Singapore O&G Ltd IPO - Thoughts

I was highlighted from a fellow blogger, Richard from Invest Openly regarding the upcoming healthcare related IPO which will be listed in the Catalyst. Many people are comparing this against related healthcare Raffles Medical which are now trading at around 30x PER. For me, I'd see this more towards the proxy of Cordlife, since they are in the industry of gynaecology and birth rates grooming.

A total of 43.6 millions of shares were offered but only 2.2 millions were offered to the public, which translates into about $550K in absolute figure. In my opinion, this is way too little and they probably want to get long term institutional investors to come in and grab the rest while leaving little to the public.

I took a quick look at the prospectus and develop the following thoughts:-

1.) Financials look really solid there.

It's hard to find companies netting a profit margin in the above range of 35% and this shows exactly how expensive is our medical costs in Singapore. For me, they are sitting in such a sweet position that even if costs do go up or outlook are a bit mediocre, they have the buffer to take it on comfortably.

2.) Dividends Payout is really enticing here at 90% of net profit for FY2015. 

Even though they maintained that they do not have a fixed dividend policy, it looks like this is a sweetener deal to entice investors into investing in the shares, as they are "willing" to share their huge profits with the minority shareholders. We'll see in due time if they can continue to maintain that, which I am a bit skeptical of because they only retained so little earnings used for expansion, if any. The yield is projected to be at 7.3% at the IPO price. Note that this is unlevered dividend yield, unlike the structure of Reits that pays out the same payout but levered.

3.) Balance Sheet looks real solid here with zero net gearing and rich cash position.

Woolala, I have a soft spot for companies that has strong earnings capability with huge cash hoard and zero debt. Perhaps the impending increase rate increase has something to do with it lately. In any case, I suspect they might go into debts once the expansion plans are properly in place since the $3m proceeds (explained later) that goes into expansion looks unlikely to be sufficient.

4.) Use of Proceeds

Based on the prospectus, $9.2 millions are expected from the IPO after deducting relevant expenses. The proceeds will go into:

I like the fact that they are not using the proceeds mostly for working capital purpose (discussed later). $3M will go into expansion while the rest of the other $6M will go into investments in synergistic businesses such as child care services, paediatrics, etc. 

Having a kid of my own, I know how much profitable it is to have such an extension works out that are child related. I see this as extremely positive move.

5.) Cashflow generating capability

This is my next favorite section of looking at businesses.

Capex remains low since the majority of their expenses would have come under the salaries portion which already make up of the cash flow from operating, so operating cashflow and fcf is generally very strong. Based on the prospectus, ipo price to operating cashflow is at 8.9x and against fcf is at 8x. That is pretty good if you ask me.

6.) Business Model

The kind of business model the company is operating is very similar to what I previously blogged about Vicom.

First, you have regular customers that are unlikely to switch out once you locked them down, unless they have a very bad experience to start with. Also, with their expansion plan regarding the paediatrics and child care services, they can tag on their existing customer base to the extension service.

Next, most of their costs come mainly from the salaries they use to pay the doctors. Finding the right expertise could be an issue but somewhere in the prospectus they mentioned about allowing doctors and professional who want to switch from a public to private practice to come in and join them. We know that when they do that, they probably bring in their regular clients with them.

The company also mentioned that they have gained more market share during the past few years so given the medical hub Singapore is trying to place itself in, it looks like they are in a sweet spot to enjoy the government initiatives.

Final Thoughts

I generally like what I see in their prospectus and outlook.

The thing that I am still considering is given the low public float they are offering, everyone might get only a tiny slice of the company. We can take a look at Starburst for instance, where the ipo was over-subscribed by more the 9x and those who bidded for 100 lots did only manage to get 5 lots.

I think the share price would do well on its first day of trading and for the upcoming years to come. I might just bid for the ipo if I think it wouldn't be a waste of time getting tiny lots from it.

Last Update: I have made an application bid of 101,000 shares for the IPO. Will update the outcome of the application.

Chinese Stock Market Irrational Exuberance

It was only a month ago that I last written an article on the China stock market (article here). Back then, I mentioned how the dragon has risen from 1,900 all the way to 3,700. The index is now at 4,800 and everyone is predicting it will only a matter of time before it reaches 5,000. The Chinese stock market rally is finally back on. There was only one word to describe this phenomenal bull run: Incredible.

Cheap Intervention?

We have been hearing a lot of news that there was a lot of margin account traders who has leveraged to participate in this bull run. I even highlighted in my previous article how people of all ages and education, some of whom with very few financial knowledge, who has participated in this long awaited bull run. We have heard the quote that when even the shoe boy has purchased shares, it's better to run away with the money. Now, we even have cleaners in China who have done the same. Perhaps a sign?

The US Federal Reserve infamous monetary policy over the last few years have fuelled the American market's recovery with a series of bond purchases and interest rate cuts. Record high were seen in the stock market, even though the economy remained weak with low inflation and low GDP growth. Now, the same can be said for the Chinese central government intervention.

Has it ever occurred weird to you that during the Chinese economic boom period when growth rates were above 10%, investors were not as bullish on the stock market as they were now when growth has stalled and they can barely forecast a 7%.

That's not surprising given a purpose intervention by the Chinese Central Government to convince investors to fuel the stock market by having a succession series of interest rate cuts in recent months. And they are making it very easy for investors to do so with the use of margin leveraging, even to the extent of using pension funds to invest in stocks.

One reason why I think the government is doing so is because too much debt is being tied up in the property market, which has stalled for growth and economy is slowing as a result without fuel for demand. As a result, they are doing this with plenty of agenda behind their own back by pushing money into the stock market and fueling for growth so that economy can pick up, but at what consequences at the end of the day. You and I will know when that happens. It won't end up pretty like how it started.

"May 15" - SG Transactions & Portfolio Update"

No.	Counters	No. of Shares	Market Price (SGD)	Total Value (SGD) based on market price	Allocation %
1.	China Merchant Pacific	72,450	1.06	76,800.00	25.0%
2.	Vicom	8,000	6.00	48,000.00	16.0%
3.	Fraser Centerpoint Trust	10,000	2.12	21,200.00	7.0%
4.	Nam Lee Metals	70,000	0.30	21,000.00	7.0%
5.	Fraser Commercial Trust	11,000	1.57	17,270.00	6.0%
6.	ST Engineering	3,000	3.60	10,800.00	4.0%
7.	Stamford Land	10,000	0.60	6,000.00	2.0%
8.	Noel Gifts	18,900	0.30	5,670.00	2.0%
9.	King Wan	5,000	0.32	1,600.00	1.0%
10.	Warchest*			96,000.00	32.0%
	Total SGD			304,340.00	100.00%

*Does not include emergency, social security (CPF), insurance endowment, and short term (1 month) funds for immediate working capital.

May was an exciting month for investors because that's when we received most of the dividends this month. I blogged about it a couple of weeks ago which you can view here.

There's a couple of changes made to the portfolio from the last update I did in April. First, I divested all my shares in Sembcorp Industries, followed by a couple more for FCT. Then, I added a core position in Nam Lee Metals and recently accumulated more Vicom into the portfolio. I'm also entitled to the bonus from CMP after they announce a 20 for 1 which increased the position for this month.

The amount of warchest has now increased to about a third of the overall portfolio, a position that I am looking to increase if there are not suitable investment to add. With the many products out there yielding quite a bit of good interests out there, I will not need to be in a hurry to utilize them to an average investment.

The portfolio has dropped a little from the previous month due to the volatility of the market to the downside. I won't be too concerned about the daily or monthly movement as they only represent short term vision which does not coincide with my goal. If market continues to be weak and presents opportunities to add on, it would be a good chance to accumulate for the long term. I will continue to look for value in the market in the meantime.

With the Fed looking to hike interest rate finally in the next few months, we could possibly see some hiccup in the market especially those with high gearing. We may also want to see the refinancing capability of the management to ensure that they can continue to refinance at a higher but reasonable rate.

Thanks for reading.

How was the month of May been for you? Let me know!!!

Recent Action - Vicom Ltd

Following my post earlier this month (here) on Vicom's Q1 FY15 result, the share price has dropped and I took this chance to accumulate by purchasing 2,000 shares at a price of $5.96. I don't have too much to update regarding the nature of the business that I have written on previously, so this is more on accumulating on opportunities when I see price weakness looming.

Based on the Q1 results, I estimate that they will come up to around 38 cents EPS for this year, which translates to about just over 10% growth year on year. Assuming the same payout ratio of 80% is maintained for this year and given their track record in increasing dividends every year, this could translate to a dividend of about 30 cents/share or 5.1% yield based on my above entry price. Hey, that's better than most of the blue chip companies that people are interested in that yields less than 5% but have a much higher payout ratio. Think those companies such as the telcos, SPH, SIA Eng, ST Eng, etc. Given that this is an SG50 year, they might even give out more as special dividend with their cash balance looks to burst the $100M point this year. But just take it with a pinch of salt.

Forward price to earnings based on my estimate at current price would translate into about 15.7x, which is very decent for a company with Vicom type of business moat. Even looking at the past couple of years, you are not going to get anywhere much cheaper than what it is now, unless earnings dipped severely or recession looms. Parents company CDG is trading at around 22x, so this gives a rough indication of what investors should be expecting.

	2011	2012	2013	2014	2015*
EPS (cents)	28.7	30.0	32.2	34.0	38.0
Growth %	-	4.3%	7.4%	5.9%	11.7%
Dividend (cents)	17.6	18.2	22.5	27.0	-
Payout Ratio	61.3%	60.8%	69.9%	79.1%	-

	Cash & Cash Equivalent ($m)	% of Total Asset	CAPEX Requirement ($m)	Net FCF ($m)
2011	55.2	41.2%	(12.2)	22.3
2012	66.0	45.5%	(4.6)	26.0
2013	78.5	49.6%	(3.9)	28.5
2014	91.0	53.8%	(5.1)	32.6
2015*	98.0	55.3%	(2.2)	-

As I had previously mentioned in my previous couple of articles on Vicom, I like the company because it has a very good core business model of people coming to Vicom for services rather than the company having to source out for demand. The nature of the landscape of the vehicle population in Singapore also means that it is unlikely to decrease, even though growth might be stalling over the next couple of years.

With their expertise in the testing and inspection services in the vehicle segments, they have also translate this expertise to the non-vehicle segments where they are expanding into the various O&G and construction industries.

Capex requirement for both the vehicle and non-vehicle segments remains low, which is another reason why I like the company. This means that they are able to free up most of the free cash flow that goes into the huge cash balance they already had. Most of the expenses should come from the salary overhead and as long as they can maintain this (which is not very difficult based on my experience to control), then EBITDA margin should stay at about the same region. In any case, they've got a very strong EBITDA margin to begin with at above 40%.

Vested with a total of 8,000 shares as of writing.

What About 2nd Chance At This Price Now?

The share price of 2nd Chance has been in severe declining phase since its last failed execution of spinning their properties into Reits. The last time I blogged about this was back in January this year when the share price declined fiercely to the news that it went down from $0.45 to as low as $0.38. If you are interested in the original article, you can view them here.

Since then, the company has reported declining earnings for quarter 1 & 2 that sent its share price plunged further down to as low as it has touched $0.30 today. I mentioned in the original article that price was still overvalued back then, but what about at current price? Do you consider giving a second chance to take a look at them?

Stripping out one off gain, last year trailing earnings are still at around $0.0244, which represents an earnings yield of around 8.13% based on current share price of $0.30. The earnings for this year will almost certainly be worse than last year judging from the first half results, so earnings yield could plunge further down to around 7% based on my estimate. Dividends could also be slashed downwards and share price could face further pressure.

Temporary or Permanent Loss of Moats

As an investor, it is crucial to consider whether the fall in earnings are temporary or permanent in nature. Some industries face certain cycles in their businesses for the different periods and a value investor would be able to use the opportunity to add to their position when the cycle is at its bottom. 

Based on the core nature of 2nd Chance business, it seems like some of the revenue contributor business are cyclical in nature and the drop may be temporary in nature. Securities, Properties and Gold are certainly assets that we are more familiar of and we know how they can go up and down based on different economic environment. The apparel business is a little tricky because they've closed down a few shops recently that led to a loss in profitability in 2015. The management cited the loss due to labor intensive and restructuring organization. My guts feeling tells me that they might be considering to streamline the overhaul process for the apparel business while the other business maintain the earnings for now.

If you take a look at the breakdown below, you would see that properties and securities contributed a high gross profit and EBITDA margin to their bottomline, and it is key because they do not require much capex and labor to incur for. These items probably tied up a lot of their investment in their books, but they are giving decent return since they purchased it many years ago.

Revenue

Net Profit

Outstanding New Warrants

I highlighted about the potential dilution from the outstanding new warrants they issue at an exercisable price of $0.40 during the period 25 July 2016 to 24 July 2017. Based on what we've seen lately, it seems that the warrants will be out of the money and highly unlikely that they will be exercised. So this concerns will go away for now.

Conclusion

Current share price is at $0.30. NAV is at around $0.37. Gearing is at around 34%. Earnings yield are at around 7%. 

This looks to me much like what we've been paying for Reits out there with the same above criteria but with so much more love than this one. Again, remember that they are having a bad cycle for their apparels, gold and properties and when the cycle bounces back, they could be a reckon to consider.

There's certainly not much catalyst at the moment, so I'm waiting patiently to see if it can go down lower to my target price at around 27 - 28 cents. We'll see how it goes in the next few weeks. If market continues to weaken, I may just give this stock a second chance to own them again.

Redefining The Conventional Definition of Success

Success in the capitalism society is often defined as one who manage to captivate through material possessions and titles. This is not surprising in the first place. Capitalism is often closely associated with economic growth and has often been criticized for its underlying focus on profits and how these ultimately lead to income inequality where the rich gets richer and the poor gets poorer.

Take external multinational corporation for instance. How many times do we see titles being inflated to "AVP" or "Managing Director" when we meet with external customers or suppliers? At the very least, you would see the title "Managers" being printed on the namecard. This is good for defining success because you want to exercise your authority by having these powerful titles.

The same goes when a recruiter asks for your current title at work and when it doesn't sound as impressive as the title at the next potential job, it might be difficult to get them. For some reason, these are the pretty hollow things that are usually overrated.

In our highly conceptualized society, luxury cars, condominium, credit cards and results lean early on what success might look like. Different cultures may represent variations in vocational perception of what success is but the general idea of bigger home, thicker wallet and fast cars are becoming one of tattered path to success.

Last week, one of channel 8 show broadcasting Jamie Chua personal luxury home and her famous collection of Hermes Birkin handbags have hit quite a bit of talking points there. Even my mum and wife were there to watch them. The general idea that I get from the public is the girls are seeing her as some sort of role model, a person that defines what "success" is with all the famous collection of luxury items one must have when you get to her age. The society is obviously mesmerized by the different definition of success they are looking for and it can be harmful at times. We can blame the media for so relentlessly corrupting us into believing that success requires us to act or behave in a certain way and own things so rare that only one of those you can own it. I like to think that people are old and educated enough to think well enough for themselves to decipher the code between the unconventional meaning of success.

As a society, we obviously need a better financially less dependent measures of success. Perhaps, we can start by defining success that works for the collective. A good example would be the collective voluntary assistance reaction to the recent Nepal earthquake. We give and provide helping hands to one another in all forms of assistance to the needy and casualties in Nepal. At some point, we need to break out from the formal structures of what success really is that rule over our head. We need to show sufficient respect to the aunties that clean our roads, the janitor that cleans out toilets and the less proficient professions that make out society a complete world to live in.

I count my blessings to be able to have them around.

How do you see or define success? What is success means to you?

Thoughts On Fraser Centerpoint Ltd - 3.65% Bonds - Part 2

This is the second series on the FCL retail bonds which seems to be a very hot topic these days. For the first part, you can view my previous article here.

The prospectus did show a bit more information on what we need to more as a bondholder and one of those is to ascertain whether there are a callable feature which would disadvantage the bondholders.

As a fixed income investor, this represents an early redemption risk on top of the reinvestment risk that bondholders need to consider, especially in a low interest rate environment where it goes in favor of the issuer. To account for this particular disadvantage to the bondholder, there is a callable premium that the issuer would have to pay on top of the normal redeemable par value amount. The callable feature would exist in the 4th year of the issued date from 22 May 2019 onwards with the details shown below. The IRR for the earliest redemption should it happen would be at 4.1%, so bondholders would enjoy the premium over the guaranteed 3.65%.

With the impending interest rate increase, I doubt that we will be seeing any sort of redemption going unless they can issue at a lower rate. It is also unlikely that the issuer will recall the bonds even in the event of healthy working capital because cost of debt is known to be much cheaper than cost of equity, so I think they'll honor all the way to 7 years. Don't get start excited yet on the potential 4.1% yield. The probability of that materializing is very low.

Who should be bidding for this?

1.) Those who are satisfied with the 3.65% yield on a fixed income requirement.

2.) Those who are willing to take slightly higher risk than SSB or SGS but with higher returns.

3.) Those who requires a less volatile investment (compared to stocks) but requires some sort of decent cash flow.

4.) Those who believes that the issuer will still be solvent after 7 years (With BAA1 ratings, they should be fine).

5.) Those who wants to be a lender and not an investor.

6.) Those who thinks that they are not able to earn a return of 3.65% per annum for the next 7 years.

7.) Those who wants to include bonds as part of their overall portfolio allocation.

8.) Those who wants to use this avenue as part of the endowment plans i.e money to be used after 7 years from now.

One thing for sure, this is not for any quick capital gain play. If you are thinking that the price will shoot up just because they are oversubscribed, you may be disappointed with the outcome.

Will I be balloting?

I doubt I will be participating in this for now.

The biggest reason lies in the fact that over the next 7 years, I will most likely be using the funds to find some sort of opportunities in the market that will yield a better return over the long run than what the retail bonds are able to provide at this time. The markets are known to be an unknown, but that's the opportunity loss (gamble) I will be taking for now.

At my age, I think I am comfortable enough to go for opportunities that I think will yield higher sort of returns over the long run. Participating in this will make one a lender, not an investor, so there needs to be clear clarifications that any sort of growth the company enjoy over the next few years will not impact the bondholders. Cash is king, so locking in at 3.65% over the next 7 years does seem relatively risk averse, especially as I am just starting to grow my wealth to greater milestone in the next few years.

Even though the overall market does seem pretty high at the moment, there are always opportunities you can find if you look deeper into several sectors that are in trouble right now. Even if not, there are other opportunities that I can park my cash with greater liquidity at the moment that yield roughly about the same decent yield returns, so I will not fret too much into this.

Nam Lee Metals - H1 FY15 Results & Thoughts

Not too long ago, I've written a post regarding buying into a position in Nam Lee Metals which you can view here. The investment thesis remains largely the same but thought that I will update the tables for those who are interested since they have announced their half yearly results this evening.

B's customized financial overview (2007 - 2015*)

Q2 Result remains largely within the expectations that the business seems to be trending back up after a difficult last 2 years which the management concede. In its outlook, the management also reiterated that business and demand for aluminium will pick up so we will probably see stronger performance from here.

There's a few things to highlight from the Q2 results.

Free cash flow has gone into negative territory because of negative working capital and requirement for capex which they have used to purchase a warehouse which was highlighted earlier. Cash conversion cycle is slow and this is pretty common to them as they will have a year of huge positive operating cashflow followed by negative operating cashflow next.

As previously highlighted in the first article, I was not too concerned about this because they have the huge cash balance in their books to mitigate the slow turnaround. Inventory did increase significantly in this quarter, implying that the company is stacking up for the increased volume. That's all that matters at the end of the day.

The company also took up term loans in this quarter which was not there previously. I suspect this facility is to ensure that working capital operations can move on smoothly in case they needed more time for turnaround and cash is not sufficient to cover them temporarily. For now, I don't see too much concern regarding this unless this gets geared up pretty high.

Earnings yield annualized is now at 14.6%, which implied a price to earnings ratio of around 6.8. It's pretty decent in my opinion, given that the company tends to payout a conservative 1.5 cents dividends to shareholders. First half earnings per share is already at 2.12 cents, so this is already covering the payout they are supposed to usually give out.

There shouldn't be any catalyst to move up the share price aggressively, so this will continue to be a long term play, yielding decent yield for now for me.

Vested with 70,000 shares as of writing.

Thoughts On Fraser Centerpoint Ltd - 3.65% Bonds

There seems to be a lot of investment vehicles coming up recently attracting investors to park their money with. Not long ago, we have the structured UOB and revised OCBC deposit, then the Singapore Savings Bond (SSB) and more recently the FCL Retail Bonds offering attractive rates at 3.65% for a maturity period of 7 years.

 

 

 

Duration: 7 years

Interest: 3.65%

Payment: Semi-Annual

Offer period: Now till 20 May Noon Close (Retail investors can apply via ATM or iBanking)

Min Sum : $2,000 (increment of $1,000 next)

Trade date: 25th May

 

There has been a couple of retail corporate bonds offered in the past too by blue chip companies such as the CMA and CMT but I don’t remember it generates so much interest as the one being offered recently by FCL. I can probably attribute this to 2 factors. First, it shows how long we have been living in a low interest rate environment that when we see corporate bonds offering at a rather attractive yield, we get excited about it. Second, there’s plenty of buzz regarding the offering and people are simply subcribing to this as part of herd investing mentality. The thing that gets these people excited are the subscribing activities where they get to press ATM to subscribe the way they did for IPO. But this is vastly different products for different needs. People who usually subscribe for IPO are usually short term focused but this is a rather meant to be a long term instrument.

 

Thoughts

 

First of all, I must say that it’s rather confusing for some people to have so many different investment vehicle presented in front of them and having limited amount of money to invest. The traditional over the past 4-5 years has been flat Reits investment because they are structured to give pretty decent yield return to investors. When others came into the scene with products such as the OCBC 360, it suddenly attract investors to park their money there.

 

The thing about deciding whether you should be investing in this FCL 3.65% bonds carries a few factors such as age, career, needs, appetite for risk, etc.

 

Depending on your age, career stability and appetite for risk, bonds are traditionally less risk averse instrument because they provide investors a fixed amount of payout until the maturity date. Bonds are subject to interest rate risk which would decide whether the bond price goes up or down below par but if you are intending to hold until maturity, you will not be subject to this risk because it will be redeemed at par. However, the one thing that many people failed to consider is investors are subject to reinvestment risk when the product mature because you will then need to seek for another product that can yield the same if not better yield. Unlike stocks, you are investing in a business that is supposedly going to move up and accumulate increasing business moat over time so there is hardly reinvestment risk if the business model proves to be successful. Having said that, stocks have plenty of other risks that I will not discuss here.

 

Going back to this, my thoughts is that with interest rate going to trend up, there will be more investment vehicle or companies like FCL that would perhaps be offering such debts deal to raise money. Imagine if Capitaland or UOL were to issue the same deal with higher yields at 4%. The investor who are invested earlier will be subject to these opportunity loss. Also, because of the rising interest rate trend in the next few years, chances are that the market value are likely to trade below the par value in order to make the Yield to Maturity (YTM) more attractive to potential investors. Note that I mention opportunity loss and not an actual loss because remember if you are holding this long term until maturity, then you are almost guaranteed to redeem your capital back at par value.

 

I suspect there’s too many hasty investors out there who blindly subscribed to this retail bonds offering without really thinking all the possible consequences. If SCI were to go down to $3.80 in the next few weeks for instance and you have no warchest, I’m pretty sure there’s a lot of investors who would be trading out of this retail bonds in order to catch SCI by then. If you are doing so, then you are only thinking short term and not what bonds as an asset are supposed to work for you in your portfolio allocation.

In conclusion, the correct approach to go about doing this is to consider your own needs based on criterias such as age, career stability, yield returns and time horizon. Once those factors are considered, you will have a better idea of whether you will need this product or not.

 

Again, there’s no right or wrong in this but one certainly needs to think through before rushing to subscribe when the excitement is still high.

Will you be subscribing to this retail bonds offered by FCL? What's your reason for doing so?

Vicom Q1 FY15 - An Epic Wave Of Carmageddon Coming?

Vicom has released its first quarter results for the new financial year and investors were waiting anxiously regarding recent news of carmageddon surrounding more deregistration of cars in the next few years. I've made a couple of blog posts in the past about the company so i will not repeat too much into the details. For past articles, you can refer to here:

Vicom FY14 Results - Are we seeing a slowdown in the business?

Vicom - Looking Ahead and Beyond

Vicom - Looking Ahead and Beyond - Part 2

Vicom - Is Special Dividend Going To Increase Again This Year?

To be honest, this wasn't anything new that investors are not aware of. I've covered in my previous rounds of articles that the deregistration wave is coming so this might somehow impact the growth that Vicom used to enjoy in the past. I've updated below regarding the latest aging vehicle distribution as of 31 Mar 2015.

I wasn't particularly concerned about the recent wave of deregistering because this seems like a situation that is temporary that would subside once it has entered into a new cycle. My main concern is more on the regulating on the overall growth rate by LTA which is currently at 0.25%. If they decide to decrease the amount one day, that would become a permanent problem for the company.

Financials

I'm generally happy with what I see in their Q1 results.

Both topline and bottomline enjoy a healthy single digit growth which I thought was decent given the recent vehicle deregistration issues they are currently facing.

Balance sheet has also gone stronger with higher cash balance accumulating in their books.

Capex figure remains low for this quarter, which indicates that they did not invest a lot of their cash into the non-vehicle testing of Setsco, though management reiterated that these segment continues to grow.

	2011	2012	2013	2014	2015*
EPS (cents)	28.7	30.0	32.2	34.0	38.0
Growth %	-	4.3%	7.4%	5.9%	11.7%
Dividend (cents)	17.6	18.2	22.5	27.0	-
Payout Ratio	61.3%	60.8%	69.9%	79.1%	-

	Cash & Cash Equivalent ($m)	% of Total Asset	CAPEX Requirement ($m)	Net FCF ($m)
2011	55.2	41.2%	(12.2)	22.3
2012	66.0	45.5%	(4.6)	26.0
2013	78.5	49.6%	(3.9)	28.5
2014	91.0	53.8%	(5.1)	32.6
2015*	98.0	55.3%	(2.2)	-

Non-Vehicle Segments

The problem for us investors in trying to dissect the company's financial statement is they are very simplified in the presentation, thus making it very difficult for investors to dig deeper into the non-vehicle segments which becomes sort of a black pyramid box that we need to try to understand.

Fortunately, there was much more indication in the recent annual report they published regarding this segment which we can refer to for reference.

There was strong demand in the oil and gas, petrochemical, marine and offshore as well as construction industries, though they do acknowledge that the volatility of the oil price and slowdown in the construction business might cause a problem for all sectors.

In marine and offshore, Setsco has been involved in the number of high end projects involving the non-destructive testing of offshore oil platforms which include three floating production storage and offloading facilities, six semi-submersible drilling rigs and two jack-up rigs.

Setsco has also provided technical expertise in the areas of project management, groundwater drilling and water quality monitoring for the development of sustainable water solution using sand aquifers for JTC corporation.

Setsco has also rolled out automated cube testing system, where robots are used to carry out testing of concrete cubes, including scanning, feeding, lifting and weighing.

For overseas operations, Setsco has provided surface friction testing services for a helicopter landing deck located at Johor Port in Pasir Gudang. It was also appointed to set up and manage a laboratory that monitors the quality of concrete materials used for the construction of the Penang second Bridge.

If there is one thing I see in common about these businesses, they are mostly testing and inspection services for the diversified businesses which require very little capex from their side to run the operations. In other words, we should be seeing continuation of free cash flow being generated on a fairly comfortable level and cash balance should continue to keep increasing.

Final Thoughts

The management sounded cautious about the vehicle testing segment but from the look of it, it seems that they are able to neutralize this effect from their non-vehicle testing segment which they are confident it will continue to grow despite the recent woes about oil prices and construction businesses.

Unlike Sembcorp Industries who seems to be hit in both of their segments in utilities and marines, Vicom looks like they are able to manage the slowdown in vehicle deregistration rather well and from this, I gather that this is a good stock to hold for the long term.

Vested with 6,000 shares of Vicom as of writing.

Dividend Income Updates - "The Power of Dividends"‏

The month of May has always been a favourite month for proponents of cashflow and investors piling on a dividend investing strategy because that’s when most companies pay out their final dividends based on the previous financial year result. What this means for investors is a direct income received through owning part ownership of the companies you are vested in that you can use to spend on anything that catches interest to you, be it shopping or travelling. Even if nothing interests you, you are able to top up your emergency funds or reinvest the dividends to purchase more ownership stake in order to get higher dividends the following year.

I have always been a proponent of dividend investing strategy because of my preference for cashflow. When I first started the strategy back in 2010, I became almost quite excited by what I found to be a very robust strategy. The tangible benefits of dividends are obvious. They are hard cold cash that you can almost immediately spend on anything and they are usually paid through earnings that the company has generated for the past year. As investors, the difficulty lies in trying to figure out the sustainability of the dividend payouts paid through the earnings of the company, especially in times when the economy is not very kind to businesses. 

As minority shareholders, the dividend income we get are usually not as significant to what the other big players do. But we are wrong if we simply discount it the way we did earlier. Small pieces of dividend incomes do add up over time, especially if you are vested in multiple businesses that consistently pay out sustainable dividends over time. Think of it from a snowball analogy rolling down the hill. The snowball started as small when you roll them at the beginning but it becomes larger as it rolls a few times. This is exactly what the power of compounding is all about.

I have received quite a fair bit of dividends this month, which I'm sure it helps tide around one way or another. Without further ado, these are the amount of dividend income I will be receiving in the month of May:

Counters	Dividends (S$)
China Merchant Pacific	2,415.00
FraserCenterPoint Trust (FCT)	296.00
FraserCommercial Trust (FCOT)	261.00
Vicom	1,095.00
ST Engineering	440.00
Total	4,507.00

The total amount of dividends received (to be) amounted to $4,507. This is almost as significant it can get because they can cover a whole lot of expenses for the month and free up more cashflow for other use. At the same time, I've also received a bonus share (sort of dividend in specie) of 3,450 shares from CMP after the company issued a bonus consolidation of 20 for 1 share. From a market value point of view, they are worth around $3,830 so I''ll take it as if it's a dividend in specie and will include them in this month portfolio updates.

Dividend investing continues to play a big part in my plans to move away from the corporate world one day and the longer these snowball rolls, the faster I am probably able to reach that stage. As always, the purpose of these updates is to provide a transparency and motivations to myself more than anything else. It is also to allow others to understand that these are feasible options that anyone can start with whatever amount they've got at start.

The traditional rules apply. Save. Research. Invest. Repeat them consistently and we'll probably see the fruits of our labor reaping pretty soon.

In the meantime, Happy month of May and enjoy the fruits of those dividends for fellow investors!!!

What about you? How is May coming along for you?

Sembcorp Industries Q1 FY15 Results and Thoughts

Sembcorp Industries has announced its Q1 FY15 results for this evening after market close. Even though I had fully divested in the stock (original article here), I still keep a close lookout on its development and there are some things that I am particularly eyeing on in addition to what I've discussed in the past.

1.) Lower Utilities Net Profit (for Singapore segment)

I am not sure why everyone is rather surprised at the drop in utilities we had for this financial year. I thought it's pretty obvious that with lower hsfo and oil prices, in addition to the higher competitive nature, we are going to see the segment performing worst than we had for previous year. Again, some may think that the overseas segment in particular the new India operations can make up for the weakness but as you can see below, the Singapore segment is the majority segment that are making up for the losses.

2.) Lower Energy Segment

If we break it down further, we see that the potential weakness came mainly from its energy while water and solid waste registered healthy increase.

Q1 13 - $39.2m 

Q1 14 - $37.1m (-5.35%)

Q1 15 - $12.2m (-67.1%)

The drop in this quarter profit for energy is pretty shocking to be honest as they represent a 67% drop from the previous year. While lower HSFO and oil prices are undoubtedly causing margins to decline, we can't rule out that they may be losing some market share to competitors. In the slides, the management mentioned that vesting contract levels have dropped from 40% to 30% in 1H2015 and will fall further to 25% in 2H2015. If so, this could be worrying signs ahead we need to take note of in the future.

3.) Free Cash Flow & Capex

Expansion Capex remained high as the company embark on an aggressive mode of expansion. The latest won project for Myanmar probably signifies the company expansion plan and its use of its cashflow even more in the future. Again, the results can only be seen in the very long term once operations stabilize and commenced operations.

Conclusion

Trailing Earnings are going to see weaknesses in this financial year, perhaps "saved" by the divestment they made recently to their UK operations which will be recognized in Q2FY15. Dividends might also drop given the level of price weakness but I think the Singapore segment will see price weakness as low as it can get now. Balance sheet has also become much weaker as a result of taking on more leverage for expansion purpose.

Marines are not any better either. They probably are able to sustain their operations for the next few years but low project order won is a potential worry if low oil price is going to hang in the balance for longer.

Based on risk adjusted return, I just don't see the attractiveness to enter to the stock at this moment. Earnings for the financial year are weak, future is uncertain, and dividend payout is low for yield hungry investors. Unless you are one which are going to hold this for at least the next 5 years, I think we won't see any spectacular catalyst that will propel the earnings or cashflow to show for any upside.

Remain on the lookout but not vested for now.

3 Things We Can Learn From Mayweather vs Pacquiao

This past weekend we've witnessed one of the most eagerly awaited boxing match in the century. To be honest, I've hardly watched any boxing match since my last days of Mike Tyson before switching to a regular in Wrestling event. In any case, let's go through the 3 things that we can learn from the event itself.

1.) Everyone Having High Expectations

I think there is an overly publicized attempt for the match. Every social media I go to, they are talking about the events. This is not a surprise since this is a much awaited event for the fight of the century so everyone has very high expectations going into the match. Starhub is quick and smart to make this a PPV event which viewers need to pay for the premium in order to enjoy the much highly anticipated sports event of the year.

The problem with high expectations is that you are setting yourself up for disappointment when it does not reach the climax you desire. I've had a couple of events like this when watching movies and I suffer from the lack of climax prime time to time from it.

Similar to investing, many investors pay a high price for a stock usually in anticipation for the company to grow well over the next few years. When earnings or growth disappoints, the stock will suffer a dramatic fall back to the mean reversion of where they belong to.

For the information, I watched via youtube a couple of hours after the match ended and thought it was a pretty decent match. After all, I understand the hype this time and lowered my expectations accordingly. Worked perfectly for me.

2.) Understand The Rules Of The Game

There were probably millions of people watching this match and probably only a minor few are boxing fans to begin with. The rest had probably never watched a single match of boxing prior to this.

The thing with boxing is the rules of the game are very different from other sports we are more familiar with. The boxers are usually very strategic and unless it's a clear one sided or knock-out, it usually goes to the full 12 rounds and the judges will determine the winner based on a few set of criterias. Boxing match is usually this dull, especially when this involves a very highly hyped event throughout the year. If you want more adventurous, viewers should switch to wrestling the way I did. I bet Undertaker vs Brock Lesnar at Wrestlemania will give you more satisfaction than any boxing match you anticipate in.

Similar to investing, when an investor purchases stock without understanding the fundamental of the company well, they are likely to be disappointed and suffered when things are not progressing well. Like all things, it's better to understand the rules of the game first before commenting on what you think should be the outcome.

3.) Supporting The Underdog

I don't know about you but whenever I am a neutral viewer when watching movies or events, I like to support the underdog. It almost feels like dramas fully captivated when the underdog loses at first, then trains hard and finally being able to outdone the favorites.

Mayweather and Pacquiao are no David vs Goliath. But the logical seems to portray that very well. While one comes from a much humble background, the other seems to be a prey when it comes to money $.

In investing, we can see this from a big versus small capitalization company point of view. While many tend to stick with the blue chip because they are clear favorites, sometimes the odds does not seem to bode well for them because they are either overpriced or simply too many people are backing them, making the boat tide sinks in gambling terms. Oh well, at least in the boxing match, we do see the favorites winning.