Monday, 1 May 2017

Review of First Ship Lease Trust (FSL)

First Ship Lease Trust (FSL) is currently the only listed shipping trust on SGX, in recent times, the market value of FSL has fallen 35% from a market value of s$102 in million to s$65.5million. This was due to the negativity of the shipping industry and market's apprehension on the trust's inability to refinance its debts. 


FSL owns a fleet of mainly tankers and 5 container ships and lease them out to shipping companies for revenue. While we tend to associate shipping to the container or dry bulk segment, FSL is more exposed to the tanker segment; with only 33% revenue derived from the container segment. 

However, its most lucrative contract are its 3 container ships with Yang Ming at a bare boat charter revenue (BBCE) of $20.8mil a year for the 3 contracted 4,250 TEU container ships. This represents 32% of its revenue with only 15% of its fleet with Yang Ming. This is because the Yang Ming contract was signed during the heydays of the container ship cycle, as a result Yang Ming has to continue honoring the contract until 2020-2021. At current rates, one is likely only able to obtain annual BBCE of US$2 mil for such 3 ships., When asked on the possibility of Yang Ming defaulting during the AGM, the board expressed high confidence because Yang Ming had recently dry docked the 3 ships (costed Yang Ming 1 mil per ship for dry docking). Dry docking is similar to car servicing and after "servicing" is completed, the ships will operate for another 5 years. The dry docking process costs money to Yang Ming as well.

As for the tanker market, most of the tankers segment rates are falling due to the continue oversupply, so its a question of how much can FSL continue to milk from the rest of its fleet

Survival and Refinancing

This is a key concern for the Board and it was repeatedly stressed that without refinancing, a fire sale of its fleet may result. As of Q1FY2017, FSL's debt is at $192 million, with the mgmt guiding that it will be reduced to $171 million by end Dec 17. In my opinion, with a potential cash inflow via BBCE of $60 mil this year, the trust will be able to pay down to about $150 million. Hence a refinancing in the region of $150 million is probably the magic number to ensure the Trust continues as a going concern.

Valuation Difference

Currently FSL utilities a "value in use" (VIU) methodology to value its fleet. This methodology is similar to the "discounted cash flow basis" used for property valuation  where the future cash flows of its ships until its useful life and scrap value is "present valued" to today's value. This is how FSL obtained its vessel value of $427 million. On the contrary, it is likely banks are valuing on a low basis which is even lower than the adoption of "market comparison basis". This difference in valuation basis is one of reasons why refinancing is not yet completed.

Weak Sponsor

The sponsor of the Trust is HSH Nordbank who coincidentally is also one of the lender. The bank itself is in a weak financial state and will be wound up next year. This has resulted in the uncertainty and apprehension of other lenders to continue lending to FSL. This is where Navios is coming in by trying to take over HSH Nordbank's role by becoming the sponsor/ trustee manager. FSL mgmt mentioned during the AGM that with Navios help, the chance of obtaining a refinancing is higher.

Dilution upon Navios entry

However the entry of Navios doesn't come cheap. The Navios and FSL deal is described in the SGX announcement link here:

Basically if refinancing is done and Navios comes onboard as the new trustee manager/sponsor, Navios gets at least a 50.1% share. So lets run through a quick maths exercise on the deal:

Current no of shares in FSL = 637,456,577
No of shares held by Nordbank which will be sold to Navios = 154,430,600

Under the agreement, should Navios exercise its US $20mil (s$28mil) convertible loan into shares, Navios has to have at least 50.1% of the enlarged share capital. Assuming the exercise of this convertible loan, Navios will receive "X" amount of shares to obtain its "at least 50.1% desired share"

Hence (154,430,600+X) divided by (637,456,577+X) must equal to 0.501. Using algebra, the number of shares Navios will get through the convertible loan is 330,531,353 shares. Divide this by s$28 mil, Navios is paying 8.47 cents per share (in Singapore Dollar value).

Thoughts on the deal

In my opinion, Navios seems to have quite a good deal because it is purchasing 330,531,353 shares at about 0.17 of FSL's stated book value. However, it seems without Navios assistance, refinancing progress will be harder. So let's re-evaluate the net worth of FSL should Navios dilution come in and assume the trust will continue to operate as a going concern as a result.

Current Vessel Value based on "VIU" methodology =  $427 million
My own discount (30%) on the VIU = $299 million
New book value of FSL = $119.8 million
Estimated value per share before Navios Dilution = 18.8 US cents per share

Add Navios US $20 million loan, revised book value = $139.8 million
Estimated value per share after Navios Dilution = 14.4 US cents per share ( 20 Sing cents per share)

Are there other ways?

A way suggested by unit holders at the AGM was to sell some of its vessels to repay the debts. Of course, the downside would be that if the market knows you are in desperate need of cash, you will not be fetching the true market value of your vessels in a fire sale.

In my opinion, if it is possible, one good arrangement will be for a "3 rights for every 1 share" exercise at say s$0.09. The raised proceeds will be close to US$120 million and this means only US$30 million of refinancing is needed. Of course, this will be difficult for many shareholders to stomach. As for me personally, I have the sufficient capital resources to subscribe for 3 times my current exposure in FSL (or even 4 times to cover for HSH Nordbank's non-involvement in the rights) 

If the above are not viable, it seems getting Navios help is a good way to persuade banks to refinance and ensure the Trust's survival.

<Vested interest in FSL at multiple entry prices>

Sunday, 23 April 2017

Short Portfolio Update

Just a quick update to my portfolio because there has been a flurry of activities.

Sale of Hyflux Preference Shares

Sold all Hyflux Preference Shares in my CDP to realize an approximate 10% gain. I managed to "pick some pennies" on this company debt instrument and have decided to allocate my capital to the below 2:

Memtech International

The thesis for Memtech was pretty simple. It is in the same industry as Fischer Tech and Sunningdale. With its strong cash position and cash flow generation ability, the price which i purchased at 0.705 seemed a good steal. Furthermore Memtech was trading at a 0.7x P/B ratio while Sunningdale and Fischer were being sold close to book value. In addition, Memtech Intl is a turn around stock with its profitability improving year on year. So given the industry it is in and how much its peers were being valued by Mr. Market, I have set a target of about 0.90 on the premise of revaluing it close to its peer values.

First Ship Lease Trust 

The reverse can be said about FSL. Its prices has been declining and I used the opportunity to accumulate more at 0.124, 0.116 and very recently 0.103. In my view, the worries of the company''s inability to refinance and becoming a "rickmers" has caused Mr. Market to downgrade it "exuberantly". I will write a review on FSL at later date, (probably after its AGM and release of Q1 FY 17 results).

Sunday, 9 April 2017

Your HDB Flat is a Depreciating Asset (eventually)

Recently, the stark reality about the value of our HDB flats was reiterated by our current MND minister, Mr. Lawrence Wong - where upon expiry of its lease, your flat will be returned at zero value to the State via HDB. The Straits Times too has been unforgiving with its relentless churning of articles on the topic of "Lease Expiry" with its latest article on private estates nearing the end of its lease and residents distraught. 

Hard Truth

A few investment bloggers and investing forum had been harping on the fact that many properties in Singapore are leasehold by nature; which means the property value eventually depreciates to zero upon expiry of its lease (be it 20, 30, 99 years etc) and returned to the State,

A feature of Singapore's leasehold is that the value of the property does not depreciate in a straight line but that similar to a concave nature. The Singapore Land Authority (SLA) has a leasehold table which shows how much value of your property is retained as the number of years on its lease runs down. Fellow blogger, Investmentmoats, has depicted this on a table and a graph showing the speed of depreciation which I have reproduced below with his permission.  
Table 1: Leasehold Values to Remaining Lease Years

Graph 2: Speed of Land Depreciation

Applying SLA's leasehold rates to the value of a HDB flat with the number of years on the lease left; from the table and graph, one will notice the speed of depreciation is most pronounced when a flat's remaining lease tenure falls below 30 years. At that stage, your flat retains about 60% of its value as compared to freehold value; moving to 20 years remaining, it only retains 48.0%, and with 10 years remaining - 30.0%. That sets out to a 1-3% annual loss! 

On the contrary, during the first 69 years of a HDB flat's lifespan; you only lose approximately 36-40% of its value. Therefore between these 69 years, about 0.2% to 0.6% of property value is lost annually (before inflation and other demand factors). The slower depreciation at the beginning probably why HDB flat prices are still intact despite using 10 - 30 years of its lease.


Hence fortunately (or unfortunately), because very few HDB flats has reached the stage where there is only 30 years of its lease remaining (only 7% of HDB flats are above 40 years old); valuations of HDB flats have remained sky high. This is because the annual 0.2% to 0.6% depreciation had been offset by factors such as i) Inflation and ii) Property demand due to a growing population. It will take about 40-50 years to see the effects of depreciation on HDB flats.

Critics may argue that the value of HDB flat at the tail end of its 30 years lease can be maintained by ensuring that inflation and property demand remains stubbornly high to offset the approximate 2-3% annual decrease. However, in my opinion, such a scenario will mean either ensuring no houses are built to meet the demands of a rapid population growth (most likely achieved by importing a lot of foreigners) or that Singapore experiences a period of high inflation - not ideal to the citizens' cost of living.

Nevertheless, even if such scenarios do materialize; at the end of the 99th year, a HDB flat is still returned at zero value back to HDB and then to the State.

Wait, there is a Solution!

Others may point out that topping up your lease back to 99 years will do the trick. Some example has been like how Singholdings did an enbloc at Robin Road and paid cash to top up the remaining lease for a fresh 99 year status. 

While this indeed can be done, it is highly unlikely HDB will do so for all of its land.This is because land use intensification or urban renewal has to be done to allow for the justification of a lease top up. In addition, it requires approval from the lessee. Property developers are able to do such lease topping up quickly and efficiently because they are the sole lessee of the land after completion of the enbloc.

Therefore, for the 937,341 flat owners (as of 31st March 2016, HDB Statistics Report), this article serves as a reminder that your HDB flat is in fact a depreciating asset. For those among the group of 937,341 flat owners seeking to flip your HDB flat for a profit, just don't be the last fool holding on and suffer from the effects of leasehold depreciation. 

And the Icing on the Cake

While I have been going on about how a HDB flat's value is affected by depreciation of its lease, another factor deserves a worthy mention - the low fertility rate (1.2 as of 2016). Without enough babies to replace Singapore Citizens and PRs in the future, it will mean a fall in demand for HDB flats; indicating less opportunity for HDB dwellers to upgrade or even monetize their flat's value when they purchase a second home.

Saturday, 1 April 2017

March 17 Portfolio Update

It has been almost 2 months since my last portfolio transaction updates. So here goes:

1. World Precision Machinery

The "No dividend" announcement was bit of a shocker to me. My main thesis to invest in World Precision was due to its consistent declaration of dividends. Therefore, i took a chance to divest it when someone was offering to buy it at 0.235 after the full year results. This allowed me to clock in a 7% return.

2. First Ship Lease Trust

This was another company hit by negative news via comments made by its auditors. However, when I re-invested into FSL trust; I was already aware of the fact that its bank loan will be classified to "Current Liabilities" because it is due in Dec 17, resulting in current liabilities exceeding current assets. So when Moore Stephens LLP, its auditor, highlighted of its going concerns due to the high current liabilities; I wasn't surprised. To me, given the company's prompt repayment, and that its 22 ships will serve as collateral and has sufficient market value in the tanker markets, I am quite confident a new bank loan will be granted (rolled over)

Capitalizing on the fall in prices due to its auditor's comments, I took the opportunity to add to my initial stake at 0.131. 

3. Silverlake Axis

I also bought 11,000 shares of Silverlake at 0.575 because I still find it undervalued due to its actions of monetizing its china associate's stake and stable core banking system segment.

4. Broadway Industrial

Sold all of my Broadway Industrial holdings as the run up in its price meant an opportunity to deploy cash for other purposes.

5. Hyflux Preference Shares

Sold some of my Hyflux Preference Shares and used the proceeds to purchase FSL. This is due to my belief that FSL trust should achieve a return of at least 10% vis-a-vis Hyflux's estimated returns of 8.5% in the next 1 year and 2 months basis.

Financial Journey

Thanks to my bonus and own saving habit, my portfolio has crossed the $300,000 mark! In my journey thus far, the growth of my portfolio has been largely down to my frugal saving habit. Hopefully as my portfolio grows, the returns it generates will eventually exceed that of my monthly saving contributions. 

Sunday, 19 March 2017

Lesson from Ezra Bankruptcy: Asset "Rich", Cash Flow Poor

By now, some of you would have read Ezra's filing for bankruptcy protection in the United States. Previously a billion dollar company, Ezra's fall from grace was due to the fall in oil prices. Nevertheless here are a few things we can learn from it.

1) Cash/Cashflow is key

One reason for Ezra''s decision to file for bankruptcy was due to its inability to pay creditors. The reason was simple - Ezra's assets was neither generating sufficient cash flow to meet its daily expenses nor did it have enough cash reserves. If one were to examine Era's balance sheet over the years; despite a growing asset base, Ezra's assets were generating paltry cash flow.

In the personal finance sphere, it highlights to us the importance of our assets (income from work or property rental income) to generate the necessary cash to service our cash expenses. This is because regardless of your asset's worth, if your cash expenses exceeds the amount of cash your assets are able to generate; chances are you will run yourself to the ground.

2) Stated Asset Value vs Value of Asset when Force Sold

In Ezra's FY16 balance sheet, Ezra's stated assets were worth US$622 million with a net asset of US$378 million. Logically, all Ezra had to do was sell off some assets on its balance sheet to raise the necessary cash to tide over. However, I have reasoned that this could not be achieved because the true recoverable value of Ezra's assets were perhaps only about 30% of its stated value. This is largely due to the oversupply of offshore oil equipment in Ezra's deep waters industry.

It highlights how in times of distress, the value one's assets is perceived to fetch might not be real. In fact, it reminds how during a financial crisis, property values can be so depressed because no one is interested to buy a home and home owners are desperately trying to sell properties to cover their cash expenses. The valuation as appraised by valuers is one thing, but the true market value of your property is another. This is something we have to take note of in light of Singapore's property market which is oversupplied; What happens if your rental income from property are decreasing. Do you have enough cash generating assets to tide over your cash expenses during these hard times?

Saturday, 25 February 2017

Portfolio Update Feb 16

Since my previous portfolio update, I have made a few more purchases.

The first was the purchase of Broadway Industrial at 0.195. The thesis is pretty simple because I am hoping for a bumper dividend from completion of its "Foam Plastics and Flow Control" Segment. I am hoping its one off high dividend will attract investors attention and push its stock price up. Thta is where I will evaluate my position. 

The Second purchase was World Precision Machinery at 0.22. Its business is in the metal stamping industry and is based in China. It is a subsidiary of Bright World Group, a chinese SOE. What attracted me was the strong constant Free cash flow generated from its operations. At an estimated free cash flow generation of RMB 80 mil annually, the company is being sold at a ratio of 6x P/FCF, to me its rather cheap and i have initiated a position.

To allay the fear of fake cash, the company has been declaring dividends to shareholders annually. 

The last purchase is a familiar name to me- First Ship Lease Trust. It was only purchased last Thursday at a price of 0.133. To me, despite the company's announcement that it will be doing an impairment exercise which resulted in a full year loss; it's strong cash flow generation ability is a draw.

The trust produced about US$70mil cash from operation before working capital changes in the most recent financial year. Moving forward, given the declining tanker rates and that many of the leases of its tankers are up for renewal this year, it will prudent to assume the company is only able to generate about 70% of that (US$42mil). Assume dry docking expenses of US $2mil and interest expense of US$8mil, FSL should be able to generate free cash flow of US$32 mil. This translates to about 1.6x P/FCF.

However the above ratio should not be a key consideration. This is because FSL operates assets which has a limited lifespan. Its ship fleet currently has a weighted average of 10 years. This means probably another 16 more years before they are scrapped.

Unlike Rickemers who is having trouble repaying its debts, FSL cash flow shows it has the ability to repay its entire debt in 5 years. My opinion is that FSL is unlikely to pay dividends for the next 5 years to pay down its loans, after which it is anybody's guess. Hopefully then, its cash flow remains strong and should it decide to pay just half of its free cash flow generated, I will be getting an approximate 30% dividend yield at current price.

Wednesday, 1 February 2017

Owning a Car in Singapore can make sense

Fellow Blogger, Bullythebear, covered an interesting concept he read from 'Tools of Titans" by Timothy Ferris. It talks about weighing the utility of the extra time gained from spending an extra dollar to get it.

This concept reminds me of constant conversations about how a car is a tool of convenience through saving time. So, I will be using a mathematical approach to show when owning a car in Singapore may make sense.

Cost of Owning and Maintaining a car

Firstly, lets find out the approximate expense of owning a car for 10 years. I used the price of a Toyota 1.6L as a gauge. Its current price is about $102,000. Next I estimated a down payment of 50% with the rest being financed by a car loan at 3% interest for a 5 years tenure. I also provided an estimate of the annual road tax, fuel expense and car insurance in the table below. As this is an annual expense which happens every year for the next 10 years, I applied a discount rate of 4% to get the present value (P.V.). Lastly, I estimated receiving a scrap value of $6,000 at the end of the 10 years and discounted it to present vale (P.V.) The below Excel shows the estimated present value of owning and maintaining the car over 10 years. This will be the amount we are spending to gain the extra time.
Figure 1: Finding P.V of annual expenses over 10 years

Figure 2: Total Expense of Car

Utility of Extra Time

Ask anyone on the street how much would they pay for an extra hour and a variety of answers will be obtained. Hence to avoid doing a sample survey, I will base it on "hourly wage" concept by dividing the monthly salary by 168 man hours worked in a single month. Hence, if someone earns $4,200 monthly (excluding Employer CPF Contributions), his perceived utility of earning an extra hour is $25 per hour ($4,200 divided by 168).

Next, I ask how much time is saved by commuting on a car than public transport. From my guess estimate of commuting to the city for work, I realize it is fair to say one saves about 30 minutes on a one way trip; so two ways will be 1 hour saved. And on Saturdays and Sundays, people will definitely use the car for easier commute. So in a year of 365 days, one person will have gained an "extra" 365 hours.  

So in the current year, a person saving 365 hours and basing on a monetary value of $25 per hour, the person gains S$9,125 for the first year. As one will realize, the utility gained is over a 10 year time frame, therefore I will have to calculate the present value of this utility earned over 10 years.

Figure 3: P.V of Utility
Figure 4: Scenario of $8,400 monthly pay


I did some permutations and made two observations.

i) Income Level

If one is earning at least an estimated $50 per hour wage or $8,400 monthly, owning a car in Singapore alone is justified because the utility from the time gained is about the same as your overall expenditure on the car (owning & maintaining), see Figure 4.

ii) Ownership of a car if one is married or with a sibling

Of course, many of us do not earn $50 per hour (including yours truly!) However, if you are married or have a sibling who is working, mathematics will prove that earning $25 per hour justifies the reason to own a car in Singapore.

Figure 5: 2 person at $25 per hour wages


This simple Excel model has informed how the efficiency of the public transport system affects the ownership of a car to a large extent. In fact, with many Singaporean graduates already entering the workforce with an at least $3,000 monthly paycheck; it is likely a married couple's combined income level would have exceeded the $8,400 threshold having worked for a while- a tad worrying.  

From this angle, it seems our transport and urban planners will have to accomplish much to reduce the travelling time by either increasing the connectivity of the public transport system or decentralizing commercial spaces. 

The diabolical alternative is to reduce the wages of the people; to make them feel time is not that valuable 😈