtkL5Ldpk-g