CIMB Research 2015-06-24: Keppel T&T Selldown Overdone - Keep ADD call but lower target price to S$1.86

• Widening discount Concerns of a fourth telco entrant in Singapore has led to the steep fall in M1’s share price in recent months. This in turn has affected KPTT’s share price, due its 19% stake in M1. 
• But we believe KPTT 's selldown has been overdone as it is trading at a 7% discount to the market value of its combined stakes in M1 and Keppel DC REIT – implying that the market is ascribing no value to its core logistics and data centre businesses. 
• At 10.6x FY16 P/E, we believe the current share price offers value and presents a good entry point. 
• We keep our Add call but lower our SOP-based target price to S$1.86 to reflect the lower market value of KPTT’s stakes in M1 and Keppel DC REIT. 
• Potential catalysts include capital recycling as KPTT divests its data centre assets to Keppel DC REIT. 

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CIMB Research 2015-06-24: Upgrade China Merchants Holdings from Hold to ADD with TP S$1.18

Three acquisitions at one shot 

• We are in favour of China Merchants Holdings’ (CMH) intended acquisitions of three toll roads in Guangxi as the acquisitions would 
  1. provide earnings diversification to CMH’s existing toll roads; 
  2. increase the average remaining concession period of CMH’s toll portfolio and 
  3. allow earnings enhancement by CMH via refinancing the debt associated with the acquired toll assets. 
• Due to insufficient information, our estimates have yet to incorporate the impact of the acquisitions. Our target price (based on CY15 residual income valuation) is raised to S$1.18 as we rerate CMH and lower our discount rate applied from 9.5% to 9% to reflect the reduced concentration risk and the potential enlarged market cap of CMH. 
• We upgrade our call from hold to Add. 

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UOB Kay Hian Research 2015-06-25: Ezra - Maintain HOLD with cum-rights target price of S$0.31

Ezra Holdings - Not out of the woods yet; a sale-andleaseback of the Lewek Constellation could be on the cards. 

FY15F PE (x): 18.4
FY16F PE (x): 20.3

• Ezra’s cash call has lifted its refinancing risks. 
• However, its high gearing of 1.27x amidst the current industry downturn and a high cost structure make the situation challenging. A possible sale & leaseback of the Lewek Constellation would unlock US$200m in equity to bolster internal liquidity. 
• On the flipside, the high vessel dayrate will add to cost burden. 
• Subsea outlook has deteriorated. We cut FY15/FY16 earnings estimates by 35- 47%. 
• Maintain HOLD with cum-rights target price of S$0.31. 

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Modest Gain in my Unit Trust Portfolio

I seldom keep track of my Unit Trust portfolio as I have spent extensive time to construct it at the onset. It is engineered to pay monthly dividends as a form of consistent profit taking and ideally, the $600k portfolio should be paying 5% dividends and having 0% growth. It was constructed with a balance portfolio in mind, diversified between equities and fixed income; invested across different currencies, geographies and having negative correlation with different asset classes such as US treasuries, equities and soft currencies. 

By and large, the portfolio exhibits low volatility month on month basis. I am actually please to see negative positions as this means that there are some form of negative correlation within the funds. I will be worried if everything is positive (or negative!). 

The investment horizon for the Unit Trust  portfolio is for extended period and rebalancing is not required (ie selling underperformers and buying more winners) as I ignore market noises and continue to receive the monthly dividends. I will opt for dividends reinvestment should a bear market comes. 

The Unit Trust portfolio excludes my CPF and SRS funds. I still hold a concentrated portfolio of Singapore equities comprising of 12 stocks. 

Good bye textbooks..

Today my maid was clearing my room and asked whether she could (finally) clear my unwanted texts, files and notes I have not touched for years. I gladly agreed.

I used to have the habit of keeping ALL my textbooks religiously for fear that I may need them if I ever meet an unsolvable problem at work. My belief was shattered as over the past decade, nothing of such happened. 

No wonder I do not see any plumber or air con technician bringing along their work manual to my home! The notes and text I have “saved up” no longer serve any purpose other than giving me lift to nostalgia lane. Over the years I have accumulated a lot of books but not knowledge; a lot of information but not intelligence; learnt a lot of case studies but not actionable plans. Are they worth keeping if they no longer serve the purpose of education?

I am a firm believer that the purpose of education is to fill an empty mind to an open one; thus I would gladly trade them for a cleaner room.  

Finally, I have more breathing space to fill up an open mind!

SBC predictions: Elections will be this year 2015 (2H), BEAR market after.

In my course of work, I am rewarded directly how accurate I read the future. If I get it right, clients make money and I am rewarded with trading fees.

Often, I base my decision on a combination of logic, pattern observation and intuition. Sometimes the trend are extremely obvious, eg we should be buying USD or HKD ever since there are talks from the Fed to hike rates last year; we should have been (and still) borrow in Eur, in which the interest rates is below 1% and buying into higher yielding assets like USD or good grade SGD bonds. When Capitaland issued a new 10 year bond paying 3.8% (reduced from initial price guidance of low 4%), everyone who has money should have bought it, as banks are willing to lend at least 70% of the purchase price and your outlay is only $75,000 for a $250,000 nominal value bond excluding fees. Today the bond trades above 102 bid. The upside in H shares look extremely glaring with good banks like ICBC, ABC, BOC (and many more), trading dividend yield of 7% with PE ratios of 5. Warren Buffet has made a comment that this is as good as money on the ground. Just pick it up. It was a no brainer that SIA and other airlines will benefit hugely from the massive oil correction; local banks will benefit as interest rates are expected to go up (3 years ago till now) etc.

I thoroughly enjoy the satisfaction that comes with monetary reward when I am proven right at work. Sometimes I do get it wrong as well. For instance, I did not expect HK gaming stocks to take a 40% hit within a short span of 6 months, oil to correct more than 50% or CHF will be rallying 30% last night. Good quality china property bonds are still paying more than 7% coupons but yet trading less than 95 and many more. I don’t get it wrong often, but sometimes not expecting an event means getting a forecast wrong due to the ripple effect of events. That’s life.  

Today let me make a free forecast on the timing of Singapore elections. Again, I have a 50% chance of getting it right, if its not this year, it will be next. However, it is more likely to be this year, after National Day and PM rally for the following reasons:

The SG50 is an elaborated celebration. I rarely follow what it is about, but it seems to have propaganda to let Singaporeans have a euphoric feel on our past achievements and be ecstatic about the future.

Mediacorp channel 8 shows are advertising blatantly in their drama on the pioneer generation cards and other excellent policies the government has administered. Ministers are attending talk/interview shows on TV frequently!

Mediacorp is 100% Temasek subsidiary.

There will be more COE supply from Feb 2015 onwards, alleviating our cost of car ownership.

The earlier the elections, the better for the ruling party. Less youngsters turn 21 to vote against them (if you have been reading SMRT feeback and The Real Singapore on Facebook), while more elder generation are alive to vote for their favourite elites.

The bull market started in 2009 March, it is in the 6^th year and we all know we are nearer to the next bear than an extended bull. Will the ruling party want to take the risk of having an election where there is a financial crisis, where unemployment will be higher and less votes for them?

Revamp of IPPT and RT this year. This will please many reservists, including myself. I will only need to pay a fine if I do not attend IPPT after elections this year. Good job for that. I appreciate the grace period.

Low oil prices will mean inflation will be lower this year, giving MAS more leeway to weaken SGD and this will be a boost to our GDP as we are 300% dependent on exports. Oil prices will not stay low forever anyway. Many countries need it to be at US$100 to balance their social budgets.

What’s the use of predicting? It is useful for me as I can have a view of what will happen this year and plan my investments or even my career according to my central view of the world.

I used to work in a civil service and I could not stand the hypocrisy of incapable people playing politics to hide their incompetence. Though I have seen many good people in mediocre roles (myself included! Haa!) who on hindsight could achieve much more if they have worked in the private sector. Yet the environment was so stifling and many doubted themselves thus not daring to venture out of their familiar zones but stayed in the old place, suffering. In 2009, I made a prediction that the markets will definitely turn around sooner than later; studied a masters in finance then and started a junior role in banking while studying part time. Today I have enjoyed a good 5 years in banking and grown my personal investment to a 7 figure sum, pretty much in tandem with the bull market. Hence I am a firm believer that everyone should have some form of predictions that will aid them in earning their first and subsequent pot of gold.

Back to my predictions; look at the return on STI on the following election years

2 Jan1997 general election, STI contracted from 2449 (2 Jan 1996)- 2216 (3 Jan 1997), loss of 9.5%. 1.5 years later, STI hit 856 in August 1998.

3 Nov 2001 general election, STI contracted from 1952 (3 Nov 2000) - 1341 (1 Nov 2001), loss of 31%. STI was nearly at the bottom then but 1.5 years later, on 1 April 2003 STI fell to 1281.

6 May 2006 general election, STI rose from 2161 (6 May 2005) – 2632 (2 May 2006), gained of 21.8%. The bull market saw STI at 3805 in Oct 2007. 2 years after elections, STI fell to 1594 in Feb 2009.

7 May 2011 general election, STI rose from 2752 (7 May 2011) – 3099 (2 May 2011), gained of 12.6%. STI is around 3300 now.

If my prediction that 2015 Sept is the elections, by past 4 patterns, it seems that STI will always be lower after elections, meaning a bear market will occur. There are no visible patterns on whether STI will hit higher before elections.

Be careful of your investments, after elections.

Annuity plans are just a function of compounded interest benefits

Today I read an annuity benefit illustration on a brochure:

40 year old male contributes 24,200 yearly for 5 years.

At age 65, he receives $2,000 per month (non-guaranteed) till 85 with a lump sum maturity of $72,000 (non-guaranteed). 

Hence the total potential return is $552,000.

The insurer has a track record of meeting its projection. Hence for simplicity sake, let’s assume above are guaranteed returns.

At the onset, it sounds extremely attractive to me. I can have an income to complement my CPF life of about $1,200 per month and about $2,000 a month I will be able to retire comfortably assuming inflation is at 0%!

However, as a discerning citizen, I tried to replicate using a balance funds portfolio of unit trust. 

Assume I purchase a balance equity fund of Fixed income + Equity. The fund is likely to be able to meet its 4.5% payout and at the same time at least maintain its NAV.

The 40 year old male contributes 24,200 per year for 5 years. Let’s assume a 3% return at 0% sales charge for the first 5 years. 

5 Years later, he would receive $128,481.

Using the 128,481, he invests for the long term at 4.5% per annum for the next 20 years. 

He would receive $309,859.

Thereafter at 65, he elects to pay himself 9% P.A and he would receive $27,887.31 yearly and after 20 years he would still receive $127,573.20, which was roughly the amount he started at age 45.

The difference? 

If he outsourced his retirement planning to an annuity product, he receives $552,000. If he does it himself diligently, he may receive $685,319 or more, assuming his investment average return is no more than 4.5% per annum. 

That’s a huge $133,319 difference!

On top of that, the DIY route allows flexibility to bring forward the pay cheque if required and still get a better return. There is no early termination charges neither is there insurance coverage though.

So what does this exercise mean? To me, it means the following

- Most Singaporeans are rich. They can afford to earn $133,319 lesser over the long term. Singaporeans are not bothered with retirement planning and putting the blame on others for having to work past retirement age. This is why the market is filled with so many retirement products that earn no more than 5% on projection basis and yet selling like hot cakes.

- The effects of compounding has been used repeatedly by annuity companies to give seemingly huge returns at a paltry investment return rate of less than 5%.

- Consider instead to contribute to SRS and CPF special account instead while investing for the long term and enjoy the benefits of compounding instead of trying to buy 1-2 products and call retirement planning a day.

- The present value of money must always be considered and discount back to present value in order to make sense of the projections you are looking at. In reality, SGD 1M at 45 years from now at 4% inflation rate is really only worth $171,200. That's probably a 2 room flat future value with a lease of 99 years. Hence receiving $28,000 yearly 45 years later is only $4793 or no more than $400 a month!