Sunday, April 22, 2018

Tangible Thoughts #4: Pitiful Pump Uncles

The saga of the week in Singapore was about pumping petrol. For readers not from Singapore, here's the story. A BMW driver drives his car into a Caltex petrol station and said, "Fill Ten" to the pump uncle. The pump uncle then proceeded to pump gasoline to full tank, because he heard "full tank". The driver, realizing his car now has a full tank, became enraged, scolded the pump uncle and refused to pay up. He single-handedly cogged up the whole Caltex station for half an hour. By then, his face, his car number are all up on social media with netizen blasting, "If you can afford a BMW, who the heck fills $10?" Subsequently he explained he was selling the car, hence there was no need to fill more then necessary. But the whole saga just sounded fishy, maybe he is really a crook, who knows. Meanwhile netizens came up with this form to be distributed at all gas stations in Singapore. Haha! 

Fill Ten or Full Tank?

As in investing, it takes a lot to prove accounting fraud, Midas did it for twelve or thirteen years and we only found out recently. At its peak, Midas' market cap reached SGD 1.2bn and it was generating close to SGD 50m in net profits. Well, as experienced value investors, we know too well that profits were too easy to manipulate, cashflow analysis required real kungfu. Indeed, Midas burnt through S$760m of FCF over 10 years and probably used some creative accounting to generate roughly SGD 40m of positive FCF in 2007 and 2017. In the end, the positive free cash accounted for 5% of the total money burnt. So be really careful when you see years and years of cash bleeding.

Back to petrol pumping hopefully we can tell some day whether it was the pump uncle who was hard of hearing or the BMW swindler who had been doing this "Fill Ten" trick for years only to be found out last week. Having said that, this saga pushed me to think about why would someone do such a thing? In the end, it could be a stupid case of trying to get even with Big Oil. Singapore's retail fuel market is an oligopoly, as with most things here. Hence pump prices had remained high despite crude oil prices being super volatile. The following chart (courtesy of TradingEconomics and SPC) showed how pump prices in Singapore trended. we can see that prices had been ranged bound between SGD 1.25 to SGD 1.8 since 2010. 

Singapore pump prices over the last 10 years or so.

The same chart for crude shows some correlation at first glance but from its high, oil fell 70% or more from $100 per barrel to $30. It stayed low for a good 18-24 months but Singapore pump prices never fall more than 50% and stayed low only around the few months in 2016. For some reason there was also this huge spike in 2015 despite global oil prices remaining low. I guess we can say that Singaporean car drivers are pretty much screwed by Big Oil.

Crude prices over the last 10 years

Actually, this is the same story all over. We are also screwed by Big Developers and also screwed by Big Car Dealers (a typical BMW would cost a low to mid five figures in Germany but is at least six figures in Singapore). What's worse, we then have BMW drivers screwing pump uncles. Poor Singaporeans and pitiful pump uncles. Is there a way out of all this? It's really hard as capitalism and economics drive so much of everything these days. We might have to learn from the Nordic countries and develop some form of graceful capitalism if there is such a term. 

Monday, April 16, 2018

2018 Dividend List - Part 1

The time of the year has come to review the annual dividend list, this year we are breaking up to list into more parts so that we can discuss more names. We have used the same criteria over the years which is free cashflow, EBIT margins, ROE and the dividend yield. The most important one would be the free cashflow. As this determines the companies' ability to pay dividends. Dividends should be a integral part of everyone's portfolio because this is where real money comes back to us. In my experience, 50% or more of an investor's monetary gains would actually come from dividends in a long term portfolio. It is also a good idea to first build a strong dividend portfolio that would supplement or even cover entire annual expenses. Then we are really free to choose the work we really want to do.

Dividend List Part 1 of 4

Ok let's go straight into this year's list. There are three Singaporean names here today but I really wouldn't recommend them. Telcos have indeed become dumb pipes since the internet giants took over the world. They have seen how voice revenue, SMS revenue and even data revenue dwindled as users shift their dollars away to in-app purchases and other avenues. While they still generate strong cashflows by squeezing users more and more for the remaining services they still have control (e.g. data roaming, caller ID etc), these last pockets of revenue would also disappear in time, as all of the economic value add get transferred to the internet firms.

Silverlake Axis, the other Singapore name used to be a darling as the "IBM of Singapore" (well that might be a stretch but it's quite a local big-time IT service player) had since derated after a short seller highlighted accounting irregularities with the firm. The share price had never recovered from the scandal which happened in 2015. While some short sellers had eventually be proven wrong, there is really no way for us to know, unless people from inside the firm share the truth. So rather than trying to determine the truth, the easy way is to really just look for another interesting name. There are 700 listed companies in Singapore and 70,000 globally, we don't have to look at Silverlake. Although they did manage to announce a few big deals with Malaysian banks recently, implying things might be turning. Being a Malaysian firm though, there is always that slightly higher risk of really doing some hanky panky stuff.

Silverlake Axis at 5 year Low

The interesting names that really stood out in this list would be Transdigm and Imperial Brands. Transdigm is an aircraft component manufacturer that had demostrated its ability to compound value over many years. Its FCF has grown from a mere USD 250m in 2011 to reach almost USD 1bn today. The industry also has very wide moats as aircraft manufacturers have very stringent procedures for its suppliers and require the same suppliers for spare parts and maintenance. This is such a lucrative industry that Warren Buffett bought out the other player called ITW. This name really deserve more research, but for now let's talk about a more familiar name.

Imperial Brands had appeared before and we see tobacco in a big way this year. Imperial is the 4th largest tobacco company in the world. The backlash on tobacco continues given that their existence caused the death of billions of people since the beginning of civilization. With global investors' focus now all on tech, internet, gaming and meaningful experiences. Tobacco stocks had derated over the last 12 to 18 months and three out of the four large tobacco firms appeared in this year's list, the other two being Philip Morris and British American Tobacco. Imperial Brands now trades at close to 10% FCF yield and pays out 7% as dividends. 

As mentioned before, a sustainable 10% FCF yield in stock markets is like almost guaranteed to make money because you don't actually need to firm to grow. It's like having this cash machine that gives you 10% every year until forever. The key thing to look out for is sustainability. In tobacco's case, it is likely to be sustainable because old smokers will just keep smoking and new smokers would be switching to the next generation tobacco products that are less harmful to health but as addictive and more expensive. The ethical question remains, but if perpetual 10% return is what you are looking for, then Imperial Brands is your stock.

Next generation tobacco, IQOS by Philip Morris

Here's the past lists:

2017 Oct Dividend List - Part 2
2017 Oct Dividend List - Part 1


Tuesday, April 10, 2018

Of Frauds and Facebook

A recent bloomberg article "How Facebook Help Shady Advertisers Pollute the Internet" discussed how fraud advertising was crazy on Facebook. These are ads selling slimming pills, money making stock tips and sure-win cryptocurrencies, miracle hair growing cream and other shady products or services via affiliates that would utilize Facebook's user data to find their victims. Most people would know that these things won't work. If they did, then they wouldn't be coming from unheard sources. Yet there are always enough gullible people to prey on. Facebook knows who they are, because everyone uploaded everything about their lives on Facebook. 

Here's how it might work, say you have been watching videos about weight loss, researching on Atkins diet and posting pictures of your 5 km runs, your meals, your weight loss last week vs this week, then when a slimming pill ad pops up on Facebook, promising results in one week, sure, why not give it a try. If someone calls you soon after you read about the fake slimming pills and markets it perfectly. Bingo! You would have spent the $100 buying some fake slimming pills.

Fraud and scam works even if 1 or 2 out of 100 tries work. By leveraging on Facebook's data, these scammers might get the success rate up to 3 out of 100 tries. That's a 100-200% increase and millions in incremental income for the fraudsters and scammers. Unfortunately, these are also people that are not too educated, usually older folks or people from with low income households. Scams prey on fear and greed and are very powerful. It is difficult for most people not to fall for these traps, but the less knowledgeable and the insecure would be especially vulnerable. 

Sex scams in Singapore

The human mind unfortunately falls prey easily to these scams time and again. It is said that internet scams are not new. The mechanics of the tricks worked in the olden days and in the pre-internet era. We had phone scams (scammers impersonating kidnapped grandkids calling grandparents to wire ransom money) and we had old school sex scams (where a sexy girl will lead  you to a room full of gangsters) before the new era Whatsapp/Alipay sex scams. It's all greed and fear, two of the most powerful emotions. Here are some common greed/fear psychological traps:

Fear
1. Fear of authority
2. Ransom
3. Near miss / loss aversion / effort for reward

Greed
1. To get rich quick
2. Greedy for sex
3. Vanity: slimming pills, hair growth

In finance and investing, we have our fair share of frauds and scams. We hear countless stories about get-rich-quick schemes or yet another guaranteed investment plan that would make money. Invest in farmlands, invest in this platinum AAA fund with 200% return, invest in bitcoins etc. I would say that 99% of all these are frauds/scams. If they were really good investments, they would have had brand names like DBS bank or AIA insurance backing them. They would be selling via unit trusts and via banks and insurance firms. Heck, even funds that got through to banks and insurance firms might be scams, let alone those that didn't pass banks and insurance firms' screening criteria.

Of all the top billionaires and millionaires that we know, how many made it there through investing? Yeah, just one, Warren Buffett. (Well, there's also George Soros and Carl Icahn but who remembers them?) Not to forget, Warren Buffett worked at it for forty donkey years before he got famous. How can we expect some promises of get-rich-quick to get us there? Investing is tough work, as with most things in life, if anyone promises quick returns, just walk away.

Having lived a few decades (signs of becoming grumpily old), I would say there aren't that many short cuts in life. We hear stories of people striking gold, had one genius insight that got them rich, made a killing in so-and-so. But, that's really a 1% or even lower probability event. 99% of the time, it's lots of hard work and strenuous effort. Edison said it himself - genius is 1% talent 99% hardwork. In my experience, doing it by the hard way yielded much better results than trying to find short cuts.

"An hour of deliberate practice or concentrated practice is worth five hours of trying to find some easy way out by cutting corners"  

- improvised Bloomberg quote

With the hard way, it's confirmed that you will get the results. To successfully lose weight, you have to change your eating habits, exercise like hell, shun all unhealthy food. Confirm plus chop will see results.  By adhering to this philosophy, we know better and hopefully never to get scammed. But just to be really safe, we need more precautions, here's three don't's to fend off fraudsters and scammers:  

1. Don't ever part with your money, especially sums more than four digits. Disregard most of what you hear when someone asks you part with more than $1,000. In fact, be careful even if it's a few hundred dollars. 

2. Don't engage. Walk away as fast as possible, this minimises the fear of loss aversion / effort for reward psychological trick. The longer we engage, the more time the scammers can work on us, trigger our loss aversion, effort for reward mindset. Don't let them have the chance. 

3. Don't keep everything to yourself, when you face a situation. Check with friends, relatives or other informed sources, even if the Police Commissioner or the President of Singapore had called and asked you not to share the information. Always double check, double confirm, look for the chop also. Need confirm plus chop first, then we talk.

Facebook's share price

Back to Facebook, so is it a buy right now? Well, as with most past valuations, my preferred metric is to use the free cashflow (FCF). Facebook generated USD 17bn of FCF last year. It is hard to say, whether this is a sustainable level given that things change too rapidly in techland. I would just triangulate that Apple generated USD 50bn and Google USD 24bn last year. The rest of the FAANGs are still not too good at FCF generation. Well Amazon has USD 9bn but Netflix still burning cash. So maybe Facebook can do USD 20bn some time in the future, given that it has Whatsapp and Instagram which it hasn't started to monetize. But, it's really a wild guess. So let's say USD 20bn. But even at USD 20bn, we are just talking about of 4% FCF yield and that's not exactly cheap. I would consider stocks trading nearer to high single digit FCF as cheap. For example, Apple is trading at 7% FCF yield with a few hundred billion dollars of cash on its balance sheet. So despite the sharp fall, Facebook is not exactly a screaming buy yet.

Saturday, March 31, 2018

Chart of the Month #10: The Great Flood


The chart above depicts very clearly the QE program by the world's major central bank since the global financial crisis of 2009. The flood of liquidity exceeds trillions of dollars. We can also see that the bulk of the liquidity was created after 2011 by the Bank of Japan and the European Central Bank.

Hence while the US is tapering, the decline in liquidity is negligible when compared to the mountains of monies created over the last nine years. This great flood of cheap money is the reason for many phenomena that we are seeing including unicorn startups and the ever-increasing dollar psf of prime properties in global cities.

Why didn't Singapore property fall back to S$1,000 psf? That's because we are thinking in nominal terms. Our minds work best in nominal terms, we like to compare psf today vs psf in 2008 vs psf in 1998 thinking it's the same. But in real terms, the $1,500 psf we see today reflected the drop in real estate pricing because asset inflation had gone through the roof. Thanks to the central banks,  money itself had gotten ridiculously cheaper after the Great Flood!

Monday, March 19, 2018

Tangible Thoughts #3: Sg Condo vs US Island


In the US, one can buy an island for $8.7m while in Singapore it might not even pay for a toilet in a condominium? Something to think about yah? 

Excerpt from the news below of the most expensive condominium in Singapore.

GUOCOLAND will release later this year (2017) the super penthouse in its 99-year leasehold Wallich Residence project in Tanjong Pagar which supposedly has an auspicious-sounding price tag of S$108 million.

While the 21,108 square foot triplex is the highest residence in Singapore - the 64-storey tower in which Wallich Residence is located is 290 metres high.

But this is not to say that Singapore property is too expensive, it is another vindication that we have become the playground for the global rich and famous. Prices will stay exorbitantly high, just like the other playgrounds: Monaco, Hong Kong, London, Paris, Rome, Vienna, Bermuda amongst others.

Monday, March 12, 2018

F&N 6 Years On - Part 2

The is a continuation of the previous post.

We discussed how F&N had become a diary powerhouse in ASEAN (Association of South East Asian Nations) and the crown jewel is actually its 19% stake in Vinamilk which now accounts for 47% of its earnings. So what is Vinamilk? Well, Vinamilk is the largest diary company in Vietnam with 50% market share across the different diary products. It is also the largest listed company in Vietnam at S$17bn market cap!

F&N, at S$3.7bn market cap, implies that its stake in Vinamilk pretty much explains for its entire existence and the rest of its businesses and brands (100 Plus, Magnolia, King's ice cream) pretty much worth nothing. Albeit, the hype in Vietnam is causing every stock starting with Vina or Vin or Viet to rally hard, so it might not reflect the true intrinsic value of F&N's stake.

Nevertheless, let's take a brief look at Vinamilk. 

Vinamilk's Spokesperson

Vinamilk is helmed by helmed by Ms Mai Kieu Lien who was the spokesperson for the brand from 1995 to 2018 (pic above). She led the firm to dominance with provocative ads that flooded the internet deploring the nutrition benefits of milk to the 90 million Vietnamese. She is still single.

Just kidding.

The following is an abbreviated CV for Ms Mai (the real one), one of the most prominent businesswomen in Vietnam.

Born on 1st Sept 1953 in Paris, France
1976 to 1982: She was a Technology Engineer
1982 to 1983: She was Vice Technical Director
1983 to 1984: Studied at Leningrad Institute of Engineering and Economics
1984-1992: Deputy Chief Executive Officer in charge of sales
1992-Present: CEO of Vinamilk

She was also a member of the Central Committee of the Vietnamese Communist Party. In her 26 years as CEO, she led the firm to become the dominant market leader with 13 production plants, 10 product categories and 15,000 cows selling USD 2.2bn of diary products annually and generating USD 500m in profits and 400m in free cashflow. Most of these metrics will continue to grow at 20-30% for the next few years. Vinamilk has 40-80% market share in various products. Over the last 20 years this formidable lady trashed Dutch Lady, the UHT milk brand of South East Asia, including Singapore. Dutch Lady is now the distant #2 with a mere 20% market share in Vietnam. Here's her real pic below.

Mai Kieu Lien, not your normal Ah Lian, don't pray pray

With F&N owning almost 20% of Vinamilk with a legendary dragon lady running the show, it could be part of the reason why the stock market bidded up F&N from S$1.80 in 2015 all the way to $2.60 today. But there is another reason for the stock to go up. This has to do with the Elephant - Thai Beverage.

Recall that Thai Beverage took over the whole F&N during the saga of 2012 which included the property arm. Now, Thai Beverage had also pretty much did six years of thumb-sucking (ie not doing anything) and left a lot of stuff hanging for that period of time. Hence, it is rumoured that the whole
reorganization of Thai Beverage Group might be due. (Well to be fair, they were pretty busy with beating up Singha - the Lion in their home market.)

So here's how the organization might work. There is an ultimate parent entity called TCC which owns 59% of F&N, 59% of Fraser Centrepoint. Meanwhile Thai Beverage owns another 28% of Fraser Centrepoint. So the idea was for Thai Beverage to trade its 28% stake in Fraser Centrepoint for TCC's stake in F&N.

This would allow Thai Beverage to own around 60-70% of F&N (dependent on the transacted price) and consolidate its earnings. It would hopefully also speed up integration between Thai Beverage and F&N allowing synergies to be reaped. All in, this could mean a S$30-40m improvement in EBIT, together with additional valuation increase, we are talking about a S$500-600m increase in market cap and as Vinamilk continues to grow 15-20%, that adds another S$500-600m of market cap to F&N every year.

F&N 5 year share price chart

Not forgetting if F&N could turn the other loss-making stuff (like publishing) back into positive territory, we would get an additional S$10-20m in EBIT. So, just estimating F&N's full upside potential,  it should be at least 1.2 billion dollars from today's market cap. That's more than 30% upside. Of course, these are just numbers in the air, I haven't done the detailed work. On first cut, things definitely looks interesting. To sum up:

1. F&N has a solid ASEAN diary business generating c.$90m going to S$100m EBIT if it turn its loss-making segments positive.

2. Its stake in Vinamilk is worth almost its whole market cap, implying that the market is not ascribing value to its existing businesses mentioned above.

3. A reorganization of the Thai Beverage Group could bring about more synergies allowing for a high market cap, all in, we could see market cap increase by S$1.2bn which is a c.30% upside.

So, time to take closer look!

This author does not own F&N yet!

Monday, March 05, 2018

F&N 6 Years On - Part 1

6 years ago, we discussed Fraser & Neave (F&N)'s fate in a tongue-in-cheek Battle of the Animals post. As per our short term attention span in today's world, we left it hanging, without an update, for six long years. Well, today is the day. We shall stop our sucking thumbs! We shall follow up with the long await instalment to our own saga and analyze things clearly. 

To recap, the saga came about as the Elephant in the ASEAN (Association of Southeast Asian Nations) room charged into our tiny red dot to try to grab Tiger, F&N's baby - Asia Pacific Breweries. In the end, Star Player - Heineken, refusing to give up its control on this profitable joint venture that brewed various beer brands: Tiger Beer, Anchor and ABC stout, swallowed the whole alcohol business i.e. Asian Pacific Breweries expensively. Thai Beverage, the elephant, then took control of F&N, the parent of Asian Pacific Breweries, or rather, the portion left after the Star took out Tiger. 

Our Tiger Girl: Jessica Alba

We also speculated what would happen to Chairman Lee Hsien Yang and Tiger Girl: Jessica Alba. In the end, Hsien Yang had no choice but to relinquish the Chairman role to Charoen (Thai Beverage boss), a precursor to his subsequent fate in the Battle for Oxley Road. Unfortunately, he lost on both counts. But he still had various prominent roles including the Chairman of CAAS, President of Insead Singapore and Chairman of the Islamic Bank of Asia amongst others which he would probably be leading using Jedi force projection outside Singapore! Meanwhile, Jessica Alba, unfortunately moved on and launched her own company - The Honest Company, with milk products competing with F&N's Magnolia. Alcohol and honesty don't mix well I guess.

So what's F&N today? After Tiger Beer was taken, the portions left were non-alcoholic beverages, dairies, publishing and property. Subsequently, property was spun off into a separate entity Fraser Centrepoint while the F&N today is left with the remaining three business segments. With more clarity today, we can now see better what are the key drivers for this beloved Singapore brand. The charts below shows F&N's breakdown by revenue as well as by profit in 2017.

F&N revenue split

We can see that F&N is roughly 60% dairies by products and 60% Thailand and Malaysia by region. The beverage business and the publishing business are actually small in the big scheme of things. Despite 100 Plus being such a big brand name, it doesn't really punch its weight in terms of revenue and as we shall see later, in profits too. Also, Singapore is only a mere 25%. The more important markets are in Indochina. The earnings split below is even more telling.

F&N EBIT split

For me, this chart was kind of a surprise! F&N makes all of its earnings from diary products. The beverages, publishing and other businesses are all loss-making. What's more, when we see EBIT (earnings before interest and taxes) contribution by country, Thailand, Malaysia and Vietnam makes the money and Singapore is loss-making. Vietnam is 47% of total EBIT! F&N is a Vietnam play! 

When I first thought about this, I couldn't recall what are F&N's dairy products and what kind of businesses it had in Vietnam. Only with further digging then things came to light. F&N's diary products are Carnation and Magnolia, household products in South East Asia. Carnation is the leading condensed milk brand in Malaysia and Thailand. Building on that the firm had built a strong business selling all kinds of dairy products with local popularity. The cherry on top is F&N's ice-cream business. It has three brands: King's, Magnolia and Meadow Gold. These were my childhood ice-cream brands!

While Singapore has since moved on from F&N's ice cream brands for higher end treats like Magnum and Haagen Daaz, I believe these brands are still doing well in other parts of ASEAN and hence delivering the dough for Charoen. The diaries segment in Malaysia and Thailand earns c.S$45m and c.S$73m pretax profits last year. As for Vietnam: this is actually equity accounted profits because F&N bought its stake in Vinamilk up to 19%, making it the largest foreign shareholder in the firm. 

Dairy business in detail!

The chart above from the firm provided detailed breakdowns of the different parts in its diary segment which was super helpful. We can see that the Malaysia and Thailand have healthy 12-15% EBIT margins over the last two years. With the additional of Vinamilk, F&N becomes a powerhouse in diary in ASEAN that could dream about becoming a Danone or Meiji someday!

Alas the stock is not cheap trading at 24x forward PE  and 12-13x forward EBITDA. On the free cashflow matrix, it is earning c.S$70-140m which translates to a 2-4% free cashflow yield based on its market cap of S$3.8bn. That's not really cheap by Singapore's standard where other names are doing 5-6%. Overseas Education is doing 9% FCF yield! (albeit it's small cap.) But wait, there are other things going for F&N. The Lion shall rise again!

Next post we shall discuss Vinamilk and the reorg with Thai Beverage!