We recently had a conversation on how accountants have an upside over us normal human beings in that by training they have to be acquainted with numbers much better than us

Able to interpret financial statements

For one, we have a problem interpreting balance sheets. I took a module in university so I am a little privileged, but for many friends it looks daunting for them.

The ability to interpret statements will go in a long way to recognize the fundamental nature of what officially the company declared.

You will be able to pick out profit and loss, cash flows and whether the company is overly leveraged

Sampling your life as a balance sheet

I also think that since they learn about this in tertiary or secondary education, it puts them on a good footing of not getting into debts, able to recognize that they are overleverage and to build up good assets

Not always the case

So my friend was telling us that this is not always the case. He has a friend who believes Jurong Technology, to him a blue chip, will always do well. Well Jurong Tech went on some really good runs, and to be honest when you see such a 2-3 years sustain runs supported by good profits you will think that way.

Well the story ends that he continued to stay invested right up to when its share price fell from dollar plus to near zero and got delisted.

Another accounts train fella got invested in Chartered Semi conductor which we all know was a Temasek holding (big brother won’t let them die right?) . Chartered went the same way as Jurong and the person probably loss a huge portion of their investments

What do you think? What about the accountants around you?

To me, fundamental reading is only part of the game, these guys fell into the trap of forming a picture that large and blue will always stay that way. Cutting losses are painful but if you have the skill to evaluate that the business proposition is failing or is not what you thought to be, you better do the same thing.

I have my own experience in thinking Interroller (Pteris) was a good blue chip paying dividend stock. When the management leaves, all hell broke lose. The business never recovered. My stock went from what I purchased at 80 cent to 13 cents currently (And I bought after a massive drawdown)

You guys should have encounter your fair share of accounts train people. Do they do well in their personal finance or manage their portfolio well? We would like to hear your stories.

If there are some blue chip stocks that I would snap up in a further draw down, Sembcorp Industries (SCI) would be one of them.

For a bit of its total return history you can view it here.

Sembcorp is undergoing some sort of mini transformation. It owns 60% of SGX listed Sembcorp Marine (SMM), which builds oil rigs and drill ships. This have become its main profit generator and made it a darling among speculator.

In recent years, Sembcorp have aggressively try to build up its utilities portfolio. What happens is that SMM generates the cash flow, pays out the dividend to SCI, SCI leverages on this to build and develop utilities around the world.

Utilities are probably more recurring in cash flow, and perhaps they are preparing for the inevitable when the oil rig craze die down.

The recent 2 quarters have evidently show the cash flow from the utilities coming in. So much so that its full year utilities profit should be able to pay for its existing dividend. The dividend payout ratio is around 30%.

That is rather good. And probably more utilities coming online.

Debt wise we know that that SMM is net cash, this utilities assets is estimated to amount to 3.3 bil and their net debt is 1.1 bil. This make their debt to asset ratio of 33%. This is much lower than many utility and infrastructure plays such as MIIF, SP Ausnet and Cityspring on my dividend stock tracker which typically hovers around 50-60%.

Its trading at a PE of 10 times. really undemanding for a blue chip. Although the dividend yield is low, we view SCI as a growth stock, which will give the odd special dividend.

The upside of this switch to utilities, is that in the future, these utilities may be spin off into infrastructure or utility trusts, which SCI will further stand to benefit from.

Do a bit of homework into this to see if you agree with me.

I have added SCI to my dividend stock tracker as well, so you guys can tune in daily to its change in valuation and yield.

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.

Here is one Singapore stock often mistaken as a S-Chip listed on the SGX. STRACO is a developer and operator of tourism-related attractions. It operates 2 main attractions, Shanghai Ocean Aquarium (SOA) and Underwater World Xiamen (UWX).

This sounds like a shitty investment

1. 4.1% yield
2. 9.43 times PE or 10.6% earnings yield
3. 59% of asset in cash,  51% of market cap in cash
4. Its interest from its huge cash holdings pays for the capex!
5. Free Cash Flow 13.4%
6. The dividend payout  is 30%

You can view the Q1 results here.

I have a rather small stake here as I thought tourist attractions do not have a strong moat. But the results are  proving other wise.

Macquarie International Infrastructure Fund is a 9% yielding infrastructure stock listed on the SGX. I am invested in this and talked about my sweet and sour relationship with this stock a fair bit (read here)

MIIF just announced their latest quarter results. There are some good news in that the tax issues of Taiwan Broadband Communications (TBC) have been settled and the expected losses are immaterial.

However, it was still not clear how the expected moderation by the Chinese government over toll charges for Hua Nan expressway (HNE) will affect MIIF. I have asked for a sensitivity analysis from the Investor Relations but judging by their record they should not do anything about it.

I am positively surprise by the surge in traffic for HNE. Still the level of debts in this stock can be crazy and what we know is that most are not amortized which means that somewhere down the line, earnings by TBC and HNE may need to scale down to pay the massive debts or to get them refinanced.

Still, I read this report from AmFraser with their projection on how the cash flow of the 3 major assets will progress to.(read report here) I find them a tad optimistic. I would rather estimate based on the worst case scenario.

MIIF probably need 75 mil from the 3 assets since they need 65 mil to distribute the 5.5 cents annual dividend. The closest projection is 43 mil + 22 mil + 6 mil equating to 71 mil. We are still a bit short there but not that big of an issue since MIIF still have a cash horde.

Still I will watch this stock closely since the management in the past have made some rather questionable moves, its underlying have debts that could cripple distributions.

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.

1. A strong business model that is based on something always needed
2. Zero debt
3. 43% of balance sheet is in cash, 16% of its market cap is in cash
4. Yield has went down to 3.4%
5. One of the few stocks that have been resilient in the GFC
6. Have been raising dividend payout yearly
7. PTB is around 3.8 times indicating that return on assets should be pretty high
8. PE of 14 times or 7% earnings yield

Vicom announced their results today again. View it here. Once again it’s the same old story, Profit up 13%, adding more cash.

I waiting for it to correct to add in. I missed my chance. This is a stock that have very strong moat, low capex and very cash flow generating.

Which would I invest in? A REIT at 6-7% yield or VICOM? I believe VICOM stands out. Even though its yield is lower, but its earnings yield is unlevered compared to the REITs and very defensive. The only thing is the price we pay is high from the historical perspective. Not much safety. Definitely a grower.

Rupert Murdoch testified in the phone spying case that he was not aware that such activities were taking place under his watch. The court ruled that he is willfully blind and cannot be made not responsible for the actions.

The interesting thing was the analysis done on whether CEOs like Rupert and Enron’s convicted CEO were living in their own world as up till the last moment they still believe that they are right.

In all these cases one thing stood out in common in that these CEO build IP a totalitarian system where no one is suppose to cross the defined structure.  The CEO surrounds himself with loyalist who keeps in line with the direction and those that asks questions were ultimately thrown out.

Sounds very much like the Temasek holdings episode.

One wonders whether we made the same psychological mistakes as Rupert Murdoch when it comes to investing.

What works now will always work

For us young investors, we often fall into not asking enough questions about how well what we do works over a longer period of time. In other cases, what works or doesn’t work now will always be the trend on the long run.

“We all succumb to the tendency to readily accept information that confirms our sense of ourselves and discredit data that doesn’t fit our dominant ideologies. And when tired, human minds fall back in stereotype and received wisdom”

If we made money then that method will always work and it will always work that way. Talk to veteran traders have told me that the playing field changes, what worked for you will be turned against you.

SPH will always be that great dividend stock because it is affiliated to the dominant political party.

SMRT is a “pa si buay zhao” business, meaning it will always be a mainstay that makes it a great investment.

You can safely purchase property at any price because PAP will make sure the price doesn’t go down

Industrial reits are definite better investment then shipping trusts as buildings will last longer than ships or aircraft.

Guarding against this form of blindness

As investors, we have to build in a systematic checklist when viewing investing methods, strategies, businesses that allows us to make more impartial evaluation

• Disprove. And always invert. This is what I learn from discrete maths. If you believe SMRT is a good investment, start off with a premise that SMRT sucks, and find evidence that SMRT sucks value wise, business revenue wise, dividends versus other business. If you keep looking yet cannot find much things bad about SMRT then u may have a gem there.
• Verify by doing qualitative and quantitative analysis.  Some good things that came up in working with my boss is that people will always be able to argue about opinions. Drill down to data of past historical earnings, and SWOT analysis would help eliminate lazy analysis
• Make it a habit to read from both perspective. For every bullish article on the market or stock make it a point to read a negative or bearish one.

• Revenue was weaker falling by 8.7% due to lower contribution since they sold of a vessel and some vessels were in repair
• Net Profit was higher due to a one time US$3.9 mil ship sale gain. Absence of that net profit would have been the same as last year
• There was a larger contribution from their share of associated companies
• Cash holding increases to US$67 mil from the sale of ships
• Due to the sale of ships their non current assets are down from US$188 mil to US$179 mil
• The group will be affected by the loss of the expiry of 2 long term contracts. These are 12BHP ships contracted in 2008 at the lucrative rates. Failure to charter them out at good rates will mean a reduction of revenue.
• CH Offshore is current trading at SGD$0.46 which is near its NAV per share of SGD$0.43. The current payout ratio is almost 50% of last years net profit. I don’t think CH offshore will not be able to pay this dividend but they may want to reduce it to be conservative. Lets just say their cash can allow them to pay 4 years of current dividends if they are breaking even.

Some have asked me whether I will be buying or selling, CH Offshore have ran up a fair bit. I still think this is a cyclical dividend play. If you buy in now you are likely buying when the cycle hasn’t turn up and buying into a stock that is conservatively managed.

The metrics to watch are pretty similar to REITs.

1. Whether CH Offshore can charter at a higher rate. Management say OSV market picking up but rates are not at 2008 level. This looks negative.
2. The quality of assets. CH Offshore has a young fleet, which should command more market value in the event of liquidation. They should be able to operate in a better condition.
3. Debt levels. In CH Offshore’s case the lack off. Using debt is a skill in itself, and we want to see CH Offshore’s management willing to get into debts and buy ships at low prices in anticipation for market pick-up
4. Operation and Risk Management. In the aftermath of the GFC and FSL Trusts problems, whether it is REITs or shipping trusts or charterers, they are essentially asset managers and the skill of the asset managers are very important. The old hands would have been through many ups and downs and their actions will tell us in the long haul whether they are able to sell ships at the peak and buy ship and good prices, at the same time tie contracts with shippers to provide a more secure cash flow.

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.

A short mention of Starhub since it is one of my larger holdings. The Q1 result released on May 4 was not bad. You can view the presentation slides here & the full results here.

• EBITDA was consistent versus last year as well as last quarter. Q1 was traditionally a weaker quarter so result is not bad
• Free cash flow was weaker than last year but still inline as they have less contributed from net working capital. As such full year free cash flow should come up to 430 mil which is more than adequate to pay 340 mil for their 20 cent annual dividend
• As they need 85 mil each quarter to pay out the 5 cent dividend, they have more than adequate
• Capex is 7% of revenue which is lower than the targeted 11% outlined by StarHub. However we do see that starhub have a tendency to spend more in capex in the 4th quarter so I do expect total capex for the year to come in at 250 mil 
• Neil Montefiore have indicated they are not likely to raise dividend. I believe they would rather maintain cash for initiatives or pay down debt
• Current dividend yield is 6.2%. EV/EBITDA is around 8-9 times. Safe by dividend stock standard but in terms of Telecom companies this is rather fair
• What we like about StarHub is its predictable cash flow and good yields even in down turns.
• When investing always look at competing stocks at the same yield, whether their business is more sturdy, whether they are cheaper. The best is that they beat starhub in all three metrics then they end up to be better investments. If starhub ends still better than them then perhaps waiting for may to Sep to see if there is a draw down in the market to get a better price for it.

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.

• Train Operations:Revenue=149m (13% rise), Profit=19m (21% fall)
• LRT Operations:Revenue=2.6m(11% rise), Profit=0.068m (217% rise)
• Bus Operations:Revenue=55m(5.3% rise), Profit= -3.7m (110% fall)
• Taxi Operations:Revenue=29m(23% rise), Profit=1.2m (131% rise)
• Rental:Revenue=21m(14% rise), Profit=16m (14% rise)
• Advertising:Revenue=8.2m(37% rise), Profit=5m (25% rise)
• Engineering:Revenue=8m(1% fall), Profit=1.5m (77% fall)

Of real consequence have been that of train, rental, advertising and engineering. Train and engineering have fallen badly while rental and advertising have sustain it.

The main attributable cause was energy and depreciation cost. With the bad press SMRT have been getting, couple with the announced 900m capital injection to improve on operations, this will further increase their depreciation expense.

I do see much benefit from their previous CEO’s drive for Rental and advertising. That have been substantial to cushion part of the costs going forward. Had she not put effort into it, SMRT’s result would have been much worse.

Net Cash Position

Although we see deterioration in earnings, balance sheet wise, SMRT is in a good position. Although they went from net cash of 125 mil to 44 mil.

Free Cash Flow Dwindling to pay Sustain Dividends

Free cash flow, which is a pretty good measure of how much cash a company has to pay out dividend from operations is worsening.

In FY 2011, free cash flow was 179 mil. In FY 2012, it became, 48 mil. Operating cash flow was the same, just that there were more capital expenditure spending.

To pay out the $0.085 dividend, SMRT requires 129 mil. If capex for the next few years is going to increase, then I am afraid dividends will be hard to pay off.

Assuming that out of the 900 mil, SMRT will assume 75% of it, this comes up to, 675 mil. Spread over 5 years, an annual increase in capex will be roughly 135 mil.

Just base on this alone, the free cash flow comes up to 150 mil, meaning to say to pay that 129 mil, SMRT may have to tap perpetual shares or preference shares, so that they can still have adequate cash flow to pay a smaller dividends and fund this capex

The company that issues usually do this to shore up their balance sheets to

• Fund future expansion. They see potential to buy assets that can create a higher return on investment
• Pay off debts. Debt interest rates get too expensive. Their net asset value have gone down such that their debt to asset ratio worsen, this could eventually affect their credit rating which will affect future debt purchase
• Cost of equity is cheaper than cost of debt. With debt they have to pay an interest which may not be cheap, equity dividends are not mandatory and thus may be more attractive

What it means to existing investors is that their share of profit gets diluted.  But that may not always be the case.

Chance to purchase yield accretive assets

Recently we seen many yield stocks ran up a lot in share price. Two good examples are First REIT and china merchant pacific.

Prior to this First REIT was yielding 8.2% in dividends. Here you will see their asset yield is 6.05%.

CMPacific is a special case. When you own 81% of the company and you really want to attract investors yet inject cash there is really not a lot of choice.

With the dividend yield that high, First REIT finds it difficult to identify prospective assets that yields higher than 8.2%.

With the price run up from 77 cents to 92 cents the prevailing dividend yield gets compressed.

Prospective assets have a lower yield to beat now. First REIT would just need to find assets yielding higher than 6.8%.

In this example,  First REIT will raise 92 mil to buy an asset yielding 7%.

The new asset size increases, so is the total equity. Although existing share holders get diluted but as you see,  the dividend per share went up and so is the dividend yield from 6.85% to 6.87%.

When share price didn’t run up

Without the share price run up,  the same placement of 92 mil and a purchase of a 7% yielding asset will reduce dividend yield from 8.18% to 7.99%.

First REIT will have to buy an asset yielding 9%. Dividend yield would increase from 8.18% to 8.31%.

Partially finance by debts

Companies can also choose to do a part placement and debt issue.

In this example share price is still low,  but First REIT choose to place 46 mil and finance the other 46 mil with debts.

The end state is both total equity and debt increases and dividend yield increase from 8.18% to 9.03%

No asset buy,  a rescue operation

The most diluting move would be to do a. 92 mil placement and not buy any asset. This usually happens when there is a rescue to replace debt with equity. The existing share holders will lose out.

MI-Reit wants unit holders to back a $430-million rescue package involving a share placement to ‘cornerstone’ investors, a rights issue and $215 million in loans.

It needs to raise cash to refinance $226 million in loans and meet a $90-million obligation to buy the 1A International Business Park property by the end of the year.

In 2009, deep in the great financial crisis, Aims Amp Industrial REIT, then as MI REIT, wanted to do just that, shoring up their balance sheet with rights issues, placements that would ultimately proof dilutive.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.

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