This Oil situation is different from 2008's

Since mid 2014, Oil prices has been on a decline from $115 to $42 now. There're only two real reasons:

1. Over supply

2. Weakening demand

Reason number 1 is really the bigger reason rather than reason 2.

Supply will likely remain high, worsening the glut

• OPEC raises output limit despite record low oil prices, despite protests from struggling OPEC members (from 30 to 31.5m barrels/day, EXCLUDING Indonesia)
• Russian Energy Minister say output cuts "isn't viable"
• Russia's output is close to record level now
• Iran will bring more supply once sanctions are lifted in 2016, and its output won't be below pre-sanction levels, worsening the supply glut

Oil in 2008 fell to $40 too

Well really, except this time it's different.

Back in 2008, when demand plummeted due to the financial crisis, Saudi Arabia brought OPEC to cut production in a bid to lift oil prices. (read: supply cut).

At the same time, the central banks have been cutting interest rates and boosting the economy (read: demand catalyst).

Also, China in 2008 was growing at a faster rate than now, in 2015. Their demand for oil is much higher than 2015. (read: demand was higher back then).

And so, you could really see oil prices recovering within a year as there were really positive catalysts and actions that helped its recovery.

Source: Bloomberg

Yet, now, nobody is really doing anything to bring oil prices back up.

OPEC wants to defend market share.
Russia doesn't want to cut output.
If OPEC and Russia does cut output, US Shale oil supply will increase again when oil prices recover, bringing to status quo.
And we have Iran joining the oil glut situation. Hurray!!

Dangerous to assume 
So, it is very dangerous to assume.

Assume that just because a stock is a blue chip, that it'll survive this oil crisis like how they survived 2008 (except the situation is vastly different).

Assume that just because its a blue chip, it's price will definitely recover. SMRT/Noble/NOL anyone?

We must therefore not simply assume. If we believe in a stock, believe so because we know that the management will be capable of driving the company out of this crisis.

Not just because it's a blue chip, or just because they've survived 2008.

Surviving 2008 doesn't mean will survive now 
It all boils down to fundamentals.

Just because the 3 local telco survived 2008, does it mean that they'll definitely survive any subsequent obstacle?
But, back in 2008, there wasn't a threat of a 4th telco. Things were different.

Just because Sembcorp Utilities survived 2008, does it mean they'll remain equally profitable now?
But back in 2008, vesting contracts levels set by EMA was much higher than in 2015. Things were different.

So please, let us always remind ourselves to think about the fundamentals, and not simply generalise the situation and mislead ourselves.

My view on SembMarine's Profit Guidance

As we know, Sembmarine issued a profit guidance for Q4 2015 stating that the quarter will likely see a net loss with the full year result affected accordingly.

I'm vested in SCI, naturally this becomes a concern for me. I did some quick research on SMM.

First ever net loss quarter for SMM

This would be a first ever net loss for SMM. A quick check on their quarterly showed that SMM has always registered a profit for each quarter.

I'm guessing a large part of this net loss is attributable to the reversal of profits pertaining to Marco Polo (either on a prudent basis or with consultation with their auditors on the accounting treatment).

SMM closed $2.06 and is heading for trouble

Looks like SMM will definitely open below $2 on Wednesday morning (3 December 2015) and possible heading to the $1.60-1.80 range. 

"I will buy it when it hits the price levels of 2008!"

I won't be so quick to say that (even if I'm interested in an all-marine counter). This time round, it's different.

I've mentioned previously that SMM actually registered healthy profits since being listed (including the 2008/09 period). We must always remember to look back at the fundamentals.

Oils prices were trading around $40 but quickly recovered to above $80 and later $100 as there was the Iraq war and Libyan uprising. 

Now, however, oil prices are depressed due to oversupply and low demand. Sanctions for Iran was lifted and more oil will be pouring in the market. Shale oil is producing more oil than it was during 2008. Demand is slowing due to the China. I could go on and on, but my point is, there situation is quite different now from 2008.

Just because 2008 was the lowest price for SMM doesn't mean it can't go lower.

My take on the whole Marco Polo saga

SMM has been in the rig building business for so long and it earns a good reputation. As with any engineering work, there'll always been "defects" and imperfections. It'll be inconceivable to think that SMM's work is so "bad" that it'll affect the main function of the rig. If you nit pick, you'll bound to find something. If Marco Polo is looking for a perfect rig, they might as well not.

Marco Polo is either too new to the rig industry to know that those "cracks" are the norm or they're simply finding an easy way to wiggle out of the contract after the oil market crashed. 

SMM didn't deny the allegations on the "cracks" probably because those cracks really exist but they are also deemed to be reasonable. It's anyone's guess really.

What about SCI?

SCI owns about 60% of SMM. For the 9 months ending September 2015, profits from Utilities stands about $300m with Marine taking about $150m.

For the full year, I'm expecting profits from Utilities to be about $400m and Marine about $100m (worse case). This would result in about 26 EPS and with $3 share price, that'll be about P/E of 11.5

Forward P/E?

I don't have the crystal ball. But just to be on the conservative side, let's assume the following profit: 

Utilities: $450m 10% growth (India in GROWING).

Marine: $50m halved profits

This would roughly give a comparable profit year on year. I'm bull on utilities as Singapore contributions have levelled out and overseas contribution is expected to be the main uplift.

That'll mean full year EPS for next year might be 26cents as well.

If given a chance, would I still buy SCI?

Quick answer is no. No, because I don't like the fact that there's no clear positive catalyst insight for the Marine industry. But now that I'm already vested, would I realise my loss? No. My gut tells me that SMM will ride out this storm. It just needs a little more time.

LGRT Nov 15 Report Card - STI continues downward fall

	Name	Portfolio %	Average price ($)	Div Yield on cost
1	Singtel	15.26%	3.69	4.74%
2	M1	15.56%	3.63	5.20%
3	Raffles Medical	9.11%	4.13	1.09%
4	SATS	8.57%	3.11	4.50%
5	Parkway Life	6.45%	2.34	4.83%
6	Sembcorp Industries	6.28%	4.56	3.51%
7	Colex	5.83%	0.321	1.56%
8	StarHub	5.58%	4.05	4.94%
9	Design Studio	5.44%	0.54	12.01%
10	CapitaMall Trust	5.36%	1.95	5.59%
11	Vicom	4.16%	6.04	4.35%
12	Sheng Siong	3.56%	0.68	4.48%
13	UOB	3.18%	23.05	3.90%
14	Perennial Bond	2.68	$1.00	4.65%
15	DBS	2.38%	23.06	3.38%
16	Old Chang Kee	2.32%	0.87	1.73%
17	SIIC Environment	1.34%	0.20	0%


Expected Annual Dividends: $3,767 ($274/month)

Dividend Yield: 4.42%

Actions:

None! I'm holding on still and steady.

SIIC:

SIIC registered a double digit growth in its results but its stock price continue to fall. Probably there's negative sentiment for China-related stock.

Others:
The STI fell to 2855 on 30 November from 2988 on the beginning of the month. STI has been performing weakly for the past few months mainly due to:

1. Slowing China
2. Weak Singapore GDP (narrowly avoiding technical recession)
3. Stronger US dollar
4. Higher rates (expected)
5. Weaker regional economy (Malaysia, Indonesia)

Unexpectedly, the financial stocks and O&G have taken a beating on the back of weaker outlook. Certainly I hope Singapore can bounce back and get roaring again. Banks are getting very attractive with the recent fall in prices.

I've been accumulating funds for a proper firing in the near future. Hopefully the right time is soon.

Slow and steady!

Exactly how defensive is this under-appreciated stock?

I last wrote about this company here

Fellow blogger DK left me a comment and I thank him for that :)

Even though this company is in a defensive sector, its survival depends on winning contracts. There is no guarantee that the contracts will be awarded to them. Competitors include 800Super and SembCorp. Revenue growth is very much dependent on the quotation of the contracts.

How defensive?

Remaining contract years - 5
Colex covers the western part of Singapore, with a 7 year contract awarded by NEA starting from 1 April 2013 to 31 March 2020. Investors have about 5 more years of certainty and that's rather great news for me. 

Re-awarded contracts
Since the new scheme has been in placed, NEA has re-awarded the contracts to the respective 4 Public Waste Collectors (PWC) in Singapore. Each of them have accordingly retained their "seats".

Uniform Fee
Yes, the waste collection service in Singapore is privatised (not all privatised schemes are "bad" and "costly", but I digress).

The Uniform Fee is set by the NEA in discussion with the 4 PWCs and is fixed for all households in Singapore (no price differentiation amongst the PWCs). The UF is fixed until the next review (something like transport fares?).

The next UF review is on January 2017 and once every 2 years thereafter.

Renewal of the next contract?
I tried googling for the criteria of the renewal of contracts to no avail. What I do know is that the Waste industry in Singapore practices the Uniform Fee scheme.

It seems unlikely that the award of contract to the PWCs will be based on price but rather service standards. I can only imagine NEA considering the service standards of the PWCs in considering their renewal applications.

Everyone is defending their own turf
From the last renewal exercise, it is quite evident that all 4 PWCs are focused on defending their own turf and not "expanding" their reach. After all, there are only 6 sectors in Singapore and it is only likely that NEA would want to inject competition into this industry.

To say otherwise is quite unlikely, given how the government lately is more keen on injecting competition into various industries (Transport, Telco etc).


But of course, nothing is certain! I'm only hoping for Colex to control its costs and enjoy the remaining 5 years of service in the Jurong sector.

StarHub's conference call sheds light on their PayTV business

StarHub is one of the few companies who conducts a conference call after their quarterly earnings announcement.

I didn't realise the significance of such calls until I've sat through them.

Financial Highlights 3Q 2015

• Total Revenue up 2% (helped by sale of handsets)
• Service (what I deem core/recurring) revenue up 1%
• EBITDA up 4% helped by controlled (marketing, staff costs)
• Hubbing scorecard continues to be good (uptick in multi-hubbing)

My favourite part of such earnings call is always the Q&A. So here's what I found interesting this time:

Rationalising expenditures
Marketing and promotion expenses were down quarter on quarter due to tapping of data analytics which enabled StarHub to manage their spend and rationalise such costs. I think we can expect their marketing costs to be kept low following the positive impacts of their data analytics.

Netflix!!!

• Expectedly, they were bombarded by questions surrounding Netflix. 
• Expectedly, StarHub cannot comment too much as discussions are still carrying on with Netflix.
• Netflix partnered with Softbank in Japan. Under the deal, Softbank will allow customers to sign up Netflix via their sales channel. Payment for Netflix will also be consolidated with their existing Softbank bills. Softbank also pre-installs Netflix app onto smartphones (I'd assume this excludes iPhones).
• They're really quite tight-lipped on Netflix. But I got a feeling they're rather positive on the development with Netflix on the partnership and this might put StarHub in a better position.

Growth driver: Fixed Services

• StarHub, apparently, is aggressively pursuing growth in their Fixed services (serving mainly the corporate customers). 
• StarHub has been building their own fibre networks (apart from NGN) as they've deemed owning their own networks to be crucial in getting corporate customers and also retaining them. (According to them, better quality than NGN it seems.
• This fibre network also helps strengthen their mobile segment to "better backhaul"
• Management seems bullish about this segment and has coined it their new "growth driver".
• StarHub aims to be the alternative provider for the Smart Nation vision. They do not think relying on 1 provider (Singtel) is the way forward and they're really building the foundation for the long-term now.
• Has already overtaken PayTV in terms of revenue contribution (2nd largest now, after Mobile)

What about your flat revenue for the past 3 years?

Ouch, that hurts. Yet, StarHub seemed to have handled this well and provided some insights:

Overall, yes it looks flat, but underlying they see growths in the right segments

Mobile

• Post-paid mobile customer base has been growing. StarHub views this as something that provides them with long-term loyalty. 
• Offset by lower pre-paid sales due to less foreign workers.
• New SIM-only plan hopes to bring some prepaid customers over.

PayTV and more Netflix!!

• Resilient numbers for quite a while despite having OTT being present. (vs a drop in PayTV revenue in other countries like US)
• AppleTV/Netflix is available for a while now (via VPN) and StarHub managed to keep their PayTV services resilient.
• Attributed to wide content: Asian and Sports content that isn't available from OTT. Netflix alone is able to substituted the English content in places like US. 
• Singapore being a multi-racial country, has customers that has different needs. That's currently what's defending the PayTV business.

63% of mobile customers are on tiered plans, ONLY

And they can't seemed to get that percentage to move up for a while now. StarHub alluded that it's tough and they will continue to do all they can to entice customers over to the tiered plans.

Chairman provided a further insight on StarHub's plan for the challenges

Challenges:

• Regulatory policies (looks at IDA hehe)
• Wifi substitution (very true, I've been seamlessly connected to Wireless @ SGX and CapitaLand Mall Wifi as well)
• Facebook/Google/Apple by passing mobile operator (very possible. Even had rumours of Apple creating their own SIM card and Google rolling out its own Wifi network)
• OTT players (Global and more localised ones)

Their strategy:

• Move from Household Hubbing to Personalised Hubbings (through data analytics)
• Engage more on Enterprise segment given the small market share

I'm quite interested in their "new" Hubbing strategy and how it pans out. Good to know management is actively looking to prepare for the challenges ahead. This is especially when a lot of those may eventually come true, sooner rather than later.

This under appreciated stock is wow-ing me again

Revenue increased 13.6%
Segmental profits increased 33.1%

That was all that's announced via SGX. But it's good enough to let me know that their business is still stable (contracted) and their profits are still surging quarter by the quarter.

It's smelly and shunned by others. Yet, I'm loving it!

Since this stock is out of the radar for most investors, it's share price hasn't reacted according to their results.

	May-15	Oct-15
Share price	$0.25	$0.31
Share price % change		24%
Profits % change		33%

This may be a smelly business, but I love it for its value it holds. Although Colex doesn't have a high dividend yield, which is contrary to what my other portfolio is, I'd find it hard to pass this opportunity to grab this value stock.

What do you think?

Design Studio's 11% yield to be maintained?

Design Studio released its 3rd Quarter financial results. Being in this industry, it's expected that revenue and profit recognition would be lumpy. Thus, any one quarter's result is not going to tell us too much about the full year's performance.

Nonetheless, since we're already 9 months into the year, we're left with the remaining 3 months for DS.

For 6 months ending June 2015
Revenue up 62.7%
PBT up 49.0%

For the 9 months ending September 2015
Revenue up 23.5%
PBT up 3.1%

PBT is now at $13.1million.

2014 full year PBT is at $23.8m while 2013 full year PBT is at $15.3m

Looking at how lump the profit recognition are, it is hard to say if DS will miss matching 2014's PBT for sure. However, to be conservative, let's assume they'll miss 2014's PBT but match 2013's instead.

Maintain Dividend yield?
Profits
2013 and 2014 saw the Directors declaring a 6.5 cent DPS. Assuming DS matches 2013's profit (which is not a tall order), it is likely that the Directors will continue to declare 6.5 cent of dividend.

Cash Flow
Cash 
2013: $44.8m 
2014: $48.4m

9M2015: $56.4m

FCF

2013: $25.5m

2014: $20.3m

9M2015: $26.8m

Assuming cash flow status for DS is the same for 9 months and full year, the dividend declared for 2015 should be easy to maintain.

At 6.5 cent per share, this gives DS a 12% Dividend Yield at $0.54 price.

Parkway Life built to last

Recurring DPU growth for Q3 is stable at 2.5%. Plife is really stable and steady!

Competitive advantage remains
Singapore Hospitals

• Suuuuuuuuuper long master leases (15+15 years, from 2007)
• Fully committed (Gleneagles, Mount Elizabeth, Parkway East)
• Downside protection: CPI + 1% rent review guarantees a minimum 1% upside even if CPI is negative

Japan nursing homes

• 70% of revenue with "up-only" rental revision
• 5.9% of revenue with annual revision linked to Japan CPI (downside protection like Singapore)
• 5.3% of revenue with fixed rental for 9 years (from 2007)
• Japan = aging population
• Properties covered with earthquake insurance
• Protected from forex risk (hedged)

Revenue segmental breakdown
Singapore 61% Japan 38%

Downside Protection risk
93% of revenue with protection scheme in place

Good debt management
Gearing ratio:   35.8%
Cost of debt:     1.5%
No debt financing until 2017
78% of debts are interest rate hedged


Looooong WALE

9.9 years. YUP. That long!

Acquisition coming up?


Since the last asset recycling done (and the yummy special dividends distributed equally in 2015), it's likely that Plife REIT will look for new opportunities in Japan and diversify their asset class (apart from Hospitals & Nursing home).

Sleep well at night

Parkway Life is one of the few counters I have which I've almost ZERO worries. It's stable, the competitive lease structures are strong, the distributable income received from them is "recurring". There's great visibility in their earnings and earnings will be in line with inflation of Singapore.

One of the few gems left in the stock exchange.

Investing in a REIT for a start?

A reader asked what's my view on vesting in a REIT for a start (of the investing journey)? This was posted on the article where I revealed that CapitaLand Mall Trust (CMT) was my first stock back when I began my investing journey.

I can't say "yes" or "no" to the question, but I can try to discuss some points about REIT.

REITS must distribute 90% of their distributable income
This is mandated by MAS. Distributable income is not the same as net profit. Distributable income is more like cash earnings (so a valuation loss will not affect it's distributable income of a REIT).

Most REITs distribute dividends quarterly, this somewhat gives investors a steady stream of dividends. 

Somewhat is key, because REITs are not fixed deposits/bonds. Dividends are not guaranteed.

You could lose your capital invested
As REITs are not fixed deposits, your capital is not protected. Instead, the share price of the REIT will fluctuate like your normal companies.

A recession could put your REIT in distress. A rise in interest rates could wipe out your value of the capital injected.

REITs are highly geared
So watch out for the gearing of REITs. Anything that's on the high side (>45%) should be deliberated carefully.

Any rise in interest rates could easily cause their finance cost to jump, thereby reducing your Distribution per Unit (DPU).

Look out for REITs with relatively lower gearing, evenly spread out debt maturity (CMT & PLife), low debt costs (Parkway Life is amazing with only 1.5% all in cost).

Not all REITs are equal
There're different industries that the REITs are in. Some hold industrial, commerical and hospitality properties (which tend to be cyclical), some hold retail buildings (I tend to view shopping malls as somewhat resilient), some are healthcare related (Parkway Lift & First REIT), some properties are in Singapore whilst others are out of Singapore.

You'll have to consider the following:

• Industry risk: Cyclical, resilient?
• Country: Any risk in foreign currency fluctuations, regulatory risks?
• Quality: Different REITs' buildings have different quality. Some are viewed to be of higher quality (therefore they tend to be traded at a premium above their peers).
• e.g: Plaza Singapura vs Wisma Atria vs Paragon
• Maturity profile of their tenants: Are they concentrated or well spread out?

Dividend Yield is important, but this criteria would only be considered after all other factors. After all, the we don't want to be caught in the yield trap.

Most people invest in REITs for income, not capital gains

So don't expect too much of a share price movement. This ain't your Jumbo share.

I won't say a straight out "Yes" or "No" to this question. But do consider the following, do your homework, and make the decision for yourself. Only you know yourself best, so let you make the best decision for yourself.

Consider if you're ready for rights issue

Sometimes, a REIT may require additional funding and they may issue rights to the private and/or public investors. Similar to what AK says, I've always preferred REITs that conducts rights issue for the public (this way, we won't have our holdings diluted).

Some may delude that rights issue is "getting back the dividends paid out previously to you". Well, it depends.

If a REIT issues rights for expansion plans, to acquire yield accretive projects, I'll be happy to take part in it. But do consider if you've the financial capability to take part in it.

If a REIT issues rights to "beef up their balance sheet", "pay down loans", and for "working capital purposes", then sorry, that's a huge red flag and I'll reconsider my decision to hold that REIT.

Hope this helps? :)