RECENT TRANSACTIONS

As I did not provide an update on my investment holdings since December 2017, here are the recent transactions for my portfolio.

Purchased shares in Hanwell Holdings Limited at $0.23 after the steep fall in share price. From an assets-based valuation perspective, I believe that its current share price presents us with an opportunity to enter, with a good margin of safety

Read my detailed discussion here - Hanwell Holdings: Net Cash 70% of Market Cap.

Received $1.10 per share in dividends from DBS, including the special dividend of $0.50. DBS has undoubtedly been my best performer thus far, with returns in excess of 100%. 

I believe that a significant factor for the recent surge in DBS' share price is the decision to increase its dividend payout ratio, with the new dividend policy to pay $1.20 in dividends annually going forward. Currently, even at close to $30, DBS provides a yield of almost 4%. At my average price of $15.01, I am collecting 8% of dividends annually, and I have no plans to divest my holdings.

I remember attending the DBS Annual General Meeting back in 2017 at Marina Bay Sands, and one key takeaway that I got was how DBS has managed to stay far ahead of its competitors in the e-payments sector. CEO Gupta shared that DBS was the first-mover to introduce the DBS PayLah! app as an e-payments platform in Singapore, which spurned many of its rivals to jump on the bandwagon. Mr Gupta also mentioned how Singapore is lagging behind China in terms of embracing e-payments. DBS' digital developments were recognised when they were awarded the 'World's Best Digital Bank" by Euromoney in 2016. Coupled with strong growth in their wealth management segment, DBS remains my top pick among our local banks.

Received $0.05 per share of dividends from SGX. For Q1 2018, SGX reported their strongest quarterly earnings in a decade, with net profit exceeding $100 million.

With my 3-month summer break ahead, I aim to do more in depth analyses of companies on my watchlist, and continue build a diversified portfolio.

Take a look at my latest portfolio here: My Portfolio


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MY PORTFOLIO






Updated as at 11/05/18

After much consideration, I've decided to reveal the current holdings in my portfolio. My portfolio is a low five-figure sum, which I have accumulated from my savings, National Service allowance and working part-time jobs.

I started investing in mid-2015, while I was in National Service. Looking back, mid-2015 was probably the worst time to start, as the markets began to decline due to the sharp fall in oil prices and fears of a hard landing for the Chinese economy. I'd concede that when I first started buying shares, I had close to zero knowledge about doing due diligence. All I did was to base my analysis on P/E or P/B ratios. I definitely wasn't ready, and consequently got badly burnt by the downturn in oil and gas sector.

It was a humbling experience to be taught a lesson be Mr Market, and one thing I learnt was that we should never underestimate the power of the markets to work against us. Nonetheless, I believe that learning a hard lesson early was exactly the wake-up call that I needed. Over the past three years, I have spent a lot more time reading investment books to continually improve my fundamental analysis.

I am still in the process of rebalancing my portfolio, as it is still heavily skewed towards the financial sector, given that our 3 local banks make up a huge proportion of the STI ETF. Therefore, the percentage of cash that I'm holding is somewhat on the high side. Sectors I'm looking at include property, utilities, industrials, healthcare and consumer staples.

Briefly, here are the reasons why I've invested in these companies:

DBS Group Holdings

DBS comes in top among our local banks, and I like their drive to embrace technology to improve their banking services. DBS was award the World's Best Digital Bank last year, and was also the first mover to introduce e-payments in Singapore. I attended DBS' AGM earlier this year, and I must say that I was really impressed by CEO Piyush Gupta's vision to keep DBS competitive by integrating technology with banking services. 

My initial purchase price was higher, but after opting for the scrip dividend scheme for a few rounds of dividends, my average price has decreased to $15, which gives me a yield of close to 8% annually.

In early 2017, I sold off half of my shares at $19, which on hindsight was too soon.

STI ETF

I purchased this after reading the book 'A Random Walk Down Wall Street', which was about the merits of passive investing through index funds. This a more of a long-term position, rather than leaving these funds in fixed deposits with near zero interest rates. I was fortunate to have made my decision in mid-2016, which gave me a good entry price. I'm currently receiving a dividend yield of more than 3% annually.

My reason for allocating a portion of my portfolio to ETFs is because I view them as an 'insurance', if my stock picks underperform, I still can fall back on getting an average index return, which is still rather decent. I am considering diversifying my ETF allocation too, keeping an eye on emerging markets ETFs or a REIT ETF.

Post on REIT ETFs: Should we invest in REIT ETFs?

SGX 

I purchased SGX in November 2016, after Trump's presidential victory, as I had expected the rise in volatility to boost trading volumes in our local market, which has been sluggish after the Global Financial Crisis. However, trading volumes have not increased significantly, and SGX faces several challenges, including the threat of investors leaning towards passive strategies instead of active investing and low IPO activity. This is probably a vicious cycle, as the lack of action in our local market further deters companies from listing here, such as Razer and Sea (formerly Garena).

Nonetheless, I am getting a yield of 4% based on my cost price of $6.99.

Jumbo Group

When Jumbo's share price fell to $0.54, I felt that was a reasonable valuation for a company with good growth potential, as they seek to expand in Asia. More details can be found in my earlier post.

Post on Jumbo: Jumbo at 52-week low

Far East Orchard 

I believe the improving sentiments for our local property market, as evident from the increasing number of collective sales, would benefit FEO, which has been trading far below its net asset value. More details can be found here.

                         2) Update on Far East Orchard

Hanwell Holdings Limited

From an assets-based valuation perspective, I believe that it an opportunity invest in a company with a huge cash pile, providing us with a good margin of safety.



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HANWELL HOLDINGS: NET CASH 70% OF MARKET CAP



I finally had some time to resume writing my blog posts. Apologies for not updating my blog for the past 4 months, as I had been really busy with school activities.

Recently, I have added a new company to my portfolio - Hanwell Holdings Limited.





For the past month, Hanwell Holdings has undergone a sharp selloff, breaking the 30 cents support level for the first time since May 2017. At yesterday's closing price of $0.23, Hanwell's market cap currently stands at $124.5 million, compared to its cash and cash equivalents of $147.9 million, and $61.4 million in borrowings. This gives us a net cash figure of $86.5 million, which makes up 70% of its market cap.

However, because Hanwell has a relatively high proportion of non-controlling interest recorded on its balance sheet, it would be inaccurate for us to simply quote this net cash amount of $86.5 million. A significant portion of this cash is attributed to the non-controlling interest. For the year ending December 31, 2017, Hanwell had $336.6 million in total equity, of which $58.5 million is attributed to non-controlling interests. This non-controlling interest has to be considered when we value Hanwell's business. I would go a little more in depth into details about non-controlling interests point later in my post.

Business Overview

For FY2017, Hanwell recorded $464 million of revenue, a 16% increase over FY2016, and a net profit of $11.1 million.

Hanwell Holdings has two main business segments - the Consumer business and the packaging business. The Consumer Business distributes household necessities including rice, cooking oil and tissue paper, comprising of brands such as Royal Umbrella and Beautex, a brand of tissue paper that many of us would be familiar with. The packaging business mainly consists of Hanwell's 63.9% owned subsidiary, Tat Seng Packaging, which produces corrugated packaging products for customers in the F&B, pharmaceutical and biotechnology industries.

Valuation

When assigning a valuation to Hanwell, I believe that it is appropriate to separate Hanwell's Tat Seng stake and the remainder of the business, because of the significant contribution from Tat Seng's operations to Hanwell's group consolidated balance sheet. As mentioned earlier, Hanwell has a significant amount of non-controlling interest on its balance sheet, mainly attributed to the 36.1% of Tat Seng that it does not own. For some brief explanation of how group consolidated financial statements are prepared, firstly, under the group column, Hanwell would report the line items as if they owned 100% of Tat Seng. Subsequently, the 36.1% that they do not own would be recorded under non-controlling interest, and deducted from total equity, which gives us equity attributable to shareholders.

Therefore, using some figures as an example, if Tat Seng has $100 million in cash, Hanwell would first record this $100 million to their group consolidated balance sheet. Subsequently, the 36.1% that Hanwell does not own, of $36.1 million, would be recorded under non-controlling interest, and deducted from total equity. Hence, simply relying on the $100 million figure without taking into account non-controlling interest would be overstating the total amount of cash that actually belongs to Hanwell.





For Hanwell's stake in Tat Seng, Hanwell currently owns 63.9% of the company. From the chart above, Tat Seng Packaging has been trading within a range of $0.56 - $0.84 for the past year. Based on Tat Seng's 157,200,000 outstanding shares, this gives us a market cap of between $88 million and $132 million. Given Hanwell's 63.9% shareholding, the market valuation of Hanwell's stake would be between $56.2 million and $ $84.3 million. Based on Hanwell's 553 million outstanding shares, its Tat Seng stake would contributes a valuation of between $0.102 and $0.152 per Hanwell share.

As for the remainder of Hanwell's business, we can estimate its value by looking at their statement of financial position under the 'company' column. Do note that this is only an estimate, as this would disregard the value of the rest of Hanwell's subsidiaries. 

When we refer to the 'company' column, we realise that Hanwell itself does not have any borrowings. The Group borrowings of $61.2 million is entirely attributed to the borrowings by Tat Seng. Other key line items under the 'company' column includes $30.5 million in property, plant and equipment; $45.8 million in receivables; $86.8 million in cash and cash equivalents; and $14.2 million in payables.

Based on these key line items, I estimated the value of Hanwell's remaining business, by including a discount factor of 0.7 for the value of the PPE and receivables stated on Hanwell's balance sheet. The estimations are shown below, taking a range of prices for Tat Seng from $0.50 to $0.80.





Using a sum-of-the-parts valuation from the calculations above, I estimated that Hanwell's fair value should be between $0.31 and $0.37. Therefore, I believe that Hanwell's current price of $0.225 presents us with a considerable margin of safety.

Downsides

A potential downside when investing in Hanwell is its low profit margins. Due to the nature of the consumer business, its gross profit margins are rather thin, averaging at below 5%. Another issue is the relatively high remuneration that Chairman Allan Yap receives. There are shareholders who believe that the renumeration of $1.639 million for Mr Yap is relatively high compared to similar sized companies.

Additionally, if Hanwell continues to sit on a huge cash pile, and not return some to shareholders by increasing its dividend payout, investors are forgoing the opportunity cost of deploying that cash to higher yielding opportunities.

Conclusion

If you were to invest in Hanwell, please be prepared to stomach some volatility. At Friday's closing price of $0.225, a movement of half a cent in either direction means a 2% change. Apart from this, I believe that its current price provides a good margin of safety. I have a target price of at least $0.30 for Hanwell, within the next 12 months. Lastly, if this would interest you, Sam Goi, the Popiah King, recently increased his stake by 1.6 million shares at a price of $0.215.

Note: I own shares in Hanwell at an average price of $0.23, and received the latest dividend of $0.0025.


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UPDATE ON FAR EAST ORCHARD



A reader wrote to me asking for my thoughts regarding some questions about Far East Orchard (FEO). I am vested in FEO at a price of $1.52, a position I initiated back in August 2017. Since then, its share price has been largely flat, trading between a range of $1.46 to $1.59. 

Third Quarter Results


FEO's 3rd quarter results were largely disappointing, with revenue down 20.7% and net profit falling by 74.2% year on year. The decline in revenue was due to the completion of some lease agreements in Australia and New Zealand, and weaker performance of assets in Perth.

As for FEO's falling profits, if we were to eliminate the effect of the contributions from joint ventures, the decline would be less drastic. For Q3, share of profits from joint ventures was $7.4 million, compared to $1.6 million this year. These profits were mainly from FEO's progressive recognition of profits from their RiverTrees Residences JV. If the profits from joint ventures were disregarded, FEO's underlying profit before tax would have declined from $5.4 million to $3.0 million instead.

Looking at 9M 2017 figures, FEO's net profit thus far stands at $10.2 million, which give us an earnings per share of 2.3 cents, far lower than $63.4 million for 9M 2016. Again, this was because 9M 2016 included much higher profits for JVs of $64.9 million.


Future Outlook


A upcoming positive for investors is that Harbourfront Balmain, a 121-unit joint venture development with Toga Group, is expected to be completed by Q4 2017. The project is a 50-50 joint venture, and it would be ideal for profits from this JV to be recognised in the 4Q 2017. This one off contribution to earnings should be able to allow FEO to sustain their dividend payout of 6 cents annually, which translate into a yield of 4% based on current prices. 

FEO also has developments in the pipeline, including Woods Square, residential and commercial development in Woodlands, and another, mixed development in London. These should provide us with some earnings visibility for the next two years.

Medical Suites


Novena Medical Centre, Source: FEO website


One of the points brought up by the reader was that whether FEO's classification of its 37 medical suites units at Novena as 'properties held for sale' for many years indicated that there were some tenancy issues, because of the lack of interested buyers.

For this issue, I've looked back at their 2012 Annual Report, when FEO first acquired the medical suites via an asset swap. As stated in their 2012 Annual Report, FEO's intention was to put some up for sale, and keep the rest for capital appreciation. Since then, these medical suites have been classified as properties held for sale. In the 2012 AR, they did not state the number of units held for sale, but provided the gross floor area, which was 593 sqm and 2741 sqm for the medical centre and specialist centre respectively. Today, this figure is 515 and 2249 sqm, so I believe a few units have been sold. 

Page 111 of FEO's 2016 Annual Report states that:

Rental income from the leasing of medical suites held for sale, if any, is included under the investment segment on the reports

As for whether there are any tenancy issues, I wasn't able to find any information regarding the occupancy rates of the medical suites, because FEO does not report this separately. The rental income from these medical suites are classified together with the rental income form their investment properties. On the accounting aspect, accounting rules allow for the properties held for sale to be excluded from depreciation. This means that these properties would not incur any depreciation expenses. A quick calculation shows that they are valued at around $4,200 psf. In their 2016 AR, they stated that comparable sales prices of the medical suites were $3,210 - $7,350. Perhaps FEO's asking price is too high, but these could still be rented out. Currently, the total value of FEO's properties held for sale is $124 million, and this value is carried based on the lower of cost and net realisable value.

That said, I believe that there are some potential developments that investors of FEO should keep a lookout for.

Tanglin Shopping Centre Collective Sale 


An ongoing process would be the 3rd collective sale attempt by Tanglin Shopping Centre. This would be their third attempt at a collective sale, after two failed attempts in 2011 and 2014. The first sale failed because the reserve price of $1.25 billion was not met, while the second attempted sale at a reserve price of $1 billion failed to meet the 80% consent requirements from the owners. 

Based on FEO's 2016 Annual Report, FEO owns 4 freehold office units in Tanglin Shopping Centre, valued at $11.2 million. Although the floor area of these units were not stated, they were valued based on comparable sales prices of $1705 to $2764 psf. If the collective sale is successful, FEO is likely to receive a premium over the latest valuation. As the ageing development is already 47 years old, the sale would probably be able to unlock some value for shareholders.


Student Accomodation


Going forward, FEO's completion of their student accommodation developments in Newcastle in August 2017 would bring additional recurring income. Their Portland Green Student Village already has 612 existing beds, and this completion would add more beds to it. FEO is also developing another student accommodation facility in Brighton, which would add another 193 beds.

Turner Court. Source: FEO website


What I like about the student accommodation sector because it is less dependent on economic cycles. I believe that FEO's weakness is the lack of consistent recurring earnings, especially after the completion of some operating leases in Perth. In the next few years, I hope to see them increase the percentage of recurring earnings' contribution to total profits.

Conclusion 


While FEO's earnings have fallen this year, I still continue to hold on to my investment as I believe that the deep discount to its net asset value means that the downside risk is somewhat mitigated. As FEO's return on assets are lower relative to its peers, my target price is derived from a lower price to book ratio of 0.70x. That gives us a price of $2.02, based on FEO's latest net asset value of $2.88. This represents a 35% upside from its closing price of $1.50 on Friday. Meanwhile, I'll continue to collect the dividends and watch for any potential development.



Related post: Investing in Far East Orchard Ltd

Note: As of writing, I am vested in Far East Orchard at $1.52

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