Value investing is not something that comes easily to everyone. I would not say I am a value investor, but that value and fundamental research and valuation is a part of my investment process. Value investing takes time and at times you have to contend with imperfect information which affects the eventual perceived value.

Losing Musicwhiz seems to dramatically reduce the number of Singapore bloggers doing deep research on prospective companies, but yesterday we chanced upon a new blogger who does deep research sharing his findings with others.

The 20 years old investor shares his insights on Vicom over here and if this article indicates how future articles will be, then Singapore Investors need not feel so bad about losing Musicwhiz

In my humble opinion, choosing this form of investing at such a young age is impressive as thinking back I cannot recall myself having this kind of thought process when I was 20. The other person that I encounter with this kind of thought process was my blog reader Nick.

Value investors seem to get younger and younger!

1. At $0.025 payout that translates to a 9% yield
2. Average DPU since listed (2005) have been $0.02 translating to a 6.9% yield
3. Business is net cash with very strong free cash flow
4. How I would describe them is that they are an extension of 3M. Using 3M’s products to customize and serve a wide industry of customers by value adding to their products.
5. Their advantage lies in the delicate balance their products sits in their users end product. It is not a large portion of the cost to produce the end product such that the customers would often think about switching. Rather the customer looks at other intangible aspect such as the quality of delivery and reliability and the additional cost should they switch over.
6. The opportunities is that whichever industry 3M’s and their suppliers products are used, they can potentially edge in.
7. This business they way I see requires a lot of business relationship building and competent sales team.
8. Once established, you will need a strong operations to deliver and meet the requirements.
9. The threat is that they are not the only ones doing this and that another competitor can readily replace what they do. To increase their sales by tapping other businesses, the relationships may have been established and the same reasons that stops people from taking away their business might stop them from edging in as well.
10. They are pretty spread out in terms of profit contribution from various industry, but by their own engineering, hard disks manufacturers Seagate and Western Digital drives 50% of their net profit and the recent Thailand flooding goes to show that this is an opportunity as well as a threat.

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Here is the factsheet for Adampak since listing. I thought it looks pretty good. Went through the GFC but had you been a holder and you have participate in the rights issue your total gain is still pretty good.

How I see the hard disk industry shaping up

Now since hard disk drives a large portion of profits, a lot of folks are talking about how solid state drives (SSD) will replace magnetic hard disks (HDD), which are the hard disks that you guys have been using all these while. Does this spell a big substitute threat to Adampak?

For the less tech savvy folks SSD have a lot of advantages over HDD but have some flaws as well

1. SSD have significantly faster reading and writing speed than HDD. You can get Windows 7 boot up in 8 seconds on SSD.
2. Consume less electricity
3. More tolerant to ambient temperature
4. More tolerant to vibration and shock
5. Their one fatal flaw is “write endurance”, which means that there is only a finite write cycle for each block.

Judging by the pros over cons why hasn’t SSD taken over HDD? One thing is the cost per byte is much much higher. But in the last 3 years they have narrowed significantly

• The average price of SSD has fallen from $40 / GB in 2007 to $2.42 in 2011.
• The average price of HDD has fallen from $56.03 / GB in 1998 to $0.075 in 2011.
• For SSDs in 2011, the lowest price per GB we have in our data set is $1.50.
• For HDDs in 2011, the lowest price per GB we have in our data set is $0.053.
• In 2007, SSD memory cost 120 times as much as HDD memory. In 2011, that has dropped to 32.
• If a 3 TB HDD would cost as much per GB as the average SSD today, it would cost around $7,260. Right now, the cheapest 3 TB drive on NewEgg.com is $230.
• The current average price per GB for SSD is about the same as it was for HDD in 2002.

Given another 2 years and I am sure it will reach a viable price. Still the way I see it, you need SSD controllers to improve significantly to lengthen the write endurance.

Ultrabooks, Macbook Air, Tablets driving SSD

Now the market for hard disks tends to be segregated to enterprise servers and consumers. I believe the use of SSD as server accelerators Is starting to see a lot of viability. However for enterprise servers the need for large storage due to the movement to cloud computing will mean that there is always a sustain demand for HDD.

However the shift in consumer electronics should see a drift towards flash storage and flash SSD. The Macbook Air in 2011 have been very popular. So popular that all the PC vendors are copying them and producing Ultrabooks.

The trend is clear. Consumers want thin, light and portable laptops. The demand for desktops should see a drop off as the move to App Lifestyle and Cloud Computing reduces the business case for desktop pc for a lot of people.

Adampak likely still very relevant

In such a scenario, what Adampak provides in my opinion can still be brought over to SSD.

SSD will still need adhesive labels similar to that of HDD, which is provided by Adampak. However, Die cut adhesives used as damping could be render obsolete due to the nature of SSD not requiring much vibration protection.

The problem for Adampak is to edge in to this new pie. This is where their sales guys need to do the job well. The SSD players likely will have their own suppliers.

The one thing that would work for Adampak is an industry consolidation. Everyone knows Western Digital and Seagate are late into the game. The likely thing that these 2 will do is buy up the smaller players for technology. But they cannot buy up Intel which is big on this.

Conclusion

I do see that Adampak having an important role to play in an industry that will continue to be around. Whether its HDD or SSD the important thing is that the management can tie up strategic customers not just in the hard disk industry but in pharmaceuticals.

Any one currently invested can enlighten me what you guys think of the industry.

They are not the only one. Rogers Communications in Canada is also filling papers to start a bank.

With so much of the economy riding on their infrastructure, the telecom think they can do more. Monetize the customers, the suppliers but mobile payment would be the lucrative one.

Don’t be surprise if Starhub, M1 and Singtel start doing this.

Vodacom has secured a licence from the Financial Services Board (FSB) to begin selling insurance products directly to its customers as it seeks to broaden its portfolio and expand its revenue streams in a maturing mobile market.

There are few details available for now, but TechCentral has established that the cellular network operator intends to begin selling insurance products much more aggressively in the first quarter of 2012. It already has a limited portfolio of options available that includes insurance for phones, tablets and laptops.

Vodacom spokesman Richard Boorman confirms that the FSB recently granted the company a licence that will allow it sell insurance products directly to consumers rather than working through an intermediary. Until now, it has supplied insurance products through a division of Santam.

“The key reason for applying for the licence is to give us more control and flexibility when it comes to insurance services,” says Boorman. “We don’t have any specific new products or services to announce at this stage.”

Vodacom’s insurance team reports to its head of financial services, Mark Taylor, who is responsible for, among other things, Vodacom’s M-Pesa mobile transactions platform, which it launched last year in partnership with Nedbank.

In an interview with TechCentral in May, Vodacom Group CEO Pieter Uys said the company might seek its own banking licence from SA regulators if M-Pesa took off in the way it expects it will in the next few years.

He said Vodacom had decided to work with a bank to launch the service because it realised it could not launch it in the timeframe it had set itself without a partner. “We have a good partnership with Nedbank, [but we want to] start opening it up so you can transact with other banks,” he said at the time.  — Duncan McLeod, TechCentral

I covered a wide range of stocks from dividend stocks with predictable cash flow like Starhub, CMPacific, SMRT, First REIT to blue chip stalwarts like Keppel Corp, DBS, SIA Engg to the really small value stocks like Boustead, Kian Ann, Adampak.

While doing the exercise, one of the stocks that grip my attention was Noble Group.

Noble Price 11 years

Here is a chart of Noble’s stock price since 2001. Notice that the stock price then was at 22.5 cents. This is during the 2001 to 2003 bear market. During this period, Noble went through some great growth. Like all stocks it went through another major bear market in 2007-2008 where it drop from $2.80 to $0.40 again.

Right now the price ended up  at $1.15. Looking at then price chart you would think that this stock is better for trading than investing in. If you had sold it at the high of $2.40 or $3.20 you would have gotten a really good deal.

Does that mean its not good to buy and hold?

Noble’s Bonus Shares and Stock Splits

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Which is where my factsheet comes in. Basically, I simulate what will happen if you bought 1000 shares of Noble at the start of 2001 and what is your returns like.

The result? If you kept Noble since 2001 at a cost of $225, your dividends would be $2903 and your unrealized gains would have been $18517. The total return is approximately 9520% which is made up of 8230% unrealized capital gains and 1290% dividend gains.

Why was there such a wide gain?

Firstly, Noble since 2001 have had 6 bonus issues. Bonus issues typically do nothing much. Instead of paying out a cash dividend, a company like Noble pay you stock dividend.

Does your average share of the company increase? Not necessary, the pool of money to pay out as dividend is kept within Noble so that they can reinvest to make you more money. Since this pool is divided equally among all shareholders by increasing every one’s share of the company, the share of company stay the same, but you get more shares.

Noble also have one stock split of splitting up its share in 2004 to 4 shares. This does nothing on its own as well. Stock splits just means that instead of having 1000 shares at $4, you have 4000 shares at $1. The rational is to make the price of each share look lower so that people are more attracted to it.

The magic comes about when Noble make more money subsequently down the road. Your bonus shares that was issue to you these 10 years means you are entitled to more of the company’s return.

So instead of getting $1000 for each $1 earnings per share if you have 1000 shares, you would get $15300 for each $1 earnings per share because now after all the splits and bonus shares you have 15300 shares.

What we can learn from this

1. You can only gain this kind of astronomical returns if you invest in a company that generates increasing profits. The bonus shares and splits are not magic. Having more shares but when profits are falling or for the matter turned into losses would just make this a bad investment. The business, economics and operation matters if you want to hold a company this long.
2. Bonus shares and good dividends appears to be indicative of management that have confidence in their business and prefers you stick with them. In my brief exercise, not many would carry out a bonus share issue. Strangely those that issue bonus shares turn out to be rather sturdy companies that grows.
3. The price you buy matters but it is important to know the value you get. Why we kept advocating buy 50 cent 1 dollar is to buy value buys at reasonable prices. Comparing 2 commodities investment then, you may get more value simply because Noble choose to reward their share holders more.
4. I tried changing the first buy price from 22.5 cents to $3 or $6 and  turns out you still make money! You only start losing money if you have bought Noble at $22 in 2001. That to me is pretty amazing.
5. Compounding and time value of money will work if you spot a company that grows its earnings and reward you.
6. Reinvest only in companies with good business, sound management that consistently shows a willingness to reward share holders. Management retires and business environment changes. Noble is in a stage right now where the chairman is struggling to find a successor. We are entering another difficult operation condition. Your dividends will ensure that you receive rewards while waiting. A change from the policy these 10 years (cutting bonus issue and dividend policy) would signal that you need to relook into it.
7. Hindsight is a bitch. This exercise just shows me I missed a great deal.

I hope I gotten my figures right. Drizzt can get pretty wrong sometimes. Do comment if you think I have gotten it wrong.

Do you guys have similar companies like this that have so many corporate actions? How did they end up eventually?

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

For a yield stock that was so stable at $1.10 it fallen down to $1.00 and now another free fall. Honestly I think the price should hold at $0.93 region and it shouldn’t fall to the next possible support at $0.84.

Yield looks attractive

Make no mistake people like SingPost because they think that it is a mature business that provides very predictable free cash flow which in turn, pays out a decent yield.

In summary, good yield for low risk, basically like a safe bond.

1. At $1.10 > Yield is 5.6%
2. $1.00 > 6.25%
3. $0.95 > 6.50%
4. $0.85 > 7.30%

For the latest dividend yield of SingPost you can track it on my dividend stock tracker [Singapore Dividend Stock Tracker >>]

On this note 6.5% does look attractive but what about the business aspect?

Change in management and operating environment

When I look at the recent price movement, my thoughts are: Why would a stable stock which usually does well in a bearish environment exhibit this kind of price movement. Some of the income yield stocks that are more stable on my Dividend Stock Tracker such as Singtel, Starhub, SPH, Vicom have remained stable.

The most recent changes at the group could be the destabilizing factor

1. Promotion of Dr Wolfgang Baier to Group Chief Executive Officer. Baier is a 10 year McKinsey veteran age 37 years old.
2. Appointment of Sacha Hower as Chief Operations Officer. Sacha is a junior partner at McKinsey as well age 33 years old.
3. Capital expenditure is increasing.
4. Free cash flow to pay dividends is barely if not covering dividends.
5. Aggressively building a logistics network in Asia Pacific
6. Partnering with DBS bank
7. Aggressively growing different products

This SingPost is growing to be pretty different then the yield stock we used to know. The cash holdings are declining. The operating cash flow is starting to look uneasy to cover the dividends.

For the first time, it seems the Chairman really sees business model problems with the old business. Why else would they bring in a CEO and COO from McKinsey?

The fear is that if they do not be aggressive and expand their product range, or optimize their economies of scope, they could become somewhat like Global Yellowpages where they are disrupted and irrelevant as a business.

I honestly think that the share price movement could be a vote of no confidence in the recent move to e-retail and logistics, as well as the risk in such a young management team.

1. Logistics, although have so much synergy with postal service, is essentially low margin, and depends so much on the global economy. Profitable? Probably. Defensive? I am thinking not so much.
2. Partnering with financial services is correct. But it didn’t work out the first time with Prudential. I still think this is an execution and marketing problem. But then, how often do you go to a brick and mortar for your banking needs anymore?
3. Much will hinge on what the new management brings to the table. They may have good ideas but I honestly am skeptical when you replace old heads with consultants. We deal with consultants all the time so I am opening up to readers whether do they execute well.

Would I buy SingPost? I still have 1 lot in there at $1.08 and unlike Starhub when it was at $2.10 (which was a good call I feel) this one I just frame a good outcome. I am fundamentally weak here so if there are folks well verse with postal, supply chain and in this aspect you guys can help educate my readers and me.

I leave you guys with a 2011 Accenture report on the challenging postal environment. I welcome any views regarding Sing Post

As mail volumes dropped,margins were squeezed, prices increased, and operational improvements were made; but the consequences of economic fragility meant the challenges remained significant. It became clear that, without action, volumes would continue to decline and the postal industry would reach a point where costs exceeded revenues. So where does the compass of progress point next for postal organizations?

Accenture Achieving High Performance in the Postal Industry v2

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

For some stocks, when the price appreciates to a certain target price, the management may decide to split the existing share to smaller shares. This is to improve liquidity. Since going public in 1965, McDonald’s has paid twelve stock splits.

Similarly, when the share price is too low, the management may decide not consolidate the shares in a reverse stock split. SGX listed Aims Amp Industrial REIT recently did a 5 to 1 reverse stock split to consolidate its share so that it looks more appealing at $1 than at $0.20 to investors.

So what is the main benefit of stock split? from the underline words, you will be able to tell that the benefit is mainly psychology. The value of the shares you held doesn’t change, it is just the size of the number of shares.

It also greatly distorts a stock investors research when you think whether companies like McDonald and Singapore Press Holdings were good long term investments since their stock price look as if it has gone nowhere.

However, an investment of $2,250 in 100 shares of McDonalds at 1965, had grown to 74,360 shares worth over $5.7million as of year-end market close on December 31, 2010. So did SPH which split a few time, else it would have been a $16 to $20 stock.

A real life example was recently encountered over at Seeking Alpha where a retail investor shares what her parent actually did and how, if you hold a good stock, the stock splits are pretty amazing:

Greyledge Gal:

I’m 49 years old. For my 10th birthday In 1972, my father put $14,400 into XOM, purchasing 200 shares. I have never touched this investment nor have I plowed back the dividends into XOM or purchased any additional shares.

Due SOLELY to stock splits, 39 years later, that 200 shares has turned into 6,400 shares. I have no insider knowledge but XOM hasn’t split for over 10 years and it is probably ripe to do so. Normally, splits have happened when the stock is selling from $70-$80/sh.

Who knows what the future holds and your investment might turn out quite differently than mine has; however, I don’t see the world quitting on oil anytime soon and XOM is also positioned well in shale and natural gas. I doubt you could go wrong even with the lower yield IF and ONLY IF you are going to make this a long term, lifetime, investment. Yes, it takes a lot of intestinal fortitude (like when IBM went to heck about 20 years ago, it took a lot not to sell but boy am I glad I didn’t!), but if you have the stomach for the roller coaster ride, investing in blue chip stocks like XOM, IBM, Chevron — another winner, MCD, etc., is the safest route for building retirement savings.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

We talked about steel stockist Asia Enterprise Holdings Q3 2011 results yesterday. This week The Edge profiled HG Metal, a steel stockist that got into a bit of an issue during the last financial crisis. [AEH Q3 Report here>>]

This presents a good case study for steel stockist investors or interested investors to manage their expectations as to whether this is a business they want to be invested in.

Some steel stockist list on the SGX includes Asia Enterprise Holdings, Lee Metal, Sin Ghee Huat, HG Metal, Natsteel.

• When the 2007 financial crisis hits, steel prices collapse from USD$1,200 to USD$500.
• HG Metal, gearing up for great growth have stocked up quite a big of inventory, and it killed them.
• There was internal strife and directors tried to oust other directors.
• Current CEO recently took over the management of the company. He owns companies that include Oriental Castle Sdn Bhd, a foundation steel works specialist with projects around Southeast Asia and China.
• Most of the steel stock price decline took place in Aug and Sep 2008 and stayed depressed for 9 months.
• Essentially their bought inventories, goes into their cost of goods sold, is much freaking higher than their average sale prices.
• Current CEO convinced HG Metal have turned the corner. Sold down inventory very quickly, paid back every single bank and supplier. Every debt was honored and no one took a haircut.
• The CEO allowed his own shares to be diluted when they did a placement
• CEO wants to pooled contacts between Oriental Castle and HG Metal to create customized demand steel products for customers
• As a stockist, the company is capable of supplying some 2,000 different steel products that can meet just about all but the most specialised needs.
• The company intends to stock higher grade products such as high-strength beams and abrasion resistant plates.
• The CEO thinks the major revenue for now is still in the distribution business.
• To improve operations, Deloitte was appointed to conduct a comprehensive internal audit of its processes and systems.
• Associate professor Chiew Sing Ping, division head of structures and mechanics at NTU school of Civil and Environmental Engineering as been asked to advise on technical and quality issues.
• He intends to gear the balance sheet more since current gearing is only 0.3 times.
• Margins have been indicated being tighter during this ongoing eurozone debt crisis.
• CEO is keen to pay dividends but will not commit yet.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

I mentioned yesterday that Macquarie International Infrastructure Fund (MIIF) may be an attractive proposition. (article here >)

Today I present some data on TBC, which is a 47.5% owned asset by MIIF. MIIF increase their stake from 20% to 47.5%.

Why increasing their stake in TBC is good?

If we look at the business, it is pretty diversified

1. Cable TV. Invests substantially in upgrading and maintaining their networks to provide high-quality of delivery of 100 channels. Their top-rated local offerings in include the ever-popular entertainment channels such as SET, CTV and ETTV. Popular news channels such as TVBSN and CTiN also play alongside kids’ favourite channels including ET YoYo and sports channels like VL Sports. In addition, a wide range of international brand names like HBO, Discovery, National Geographic , ESPN and CNN also feature in this strong line-up.
2. Digital TV. Not well penetrated now, which might or might not present an opportunity to TBC. 4 high-quality channels from AAA Networks, including History HD, History, Crime & Investigation Network, and Biography. Near 70 of analog channels, now available on the digital platform.
3. Broadband. TBC offers a high quality broadband internet access service via its hybrid fiber- coaxial (HFC) network. With its DOCSIS-3 ready infrastructure, TBC can offer high bandwidth services at the best value, so our customers can enjoy the best internet surfing experience.

The increase stake in TBC also cut its debt and interest payments. With less loan amortization, it means that TBC can pay out more of its EBITDA as dividends to MIIF.

The growth of its EBITDA and Margins are impressive as well.

We should see a terminal EBITDA margin growth. It cannot keep climbing like this. The adoption of digital tv is also low and we do not know if it will take off. The key is for them to move to higher ARPU.

The risk is that with mobile broadband, this may get cannibalized.

As investors we look at TBC to pay SGD 50 mil which is equivalent to $0.038 cents of dividend. That is nearly a 7.8% yield.

HNE and CXP will pay for the management fee and act as the booster.

Think of buying into MIIF as buying into a broadband operator. Evaluate whether a broadband operator in a market that is in a different demographic as Singtel, Starhub and M1. Would a 7.8% yield be a good compensation? Current yields of Starhub, M1 and Singtel are 6.8%, 7% and 5.5% respectively.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Its an exciting week but lets not get ourselves distracted. Some fundamental knowledge about the telecoms we are investing is important.

We talked about in the past why telecoms in US and Europe are moving towards tiered pricing and charging more to people who use more mobile bandwidth.

The future could be that Singtel and Starhub could not increase their tariffs for LTE implementation. Would you pay more than $40 dollar just because LTE provides more throughput? I think not. There is just so much you are willing to pay.

Mobile data charging is a pickle for most operators. When offered quota-based plans, subscribers react with confusion (not at the least alleviated by data plan calculators and other visualization aids). Frustration comes next, when they are offered ‘unlimited’ data plans, but those are too slow or get throttled. Selling bits and bytes simply doesn’t cut it anymore. Strand Consult is already predicting pricing model failure, suggesting that “any operators that believe they can increase prices by [simply] introducing LTE are in our opinion naïve.”

The future could be that Singtel will segment users according to the services provided

1. webpage viewing (non-bandwidth intensive)
2. streaming videos and music (bandwidth intensive)
3. mmorpg gaming (relatively neutral bandwidth intensive)
4. location based retail
5. banking and stock market specific service
6. personal cloud
7. office and project management cloud

Different services provides different benefits to different users. Telecoms should charge based on the quality of service you want and they should be measure this way.

Not as a dumb pipe.

Do read this article It is coming: The emergence of second-class mobile citizens.

Do tell me what you think this can be the case for your home telecoms.