Saturday, 20 August 2016

How Perpetual Securities affect Ordinary Shareholders

Perpetual Securities are a class of financial instrument and has in recent times gained popularity due to a low interest environment. Companies such as Ezion, Hyflux and even Mapletree Logistics Trust have issued such instruments to retail investors. This post seeks to cover the basic of Perpetual Securities and how it affects ordinary shareholders

Classifying Perpetual Holders

Perpetual Securities are bond like instruments which gives perpetual holders a fixed dividend payout at each time period. In addition, it has no maturity date to redeem and its dividends are either non-cumulative or cumulative (cumulative means the payment of dividends are accumulated and brought to the next payment date). It is classified under "Equity" in the balance sheet. Below is Hyflux's balance sheet which shows that perpetual securities are classified under the "Equity" section.


Hyflux Balance Sheet
So while Perpetuals do have bond-like payments, it is classified as "equity".

Perpetual Securities where do they rank?

In the event of a liquidation, the proceeds of the companies are distributed in this general order:

1) Secured Lenders
2) Unsecured Lenders
3) Perpetual Holders
4) Ordinary Shareholders

Perpetual holders are behind lenders but ahead of ordinary shareholders when receiving the leftover proceeds from the sale of a company assets.

What it means to Ordinary Shareholders?

As ordinary shareholders who own shares of a company, we are the last in line to: i) Receive dividends/payments or ii) Proceeds from a company's liquidation. Seems quite a lousy deal for us and this is precisely why we should always carefully assess the value of our shares! 

Therefore, while some companies may proclaim that they have a healthy leverage or debt servicing ratio; as investors, it is our due diligence to check the validity of their claims by analyzing for other obligations or preferred shareholders who are ranked ahead of us. Using Hyflux's balance sheet as an example, it can be seen that preference shares contribute to approximately half of the company's equity. 

Quiz time: Usng Hyflux as an example, if Hyflux is liquidated and instead of relaising its full equity value of 1.7 billion,  the company only receives 1 billion as leftover for its equity holders. How much does perpetual holders and ordinary shareholders receive separately? 

Answer: $964 million to perpetual holder & $36 million to ordinary shareholders

Yes, this how it works. Perpetual Holders receive proceeds before ordinary shareholders.


Profit effect to Ordinary Shareholders

That's not all. Let's look at Hyflux's latest profit & loss financial statement




Both snapshots are taken from the same financial document. However there is something strange. On the first page, Hyflux reports a net profit to the owner of the company; but digging deeper, Hyflux in fact made a loss for ordinary shareholders. How is it possible?

This is because the dividends paid to perpetual shareholders was factored. As a result, while Hyflux did report profits for the period, ordinary shareholders of the company faced with a loss. This also means the net asset value of their shares decreased. This is the effect of perpetual securities dividends to ordinary shareholders.


Company's net profit - dividends to perpetual holders =  Eventual Profit to Ordinary                                                                                                     Shareholders

Conclusion

As equity investors, it is important for us to check for the presence of such financial instruments in a company's balance sheet. It tells us a lot of information and will affect our valuation of a company's earnings, cash flow generation ability and proceeds available to ordinary shareholders in the event of a liquidation. 

< The author is neither vested nor shorting Hyflux Stocks, Hyflux is used because it is a good case study and a popular brand name people can associate with in Singapore>

Friday, 19 August 2016

A new addition - Ezion Holdings

Thanks to the roll out of Pokemon Go in Singapore, I have been fairly quiet in the investing realm. However, the achievement of "level 20" milestone has turned my attention back to investing. My recent purchase has been in Ezion holdings in the region of 0.29.

In one sentence, Ezion owns liftboats and charters them out. Its business segment is mainly in South East Asia where many oil wells in SEA are maturing and will require maintenance; this is where the use of liftboats is needed. Its share price has fallen drastically due to Swiber's turn of events and its own recent rights issue. However there are a few positives for the company.

1) Customers

Ezion has a few customers who are national oil companies in the South East Asia region. As these customers are mainly NOC and SOEs, the delinquency rate should be better. However, it is worth noting that Ezion did impair a significant amount of receivables last FY. It is important to note that even despite being national oil companies (NOC), there is still a chance of late payment. One of the most newsworthy article is how Saudi Arabia, a rich oil nation, has delayed payment to its contractors ( see here).

In addition, the company has been trying hard to charter its liftboats as evident by its venture to offshore wind farm support with its partner, a Chinese SOE - Chinese Merchant group.

2) Balance Sheet

The recent rights issue has strengthened Ezion's balance sheet. In addition, Ezion's debt maturity has a long duration. Rolf has provided a good breakdown of Ezion's debt in his blog, which can be found here . A significant portion of Ezion's bonds matures in 2018 to 2021. Hence if liftboat charter rates do not improve in 2018, it will be when I have to reconsider my position.


In addition, one of its debts caught my attention - "Ezion 3.65% 2020". The bond has been uniquely structured in that if Ezion defaults on its s$120 mil bond, DBS will repay on its behalf and convert the amount as loan to Ezion. Details of the bond can be found here . To me, it seems Ezion has the credit support of DBS and this will enable Ezion to get lower interest for its loans. In many business models such as Ezion's, it is important that banks give their backing, otherwise, you will be in for a hard time during tough times like now.

From Ezion's annual report 2015, Ezion's loans are of relative low interest. Furthermore, with the recent rights issue s$140 million, its balance sheet should be strong enough to last till the first tranche of bond due in August 2018.

Ezion's Bank Loans

Worries on Ezion

As a shareholder, Ezion's perpetual securities of 7.0% is a sore thumb. In my opinion, as ordinary shareholders of a company, perpetual securities should be viewed as a debt because 1) perpetual holders are ranked higher than you in an event of liquidation and 2) often, they will have to collect their dividend before you do. I will write more about what perpetual securities are and its effects to ordinary shareholders of a company in a separate article.

Moving back to Ezion. Ezion has perpetual securities which are cumulative and costs 7% per annum. It was issued in 2014 and if the company does not redeem it at the end of 2018, the "interest" will step up to 10% per annum. In my opinion, the company will definitely have to redeem its s$150 million in 2018; this is because "debts" at 10% interest will kill off the company's margin. Hopefully DBS will grant it a loan to redeem its perpetual securities, otherwise another rights issue will happen.

Conclusion

My investment in Ezion is more of a special situation, the company's valuation by Mr Market has been beaten down so much, that there is likely value in it. Post rights, the market is currently pricing Ezion at a market cap of s$551 mil (US$ 410 mil) - valuing Ezion's PPE+ JV+ Associates to be worth 1940mil instead of 2540 mil on its balance sheet. To me, there seems to be a slight mis-pricing, given that its many service rigs are new. However, I do agree that the value of its associates are not worth its 83 million stated because it contains Ausgroup, Charisma Energy and JK tech, which I think are worth much less.



Saturday, 16 July 2016

Halftime Review of my Portfolio (2016)

My investing performance for 2016 has been poor so far. Due to my large exposure to the O&G sector though Penguin Holdings, my portfolio has taken a beating. While total portfolio value has increased slightly from last year's, it has been mainly due to my constant injection of fresh capital (averages about $3,000 monthly). 

Winning the battlefront/Losing the War

Spook by Yongnam's under subscription of rights, I have quickly sold off my recently converted shares at 0.215. My gut feeling is that Yongnam may be priced even more attractively in the future and hence I have decided to lay off for now. In addition, through active monitoring of the tanker industry, I have decided to divest a partial stake in FSL Trust for a profit. While I have indeed made numerous small gains from Yongnam/ Silverlake/FSL/Accordia, the losses on Penguin and China Fishery have balanced the scale ( Have decided to write off China Fishery).

Tanker Industry

In my opinion, a bubble is forming in the tanker industry. Tanker rates in the MR and Aframax classes has fallen from their highs due to a rising supply of tankers and new shipbuilding orders. In Oct 15, FSL purchased "FSL Osaka" for $21.8 mil, with a then projected conservative rate of $16,500 per day, which was rather conservative when MR rates in the region of $17,000 then. Fast forward to today, MR rates are going at $15,500 per day. Given the fall in Aframax and MR rates, segments which FSL trust is in, I think it will be wise to take some money off the investment.

With many tankers berthing at sea as oil storage, one can't help but wonder how low will oil tankers rates be; should this floating storage be relived of their cargo and return to the spot tanker market.

The Economy

Human nature never fails to disappoint - when a market is improving, the end result is massive investment and orders, creating a scenario where the increase in supply outstrips that of demand growth. This causes a massive buildup of inventory/idle capacity. 

We have witnessed this in the oil industry where an environment of high oil price resulted in massive and expensive oil drilling projects. An oversupply of oil is now driving prices down and rendering these projects unprofitable. In the US, this is causing many energy companies to default on their debts. The global shipping industry is another, where years of boom building has caused the Baltic index to fall to lows. In Singapore, we are starting to experience the oil downturn from mainly the effects of CAPEX cuts by oil majors. Order books are drying and those who still have orders are doing it at low single margins.

My Thoughts

It is likely oil will remain below $60 for at least 2 more years. While demand for oil is growing annually, too much inventory is waiting on land and on sea for the increase in oil prices. It is going to take years for these excess supply to work through the system, thus putting a cap on oil's rise. This means for many oil demand derived industries such as offshore support vessel/crewboats/service rigs, there won't be an upturn of activity in the near term. 

With so many Singapore companies exposed to the offshore support industry, it is inevitable our local economy will be badly affected. My prediction is that the worse is yet to come for our country. Being a value investor whose only expertise is in the SGX, I am taking more money off the table and waiting to see how things go. My anticipation is that many O&G related companies will be sold down to even more distressed levels; hence this is why I have even sold off some stake in my largest stock allocation, Penguin Holdings.

Companies with great balance sheets (think Tiong Woon and Penguin) will find it trying to navigate through this oil crisis. In addition, the downturn will affect other industries including property and retail. This is my second order thinking. The probable bright spot is in the public infrastructure sector where the government will be pumping more money to support infrastructure and as a tool of expansionary fiscal policy.

While I have made such bold predictions through my crystal ball; the present enemy is myself. With close to 47% now in cash and more money returning in the form of P2P repayments, itchy hands will itch; resulting in foolish bets. After all, idle hands are the devil's workshop.

In that sense, I look forward to the release of Pokemon Go to stop the itch.  


Wednesday, 22 June 2016

Last Week Tonight John Oliver: Retirement Plans



If you have not watched John Oliver's talk on retirement plans. Watch it!

It is probably one of the most entertaining material on personal finance; albeit something which has been espoused so often by financial bloggers.

If you do not have 21 minutes to spend on managing your finances, just go to the 8 minute mark and watch till 11 minutes. It is one of the most important lessons you will learn on personal finance.

If what John Oliver mentions has truth; financial advisers often placing their interest before yours, it makes me wonder why some many countries are allowing it. One sunny island, home to a population of 5-6 million people, in fact has the highest financial adviser ratio to population!

I wonder how many residents on that island are aware their own actions are hurting their retirement. 

Monday, 20 June 2016

Portfoilo Update in June 16

This month I am on speculation mode.

I have covered my short on Sino Grandness at 0.62 using SBL. You can read my experience here. All in all, I feel SBL is a pretty lousy way to short shares due to the high fees and lengthy process.

In addition, I have purchased Yongnam's rights at 0.001. The company did a rights offering recently where new rights can be exercised at a price of 0.21. Given the company is trying to improve its balance sheet by way of equity raising, I will be watching how the company performs in the upcoming quarterly results. The margins in Q1 seems manageable and the company has turned cashflow positive. Hopefully, this good performance can be carried on to Q2.

Also, I have since sold off World Precision Machinery at 0.31 due to my less optimistic outlook of China. I think the financial situation at China is worsening. Hopefully, it does not turn too bad because demand for commodities (oil and Coal) will be adversely affected. This will indirectly affect my portfolio exposure to the O&G sector.

I am still optimistic on our government's continuous expenditure in infrastructure. I am now exposed to this sector via three companies - Yongnam, TTJ.

Wednesday, 8 June 2016

3 Takeaway from Shorting Sinograndness

Using the Securities Borrowing and Lending Scheme (SBL), I have successfully shorted Sinograndness (SFIG) today at 0.700. Here were some takeaway from this first experience.

1. Long Processing Time

Being my first experience, I asked to short SFIG on 7 June 2016 @ 1030 hrs, thinking I could execute the trade immediately at 0.770. Unfortunately, my trading representative informed me the process was not immediate and they had to put up inquiry with CDP to borrow the shares first and then deliver to me.

The whole process took almost a whole day and it was only at 8 June 2016 @0915hrs, was I informed the shares have been delivered to me. I had to endure the long wait and eventually settled for a short order at 0.700. All in all, I have learnt that using SBL to short is a tedious process. And if I needed shorting to be done soon, it is wise to borrow the shares from SBL, probably one day in advance and which you will incur an upfront $21.40/- processing fee.

2. Higher Rates

To short a share using SBL, it has to be done offline. This meant a higher commission incurred from brokerages (approx 0.5% of contract value or minimum of $40 + GST, whichever is higher), this is way higher than CFD/online brokerage rates.

3. Lower Finance Cost for Less Popular Shares

The saving grace was the finance charge for SBL at 8% p.a. It is less than CFD rates for less popular shares which can range from 8 -12%. For shorting blue chip stocks, my opinion is that using CFD is clearly the better choice; however be careful of the use of leverage as it can kill you dearly when things go wrong.

Conclusion

Nothing much, but in my opinion using SBL for even less popular shares is a tedious and expensive process; now I probably understand why CFD is still popular and why no single share of mine in CDP has been lent out since 2010.

Friday, 13 May 2016

ISR Capital - Is it real or the new "Mini blumont/Asiaons Capital"?

One company caught my eye today - "ISR Capital"

From 0.6 cents on 11 May 2016, ISR is now at a price of 6.0 cents as of writing, that's a 10 bagger in two days! So what's going on?

ISR Capital

Basically ISR is an investment company which invests in companies that are listed/unlisted and debt securities in such companies. Doesn't that sound like a group of companies which gained infamy on the SGX sometime back in 2013?

Its current book value stands at 0.5 cents. Therefore, it is now trading at 11 times its reported book value. The company has a negative cashflow generation in the latest FY.

Its current CEO is Ms Quah Su Yin and the company was asked by CAD to help in CAD's probe into the penny stock scandal in 2013.

My Take

With such a high book value and an investment holding company where I do not see any hidden value among its balance sheet; I honestly do not know what is going on at SGX. Unless of course, I may have overlooked the many hidden gems hidden among ISR capital's balance sheet.

What do readers think?