Thursday, October 20, 2016

SIA Engineering - Part 2

This is an continuation of the previous post on SIA Engineering (SIAEC).

As described in the last post, SIA Engineering has a solid business model that helps global airlines maintain their fleet. SIAEC's business moat is built on strong branding, economies of scale, efficiency which churns out high free cashflow and a high return on equity (ROE). It's also worth noting that the business is somewhat counter cyclical - when the macro economy slows and air travel is reduced, the airlines send more of their aircrafts for overhaul. This is shown in the same table (used in the last post as well) below which has 2010 and 2011 having strong FCF despite the world going into a slowdown after the GFC.

Okay, as promised, we would need to explain the rest of the table in this post.

For readers well-versed in DCF which stands for discounted cashflow, the calculations would be straight forward but for others, let's just walk through this a bit. We have described the left columns which are just historical FCF and we have the FCF projections under FCF Proj. Right in the middle we have the column "Discounted" with numbers starting from 245, 250, 254... finally ending with 235 and 225. This is essentially discounting all the future cashflow into today. Hence the term: discounted cashflow model or DCF model. The concept of discounting is the opposite of money earning interest. In finance, a dollar today is worth more tomorrow bcos money can earn interest. Putting into government bonds will earn 2% (well used to be easier, now we need to put it for 30 years to earn 2% per year, but still, there's interest income/return on capital). In any case, since future dollars are worth more, we should discount future cashflow back to today's dollars. The discount rate used is 8%. This is depicted as the WACC at the top right.

Now as to why do we use 8% to discount is a major convoluted academic argument. To some, it's still inexplicable, like why is Singapore's first ever gold medalist Joseph Schooling standing inconspicuously in a midst of pilots and Singapore Girls at his own celebration party. Humble as he is, Joseph probably doesn't give a damn how all these attention seeking corporates are leveraging off his big win. That's story for another day. In a similar vein though, the world's greatest investor Warren Buffett doesn't give a damn about the convoluted academic argument about discount rates.

(Note: SIA Engineering is a separate entity from SIA)

But we need to explain WACC. WACC stands for the weighted cost of capital which is literally the cost of capital taking into account of the two type of capital: debt/bonds and stocks/equity. Capital is not free. Debt investors ie bondholders typically want to earn a low single digit return as their capital is more or less protected. Shareholders however stand to suffer permanent capital loss and hence it had been argued that the return that they earn should be a high single digit, which is why for our purpose, we have put in 8%, this knowledge site's namesake. For more, pls read this long article - Value Investing.

There are few more numbers that require some explanation: VCF, TV and IV (boy this is getting dry, but that's real investing, so bear with it!). VCF stands for the value of the cashflows projected which is essentially summing up the numbers in the discounted column. TV stands for Terminal Value.  This is the value of all the cashflows the firm will earn starting 2023 into perpetuity. Since we determined the cashflow from 2016 to 2022 (that's VCF), we need to determine the rest, and since firms can last forever, that's captured in the terminal value (TV). There is a formula for this:

TV = FCF*(1+Growth) / (WACC-Growth)

As explained, WACC is also the discount rate of 8% (for simplicity let's just put WACC = discount rate), and Growth at the far right is at 2%. The Growth here is an important number. It is also called Terminal Growth, which means the final growth rate for the firm into perpetuity. In theory, this should be GDP growth ie only 2-3% or even 0% for some countries. There is no such thing as 10% terminal growth. Since nothing grows 10% into perpetuity (it gets too big and overwhelms everything else!). Finally we are getting close to the end.

The same table again for easy reference

Now that we have the TV we add VCF, TV and the net cash of the firm, we can finally get to its intrinsic value or IV. To be exact, it's the intrinsic equity value of the firm. Again it's:

VCF + TV + Net Cash = IV

In this case it would 1714 (VCF) + 3535 (TV) + 560 (net cash) =  5809 (IV). SIAEC has 560m of cash which gets added (if it's debt we need to subtract). As stated, we then get to the IV of S$5.809bn and by dividing by the number of shares, we get to an IV per share (IVPS) of $5.2, or a 36% upside! This is the conclusion of the last post. SIAEC is a BUY.

But wait, all this number crunching, how accurate can it be? Isn't prediction futile? The answer is yes. As explained in the last post, all this number crunching is to just have a sense, most probably the numbers won't turn out right. In 2022, we shall see, more than half of those numbers would be wrong. So keep reading on, just eight more years! DCF modelling is just that - to give a sense. In fact, we should be doing multiple models. So here's another one below. This is the bear case model which have the starting FCF at a much lower S$200m and the T4 growth at only 5% for three years and then future growth at 2% which is same as the terminal growth. So for this model as you can see, the IVPS drops to $3.8 which means that there is no upside. Some might argue that's not conservative enough and we adjust the terminal growth to 1% and IVPS drops to $3.5 which was the stock price low in the last few years.

SIAEC's Bear Case

As you can see, the range of intrinsic value per share is from $3.5 all the way to $5.2. Now we are on to something. We have perhaps established that the risk reward is favourable. If things go really badly, the stock might drop to $3.5 ie 10% downside from here. But if things go well, then we have 36% upside or more. There could be a good bet here.

This is the crux of investing. We cannot predict the future. The future is a set of probabilities. We want to bet such that if it pans out the way we think it should pan out, then we make good return. But if it doesn't we don't get killed. In SIAEC's case, if it crashes to $3.5 and we lose 10%, we can easily make that back with two years of dividends.

This is why we love moat companies that pays dividends!

SIA Engineering - Part 1 

The author owns SIA Engineering since 2013.

Friday, September 23, 2016

SIA Engineering - Part 1

SIA Engineering (SIAEC) is one of the strong blue chips name in Singapore to buy and hold for dividends. It has also made regular appearance in the annual dividend stock list posted on this site in almost every year since 2009. The long term stock chart below shows that it has compounded its intrinsic value, albeit with some cyclicality while paying annual dividends for the past 14 years (based on Yahoo! Finance, the "D"s representing when dividends were paid). An investor who bought the stock at $1.5 in 2002 would have almost tripled his money including dividends.

SIAEC's long term share price

SIA Engineering's business deals with the maintenance of aircraft when they land in Singapore as well as in the other airports in Asia where the firm has presence. 40-50% of its revenue is ultimately tied to its parent: Singapore Airlines but the other businesses are also growing. SIAEC also operates line maintenance in Australia, US, HK, Indonesia, Philippines and Vietnam via joint ventures and subsidiaries.

The investment thesis for this stock quite straightforward.

SIAEC is a play on the rise of global tourism alongside the influx of Low Cost Carriers or LCCs operating in Asia. It also benefits from more full fledge airlines outsourcing maintenance to established third parties like itself. As a leader in the industry, it enjoys a strong track record, economies of scale, an accumulation of knowhow and efficient processes and a strong branding via its relationship with Singapore being an aerospace hub and its parent SIA. It has generated strong free cashflow in the past and is likely to grow its earnings with the opening of T4 and T5.

Aircraft maintenance is a flow business that thrives on more air travel, more aircrafts in the skies and more efficient safety checks. SIAEC is one of the few key players in Asia in the space alongside ST Engineering and HAECO, the maintenance arm for Cathay Pacific and has benefitted from this trend. The maintenance, repair and overhaul (MRO) business as it is formally called has high barriers to entry as it requires a certification process for each and every airline as well as a steady track record in order to win customers. In fact, some airlines view this as fundamental that it doesn't outsource this entirely but conduct some MRO operations in-house. Hence SIAEC had benefited mainly from LCCs in recent years since LCCs do not have the capacity to have full fledge MRO operations in-house.

However more national carriers are also choosing to outsource maintenance to players like SIA Engineering as they can they reduce their asset footprint, sell hangars and facilities. It is also expensive for airlines to maintain a competent MRO workforce. Hence established players like SIAEC that have know-how and once they get economies of scale, can do MROs much cheaper than established airlines.

With Changi Airport embarking on an ever-expansion to Terminal Four or T4 in 2017 and ten years later to T5, SIAEC will also stand to gain more business simply by being the dominant player in Singapore. Airlines would definitely love to stopover in Singapore, do a quick overhaul and move on. This has always been our advantage. We are efficient, can turn around fast, has the reputation to get the job done well and all these in turn help to suck in more traffic and strengthen our brand name.

The Singapore Girl, helping SIA builds its brand name over decades

In fact, branding is one of the key business moat for any companies. SIA started building its brand name since the inception of the company. The Singapore Girl is iconic. To this day, most people when ask what they know about Singapore Airlines would answer, "Singapore Girl." For SIA Engineering, it is imperative that they strengthen on their own brand name as a reputable MRO operator capable of delivering the best maintenance with high efficiency.

For SIAEC, the parent SIA business is doing well too. The SIA Group has built a sizeable fleet over time across its four brands: Singapore Airlines, Silk Air, Tiger and Scoot and this MRO business is captive for SIAEC. It generates the base earnings which allows the firm to re-invest in JVs in Singapore and in the region. SIA owns almost 80% of SIAEC and hence is happy that its subsidiary does well.

However while the story sounds good, SIAEC's earnings had stagnated for a few years. Part of the reason was cyclical as the global maintenance schedule has a cycle with major checks done only periodically. There was also an influx of new airplanes in the last 2-3 years which require less maintenance at the initial stage which led to a decrease in workload for the industry. But we should expect maintenance to come back as these airplanes mature. Also, the total installed base of airplanes globally had continued to increase, so logically, maintenance work over the cycle shouldn't decrease. In fact, maintenance would only increase over time with a larger installed base.

The other key risk for SIAEC was the increase in labour cost in Singapore. With the government restricting immigration, SIAEC, as with many labour intensive businesses with our other listed entities (Sembmarine and Keppel), had suffered from an increase in labour cost as they were unable to hire cheap foreign workers for the more menial work. The mitigating factor here would be its strategy to diversify into lower cost regions such as the Philippines and Vietnam.

So that's the investment thesis as well as the risks.

Next we look at the free cash flow (FCF) generation of the firm. The table below shows a quick and dirty analysis of SIAEC's FCF and also a simple Discounted Cashflow (DCF) model for the firm. Most analytical work that real investors do really don't need 20 tabs excel spreadsheet with each tab running into thousands of lines. We just need to know the key drivers and try to model it as simple as possible. So that's what the following table tries to achieve.

SIAEC's FCF analysis

On the left we have SIAEC's FCF for the past few years. As stated, it had stagnated. It only made S$168m in FCF in the last year which was less than half of its peak at S$353m made in 2011. However the average FCF is a much more decent S$233m over the past seven years which translates to a FCF of c.6% (shown in the far right as FCF Yield). In the projections, in the middle, we try to forecast the future FCF. As with all predictions, it's almost 100% that we won't get this right. The whole purpose of doing the projection is to have a sense of how the stock price is trading vs its intrinsic value.

So as simple as it can be, we project its Dec 2016 FCF to be slightly higher than average of S$233m at S$245m. This is also what the company might be able to achieve in 2016-2017 after a weak 2014-2015 esp with the opening of T4. For the next few years though, we are projecting a 10% increase in FCF per year for three years as we expect T4 to be up and running full speed by the end of 2017. Then in 2019 the growth tapers off at around 3% per year. With this scenario, we get to an intrinsic value per share (IVPS) of $5.2 with an upside of 36% (beside FCF yield). Incidentally, the stock hit its high in 2013 at $5.29! Often times, we see such convergence between technical and fundamental analysis.

In the next post, we will dive into the full DCF calculation and analysis. But for now, it suffice to say that SIA Engineering looks like a good investment giving 36% upside. Its moat had allowed it to generate both a good ROE (at 16%) as well as a 6% FCF yield. It has consistently paid dividends and continues to pay c.4% today. This is one of the true blue chips in the Singapore stock market.

The author owns SIA Engineering since 2013.

Tuesday, August 16, 2016

2016 High Dividend List - Singapore, US, Australia

It's out!

The second section of this year's list threw out a few interesting names in the tech, finance and other sectors and there's an interesting discussion point that would serve to transform fundamentally the way some of us might want to invest! Yes, it's a big deal. First, here's the list:

2016 Dividend List - Part 2

Again, since the list gone global, Singapore names were relegated. To just one in this second portion - SATS. This name had appeared multiple times over the years, it continues to be a good firm although valuation might be too expensive at this juncture. The issue with SATS could be more fundamental depending on how we want to look at it. More on this later.

There are actually a few interesting names here which we could discuss a little and interested parties could do more work. In my opinion, some of these are moat companies, but unfortunately time is always limited and there is not enough work done to be able to make buy decisions. Western Union is a global payment network that serves the un-banked, under-privileged class. Most of us in sunny Singapore perhaps only use Western Union for sending money to Philippines for domestic helpers. And this is their moat. It's a powerful business that the firm has built over many years and today links 500,000 financial institutions across the global. The big risk is how the internet and dotcom can disrupt the business but again this is an unknown. It might take years, or it might be like Uber vs taxis - taxis globally are suffering bcos of Uber. For payments into emerging markets, we haven't seen any strong global challenger yet, so perhaps Western Union is safe.

Symantec is another super interesting name as it is touted as the cybersecurity play. As everyone would know, cybersecurity is a big thing with global hacking and global scamming becoming so rampant. Large MNCs are actually at their wit's end against hackers. We heard about these large scale hacking at Sony, Target with credit card numbers stolen etc, and heard no solutions. Even in Singapore, we had these scams with our banks and the banks couldn't do much to recover the lost monies. It's a big problem. Symantec has a strong track record in anti-virus and this business generates superior free cashflow (FCF) year in year out. However anti-virus is actually quite different from cybersecurity. The firm had been trying to market itself as a leader but savvy investors know all too well. It just spent four billion dollars buying Blue Coat, a supposedly real cybersecurity play. So if they were already a leader, why spend the kind of Jho Low - 1MDB money buying Blue what? Well, there is not enough homework done to draw conclusions. It's something interesting but let's move on.

IBM, the tech stalwart, trading at 10% FCF for a few years now, with a 3% dividend and a $100bn revenue. Some say it's the big data / A.I. play given its strong branding with Watson (one of the real viable A.I. business solutions). Of course more than 50% of its revenue is recurring by locking customers in binding software contracts and it continues to move into ever higher margin businesses like consulting and platform solutions. But with such a big base, it is struggling to grow. Buffett also hasn't made money here although it could be said that of the three quick highlights, perhaps IBM would be the safest. It's the cheapest in terms of PE and FCF and mostly likely the one to sustain or even raise its dividends - that's what this post is about yah?

There are some interesting Australian names as well. Computershare stands out as a database for listed companies in this part of the world. There are a few comparables and the one in Singapore being Boardroom. The business is mundane but cashflow generative. They handle share registries and provide software that specializes in share registry and stock markets and also provide corporate trust services. It's like IBM's recurring annuity business and there are very few competitors globally. It looks good at a first cut but again, more work needs to be done. 

Okay, back to SATS. This is a great franchise selling food to Singapore businesses. Its core focus is of course its airline food business where it has a monopoly selling to all the airlines stopping here in sunny Singapore. With Changi expanding terminals out to T4 and T5, SATS would just ride on our traffic growth. It has other businesses like selling food to our beloved armed forces, food to cruises and ships and what not but those are pretty marginal. So what's the issue?

The issue is much more fundamental and something to really think about along the lines of ethics and the way we want to really invest. SATS also has an abattoir business which involves taking lives and hence putting some vegan investors off. Now this may not be a big deal to non-vegan investors but let's extent the concept further. 

Natalie Portman Vegan Quote

#37 on the list is Imperial Brands, the fifth largest tobacco company in the world. Again this is a strong dividend play that gives out 3.6% dividend while generating a stellar 6.5% FCF yield every year. And it will continue to churn out cash enough to drown investors. Tobacco is one of the best business in the world. It costs almost nothing to make cigarettes, decades of regulations have restricted marketing expenses to pittance, hence gross margins are super high at 70%. The irony is that despite such high margins, tobacco companies can raise prices year in year out with dictated tax increases which further improves margins. There are also no new competitors since new entrants cannot market their products and hence unable to grow their market share. As such, existing tobacco companies have become global oligopolies, maintaining their global share and piling up mountains of cash, all of them. Meanwhile despite the number of smokers declining (as they die out) and the number sticks smoked also dwindling, volume reduction had been more than offset by price increase and tobacco companies had grown earnings at double digits due to what we discussed, and will continue to do so for the foreseeable future. So it's not just strong FCF but strong and growing FCF!

Warren Buffett had described that tobacco companies are one of the best businesses to own, yet he doesn't own one. Why? Because tobacco and smoking is also the single largest cause of human death in the history of humankind. According to the website Tobacco Altas, tobacco had killed 100 million humans which is more than the number of death for WWI and WWII combined. Projecting forward, it would be responsible for 1 billion deaths by the end of the 21st century. Okay, some might dispute these numbers, but throw your own number, it definitely doesn't change the fact that tobacco killed a lot of people.

So here's the important point, do we want to invest in companies that are killing people? Or killing animals? Destroying lives? This is a big question and it is also difficult to draw the line. If we are still eating meat, then why stop buying SATS? Should these actions be synchronized? What about gambling stocks? Genting is another great business, but do we want to be partially responsible for destroying families? What about companies making firearms? Or companies involved in drugs? Or even Pokemon GO? Or for that matter, all addictive games since there are millions of youngsters throwing their lives away in virtual worlds when they could have done more in this real world? 

Buffett himself hasn't sorted this out. He had been lambasted for being invested in Coca Cola knowing that sugar causes obesity and hence a whole host of health problems. The argument goes that if the Oracle of Omaha is really ethical shouldn't he say or do something about sugar? So it's not easy to deal with. The investing world is also grappling with the so-called ESG compliant wave. ESG stands Environment, Social and Corporate Governance. This is not new, in the past it was CSR or Corporate Social Responsibility and now it's ESG. The idea is to invest in companies that are doing the right things, and doing things sustainably, i.e. not harming our planet, nor the society etc.

I guess as individual investors, we should draw the line that is right for us. For me it would be selling out all my tobacco, gambling, abattoir names over time. For others it could be just tobacco. Or it could be no Pokemon GO names. Something to think about when hunting stocks or rare Pokemon perhaps.

Here's the past list:
2016 Dividend List - Part 2
2016 Dividend List - Part 1
2015 Dividend List - Part 2
2015 Dividend List - Part 1
2014 Dividend List
2013 Dividend List - Part 2
2013 Dividend List - Part 1
2012 Dividend List
2011 Dividend List
2010 Dividend List
2009 Dividend List

Thursday, August 04, 2016

2016 High Dividend List - Singapore, Europe, US

The annual dividend list is out! As per last year, restricting the list to just Singapore can only yield a handful of names, hence it's more worthwhile to see things from a global perspective. The criteria for the screen had not been change for years except minor tweaks. Here's the first 20 names:

2016 Dividend List - Part 1

There are two Singapore names in the list: Yangzijiang and UMS. Yangzijiang is a shipbuilder which unfortunately is stuck in a bad part of the shipping industry which would take years to unravel i.e. low probability of making good money relying on fundamental analysis. It might worth a trade but definitely not a moat company that value investors would buy and hold. On UMS, this stock started appearing in 2014 and its financials do look pretty good. It had been generating steady FCF since 2010 and currently trades at an impressive 12% FCF yield. Alas, there were also stories about the management which in this post serves to to flag out another important point - not to invest in companies with corporate governance issues.

One of the most fundamental principles in investing and perhaps in life is actually about integrity or trust. In the case of investing, it would be trusting the accounts, in life, it is about integrity. Sometimes, this is so fundamental that it is often overlooked and we get into big trouble because of it, like trusting a "friend" with money and never seeing the money or the "friend" again. In fact, because integrity is not 100% most of the time, we setup legal systems to deal with it. So if the accounts cannot be trusted, what's there to analyse? How do we apply fundamental value investing in such situations? The answer is we cannot, so when there is a reasonable doubt that the accounts or the management cannot be trusted, we are better off not looking.

Having said that, it's impossible to say if UMS is that bad, it's just one or two stories told in the market. There are more clear cut poorly accounted companies out there, some trading at multi-billion market caps. Sometimes, it takes years to figure things out. Sometimes even if it's figured out, the share price could pop! Re: Herbalife. The SEC ruled that it wasn't conducting its business correctly, but stop short of saying it's a Ponzi scheme and the stock pop! Such is investing, you can make money when you are wrong and lose money when you are right! 

Alanis Morissette's hit song really comes to mind!

It's like rain on your wedding day 
and good advice that you didn't take
and isn't it all ironic

Ok, back to investing, stock ideas and the dividend list, sadly the first part of this year's list didn't really give any good ideas. What stood out were the number of IT has-beens or energy related names which unfortunately would not be a good place to start. Would Cisco come back? How about a Chinese utility company? Not too exciting. 

If someone put a gun to my head and ask for one name, then perhaps I would suggest Michelin. This is not a high conviction idea. Again tires are pretty much old economy, and nothing to shout about. With self-driving cars and Ubers, the world view is perhaps one of "Who needs to change tires?" However, as long as cars don't fly, I believe tires will sell. Also a significant part of tire makers' earnings actually come from performance tires that we don't see as passenger car drivers and laypersons. These are tires that are used in aerospace, trucks, mining, construction etc. These had grown well over time and Michelin had been the dominant player in these are markets, alongside Bridgestone.

Michelin long term share price chart

Michelin's long term share price says as much. The chart above shows its stock price performance since 1990 and we see the familiar compounding chart. An investor could have bought the stock at 5 Euros in 1990 and made close to 18x today. Michelin generates 1-1.2bn Euros of Free Cashflow (FCF) today and trades at 16.7bn, i.e. giving investors a nice 6-7% FCF. The French are somehow simply just good at building brands. Who wouldn't love the Michelin Tyre man?

For some reason, to better its brand, it started its famous restaurant guide a hundred years ago and is now the Bible for food lovers worldwide. Singapore had the good fortune (some say bad) to actually see its version come out this year! For those who missed it, here's a portion of the Singapore's list (the well designed Michelin website does not make it easy to cut and paste the full list here)

Singapore's Michelin Guide (just one part)

So that's the first instalment of this year's dividend list with one important philosophy: find integrity, or not to invest in dubious companies, and one so-so stock idea: Michelin giving 6-7% FCF yield and a stolen food idea list (above) and as usual, we have all the past dividend list (below).  

2015 Dividend List - Part 2
2015 Dividend List - Part 1
2014 Dividend List
2013 Dividend List - Part 2
2013 Dividend List - Part 1
2012 Dividend List
2011 Dividend List
2010 Dividend List
2009 Dividend List

Tuesday, July 12, 2016

Great Scot! Brexit?

It's been three weeks into Brexit and the financial world now think that maybe it was never an issue at all? US S&P is back near all time high, the FTSE 100 bounced back with a vengeance and hit its high for 2016. Even the STI is now close to 3,000. Brexit? Nah. Let's Move On! That's market short-termism for you.

For most people, it was actually more disappointing that in the same week, England was knocked out of the Euro Finals. By Iceland. Ouch! People asked, "What happened?" This was the Great Britain, we were talking about the most powerful empire of the 19th century! First, it took a big retreat on globalization with Brexit, then it lost its prowess in football. To rub it in, even the British Gentleman spirit was lost when Michael Gove, a former Secretary of State for Education backstab his political ally Boris Johnson to announce that he would run for Prime Minister, and not support Johnson instead. It was one of the darkest days for the UK in recent history. May God not just save the Queen but the Empire on which the sun never sets.

English Football

Okay, things really looked bad. This could be it for the UK, literally, now that Scotland might want to seek another referendum for independence since the Scots really wanted to be part of EU. Great Scot! How are we gonna ship enough Johnnie Walkers if we are not part of the EU! If Scotland leaves UK, then what about Ireland? It would mean breakup of the United Kingdom. This further implied the same fate could await the EU and other alliance (ASEAN, NATO etc). This is MAJOR. Globalization has been the big trend of our lives and now the people of UK voted and demanded that they didn't want more. It was a vote that the common man said, "Enough is enough." It could be the beginning of the Great Class Divide, the elite vs non-elite. This is the rebellion against capitalism. It had already started in some ways. ISIS, random bombing and shooting, refugees, Donald Trump, even going back earlier in Singapore: Worker's Party winning Aljunied GRC!

Okay, breathe.

For now, let's drill a little deeper on the financial markets, what are the really big implications for Brexit? Where's the catch and most importantly where's the big money making opportunity? As markets become more and more short term, most market participants had already failed as long term thinkers, most simply prefer to trade. Brexit went from "Not Gonna Happen" to "Oh Shit" and to "Nah, it doesn't matter" in three weeks! It really showed something about the intellectual depth of the markets i.e. really shallow. Brexit has big long term implications that wouldn't have changed in three weeks, if what is described in the previous paragraph unfolds, this could ultimately lead to WW3, or some global anarchy, maybe we might evolve into the human society depicted in the Divergent Series. This is really big deal. Ok, hope everyone got the idea. Here's the three biggest deals today:

1. Currencies
2. Financials and F4
3. UK stocks

Needless to say, currencies saw the most volatility with the British pound or GBP collapsing to its 30 year low. In one fell swoop, the GBP fell from 1.5 against the dollar to 1.3. It was said that we might see parity. That has never happened since the pound and dollar exchange rate was recorded in 1791. The closest it ever got to was GBPUSD of 1.1 in 1985. Against the SGD, it also fell to an all time low of 1.77. Singaporeans are now rushing to change pounds and buy UK properties but alas no money changer would be dumb enough to effect that transaction now and banks are also unwilling to support the purchase of London condominiums. No easy lobang bros!

GBPSGD exchange rate

Meanwhile, the second order impact on currencies was even more significant. As the pound lost its status, the other currencies benefited. Obviously the dollar and Swiss Franc rose. In Asia, the yen strengthening much more than expected, negating the effects of Abenomics causing the Nikkei to plunge. The Chinese government took the opportunity to weaken against all other currencies in order to boost its exports, it was called a stealth devaluation, but this would cause further capital outflow. The Chinese simply couldn't have their cake and eat it. 

The other big impact would be on the global financials. The key cities that controlled the global financial markets were always New York in the States, London in Europe and the three Asian contenders: Hong Kong, Singapore and Tokyo. With Brexit, what does it mean for the financial gateway into Europe that was the UK and the hub that was London? If Brexit meant that UK loses its privileges as a EU country, perhaps a new hub might be needed. There is already talk of a F4 alliance (more on this later). This major stress strained on the global banks. JPM, HSBC and Standard Chartered fell 5-10% immediately but had since recovered. Again, vultures targeted the weakest links, such as the Italian banks and Deutsche Bank, now trading at 0.28x book. Investors are saying 72% of the largest German bank's book is worthless. As we had seen over the last few years, there is an increasingly discerning power amongst investors. Good stuff stays good. There was that 5-10% drop in the solid banks but that was it - the minuscule, small window to buy. In a week, everything good rallied. Junks though collapsed and stay cheap. 

F4 in Taiwan

Then there's F4. Sorry, no, not the Taiwanese boy band. Sorry. This is different. This is another gamechanger. Shortly after Brexit, the Swiss Bankers' Association took the chance of a lifetime and ran with it. They proposed forming an alliance by the same name F4 which comprises of four new financial hubs in Switzerland, UK, Hong Kong and Singapore as a counterweight against new possible emerging hubs in the EU: Paris, Frankfurt, Brussels etc. If this succeeds it would bring about a new force as the Swiss controls a quarter of global asset management business. It was proposed that the F4 alliance would coordinate positions on global financial regulations and create new international standards as well. This could even rival the US and make them conform to global standards rather than letting Uncle Sam always writing his own rules. It's a very interesting development to say the least and our beloved motherland is part of it!

The last point would be on UK stocks. So everyone was expecting UK stocks to be hit badly with Brexit and there might be opportunities to buy on cheap. Alas, the window was just one day - the day of the Brexit announcement. Then the stocks took off and never looked back. As said, investors are becoming very discerning when it comes to premium good stuff. Global powerhouses listed in UK like Unilever, Reckitt, Diageo (yeah Johnnie Walker) and even Royal Dutch Shell share prices jumped as the pound fell. This was because their business was global. While the stocks were denominated in pounds, since the earnings were global, a cheap pound meant that the share price should rally. This is an important point as most investors tend to only think about which currency their stock is denominated in, believing they would earn in that currency. But in reality, it doesn't matter! A rose by any other name will smell as sweet. A good stock denominated in ringgit would simply compound faster. Diageo's share price above showed as much. The stock did nothing for three years and rallied 20% mirroring the fall in the pound.

Diageo's share price

Diageo had been mentioned previously but it might worth reiterating that this might be one of the best stocks to own globally. Diageo is the world's largest spirits company with megabrands such as Johnnie Walker, Smirnoff, Guinness and Bailey amongst others. It has 40% value share in Scotch (whisky from Scotland) and is the world's largest producer of vodka. 40% of its earnings comes from the emerging markets while it continues to enjoy pricing premium in developed world with its key brands, It also has an unparalleled global distribution built over the last 180 years that ensure its products reach every corner of Earth. Pirates robbing East India Company's ships in Singapore were after crates of Johnnie Walker whisky in 1819. 

Diageo's Portfolio

Okay, fast forward to today, Diageo, with 20% of its earnings from Johnnie Walker, has been a cashflow generating machine given its business of selling highly priced beautiful bottles of alcohol to rich men and high end bars in the last few decades. It churns out GBP 2bn in FCF globally (soon to be GBP 2.5bn with the collapse in pounds) and this is expected to grow at a 5-6% clip annually. This means that Diageo's FCF doubles every 11-12 years and it had indeed been the case so far. Its FCF in 1999 was GBP 0.5bn and it grew to GBP 1.3bn in 2006 and now almost doubling to GBP 2.5bn in 2017. Of course the market knew this and bought it up since three years ago. Today, as was three years ago, Diageo trades at high multiples: 22x PE forward in two years, EV/EBITDA of 17x and FCF to market cap at a whopping 26x. It fell around 5% during Brexit to teens PE before rallying 20%. Now the ship had sailed.   

In conclusion, Brexit was a lesson about market's short-termism, the world's populace dismay at globalization and the wealth discrepancy it created, the possible emergence of a new financial order led by F4 (no, no, again it's not the boy band) and the power of great companies with strong business moats. On the last point, it was a reminder that we should simply buy a portfolio of these stocks and sleep soundly, not worrying over the whims and fancies of global markets.

Well, maybe Brexit won't really happen, it would take at least two years just to iron out the exit road map (and ten years to fully exit). Let's hope England do better in the 2018 World Cup and God Save the Queen!

PS: This writer owns Diageo.

Tuesday, June 07, 2016

Teach Less Learn More - Lessons Learnt Part 3

This is the last instalment about Singapore's Teach Less Learn More Education Philosophy, its trials and tribulations and the improvements needed. Links to the earlier parts below:

Part 1
Part 2

We discussed how Singapore's education system should nurture the love for learning and also focus on collaboration not competition. Google and the great companies of the world collaborate to bring about better results. It's not voting out your mates in some reality TV in order to win a million dollars. The real world is about working together to create blue oceans, not battling it out in red oceans.

In this final post, we would like to discuss adaptability and understand the game changing future that is upon us and how we can prepare our kids for it.

The world is changing faster than ever. A hundred years ago, changes from generation to generation was rarely as epic hence fathers could teach their sons very useful life lessons and the next generation benefits. But in today's world, things are moving so fast that whatever we learn becomes obsolete in a few years. What our fathers learnt has no implication in our lives today. We can barely learn anything from our parents when it comes to work and technology.

In fact, whatever we learnt in school just a few years ago is already obsoleted. Considering that our primary schools and secondary schools are using curriculum pretty much improvised from fundamentals half a century ago, we can safely say that almost everything that our kids learnt in school today has no use when they enter the workforce. What could be more important is really teaching them how to learn and how to relearn, on top of nurturing their love for learning and collaboration.

Yes, this is about adaptability. A great concept in a profound religion is the concept of impermanence. Everything is ever-changing and the only constant is constant change. In today's world it has also become constant change faster and faster. To adapt to such an environment, one must learn to be resilient, to accept new norms and reject outdated thinking all the time and faster each time. 

The way humans communicate shed light to how our world is really moving. A hundred years ago, person to person written communication was the snail mail. Some of us might have the privilege to experience this outdated mode of sending letters via snail mail to pen pals or loved ones, then waiting for their replies which could be weeks. Then telegram came along, we could send today's equivalent of SMS to our loved ones at an exorbitant cost of 10 word at $3 via the global telephone network pioneered by Alexander Bell and his successors thereafter. Then we moved to fixed line telephones, which was a break through then. About thirty years ago, phones went mobile and we could also send SMS via our mobile phones, for 10 cents per message.

Remember this?

But when the internet came along, the whole game changed. We had emails replacing snail mail and we wait for hours or days for replies, down from weeks. Then we had the first generation of chats like ICQ, then Skype for video, Messenger and today Facebook, Whatsapp, Instagram, Wechat and Telegram (again)! We created another whole online world for communicating which for some became even bigger than the real physical world in terms of communication. Everything has changed. We no longer wait for weeks for a reply, we are down to seconds. A minute could be an eternity for some. 

Yet we are learning to solve how many marbles Ravi has in our primary schools (an anecdote from the previous posts).  

Along this evolution of social communication, some inevitably fail to adapt. Some of our friends are not on Facebook, some not using Instagram or Twitter, unable to adapt. Most might not heard of Telegram, the new Whatsapp. To adapt is to keep shedding the familiar for the unknown. It is not easy hence not taught. But for our next generation, it could be imperative. It's adapt or die.

Adaptability also means being able to learn and relearn and to be resilient. Not calling it quits when the going gets tough. These attributes again, are not developed by solving complex math problem sums involving Ravi's marbles or rote memorising. Adaptability might well be about introducing important universal concepts drawn from the intellects of the past philosophers: resilience, tenacity, not taking things for granted.

Another big theme in our lifetimes could be the advent of A.I. or artificial intelligence. Computers are getting smarter by the minute. They can beat the best human players in traditional board games like chess and GO or weiqi, supposedly impossible still for at least another decade. The A.I. community is now targeting games like Warcraft. Pitting A.I. against the best players in a highly complex real time multi-player game. Again it might not be long before we see A.I. beating humans at their own computer games. In fact, it had be theorized that A.I. could go into what is called a singularity - a point of no return.

Since A.I. can learn by teaching themselves, as the weiqi program that Google's AlphaGo invented did, what happens if they keep teaching themselves in milliseconds and their intelligence explodes in an exponential way? This has been hypothesized, and if it comes true, then human as a race could face an eventuality. It could be utopia, where machines do all menial jobs for us, find cures for all our illnesses and we can be left to pursue our real purposes of our lives, which we have to then figure out. What is our real purpose in this universe if we don't have to worry about food, money, health problems?

A.I. - Termination or Salvation?

Or it could be apocalypse, ie. machines wipe us out like what Hollywood depicted. Machines that are able to teach themselves would eventually come to a point where they surpass us in every and any way imaginable. Just as they already did in chess and GO. So why would they need us to be around? These are big questions, worthy of yet more discussion. But to get back to the education issue. The key question is:

Why are we still trying to figure out how many marbles Ravi has in a way-too-confusing math puzzle?

Computers can do all the math that needs to be done. Yes it is true that we need to learn the basics and the fundamentals, but nothing beyond what is more than necessary, definitely not solving for marbles via convoluted English sentences designed to confuse nine year olds in a math problem that requires algebra but yet algebra cannot be used as a solution. The future is not about hard math nor hard science, not about rote learning, memorizing, concepts way too advanced for pre-teen kids i.e. all the things the Singapore's education is focusing on.

Ironically as computers take over more and more routine calculations, jobs that are immune to this mega A.I. threat are the ones that Singapore gave the least emphasis on, like hairdressers, barbers, chefs, masseuse, chiropractors, therapists, nail artists, trainers, pastors, gurus perhaps even, here's the kicker, school teachers. In short, jobs that require more human touch where robots find it hard to make the emotional connection. 

Ultimately it might be teaching our kids what it means to be human. To be compassionate towards other, to be able to empathize, to use the best soft social skills to help others. These are the important lessons that might differentiate the next generation and give them the edge over robots. Singapore's education has skewed towards forging the alpha male or female, to compete and beat everyone in some rule based animal war. The world is changing. It's not hardcore competition nor grades and results. Education should be about:

1. Collaboration
2. Resilience and adaptability
3. Learn to relearn
4. Empathy and the human touch

It is not too late to focus on these. Teach Less Learn More doesn't have to become another acronym. Let's hope we move faster towards this new direction, more and less alluded to by the baby steps initiated by Mr Heng Swee Keat, our former education minister.

PS: Very good to know that he is recovering from stroke! Let's hope he get well really soon!

Monday, May 23, 2016

Teach Less Learn More - Lessons Learnt Part 2

This is a follow-up post on Teach Less Learn More - Part 1.

Teach Less Learn More (TLLM) was touted as the frontier philosophy in Singapore's education system to make learning holistic, bringing learning from inside the classroom to hands-on experiences, learning by discovery and less rote memorizing. Unfortunately, the implementation left much to be desired. Today, after years of TLLM, we are still stuck in an epic education war, akin to the popular Animal Kaiser game, where no animals nor their masters actually win.

Perhaps we have to go back to the genesis of Singapore's education system to understand a bit more. Singapore's national education system started in the late 60s and early 70s. Back then, the late Dr Goh Keng Swee, Singapore's chief economic architect needed to solve urgent problems: illiteracy, lack of core math and science skills and the need to increase in productivity and efficiency of our workers working for Multinational corporations or MNCs setting up shop in our little red dot. So he created an education system to tackle these issues, focusing on the most efficient way to produce engineers and workers.

Dr Goh Keng Swee

Dr Goh Keng Swee was a super remarkable man. Yes, super remarkable. We owe Singapore's success as much to him as our late founding father Mr Lee Kuan Yew himself. (Links to these posts attached to their names in the previous sentences.) This website has posts dedicated to our two most important Titans. The education system they created fifty years ago was best suited to solve the issues then. We focused on rote learning, skewed the importance of math and science and we made sure we produce engineers by the truckloads at the end of it. It worked perfectly. 

Alas, after half a century, we failed to reform the system for today's world. Today's issues are, by and large, created by still following an outdated model laid down by our founding fathers. We had some nominal education ministers, whom didn't restructure for modern times when they were in power. We introduced school rankings and a completely berserk implementation of TLLM. We crammed difficult concepts into our young minds thinking it's improvement. 

Yeah, Laplace Transformation at PSLE, anyone? Or perhaps psycho-analysis of Lolita at Primary 5?

Then we had Mr Heng Swee Keat who did a lot of wonderful things but he left the Ministry of Education way too early and now it's really unfortunate that he had a stroke. Our hearts to Mr Heng and his family, hope he can come back soon! 

For all the good things that Mr Heng has done, we need some strong follow-ups. In particular, here are three points worth discussing:

1. Love for Learning
2. Collaboration not Competition
3. Adaptability: Learn to Relearn

The tragedy of all the mis-steps in education over the years was that it killed the students' love for learning. By cramming more and more difficult concepts into young brains when they are not ready simply turned them off. Imagine throwing the baby into the deep end of the pool and then expecting the he becoming next Ang Peng Siong in eighteen years. That seemed to be the way our education system wanted to work.

Stop cramming difficult concepts into our young minds and start nurturing the students' love for learning. The world has changed. We do not need to churn out engineers and secretaries as fast as possible. We need multi-dimensional thinking, adaptability and teamwork. It is time our schools start to teach more of these.

It has been said so many times that it's like super cliche. But we have to say it here again. Learning is a life long process. One can never stop learning. It's the truth. Our education system has made learning so tough, it's not funny. If we kill the love for learning in our next generation, then how can they continue this life long process? 

It is not too late to revamp the system to one based on nurturing our students' love for learning. We should move away from tests, cramming difficult concepts, rote learning to make education really beneficial. Learning should be fun, entertaining, relevant, practical even for the daily lives of young students. It should also be impactful and inspiring. There is really not much relevance in solving for how many marble Ravi actually has, knowing that he has 245 more then Siti and John combined and John has yet another 69 marbles more than Siti and all of them has 941 marbles together. Whatever! How does this help a nine year old in his daily life?

The only reason why primary school students derive joy in solving as many as these problem sums is to be able to beat their classmates by solving more sums than them. This is a very sad revelation. It creates another big problem. It foster excessive competition. We are not saying competition is not good. Competition is obviously necessary. It is dictated by nature: survival of the fittest. But excessive competition which is what Singapore is all about has lasting damage. The real world is not about individualistic competition except in Olympic games. 

In most work environment, we work as a team. There is competition but that is based on company vs company like Google vs Apple, or even consortiums vs consortiums like European banks vs US banks. It is rarely about individual competition or even competition within the company. Companies that encourage the culture of intra-company competition usually fail. Within the team, or within the company, it is about collaboration, not about competition. Yet, the Singapore education has evolved into one where it is all about becoming #1. Or being amongst the top. Only the top quartile or decile wins. Beating the next guy to be one up. This is a loser's mentality.

More often than not, Singaporeans have the mentality that there can only be winners and losers. If you lose, that means I win. To go up, I must step on others' heads. I cannot lose even if I am giving money away. Must check whether the auntie selling tissue really lives in one room flat. This loser's mentality is very detrimental and most work environment collapses when such mentality dominates the culture. These losers think that the compensation pie is fixed. If I get a smaller slice means someone is getting a bigger slice. So they go all out the grab the slices. They are willing to backstab, hit below the belt, go under the table and do all sorts. This is loser's mentality at its worst.

It is not about competing who's winning and who's losing. It's collaboration.

In the winning culture, the winners know that the pie is not fixed. It is as big as they want to make it because the world is their oyster. They collaborate in the most ingenious ways to grow the pie. This is how the Facebooks and the Googles of the world is taking over the planet. Our education is not contributing to create more of these world dominating companies, nor educating the workforce to be able to adapt in these winning culture. 


The real world is about collaboration, not competition. There is no #1 spot, nor cut off scores, nor elbowing to be amongst the top. It is teamwork, thinking win-win, forging new routes to access the blue ocean and adapting along the way. 

For those in the workforce long enough would know there is really limitations in what one person could do. Humans work together since prehistoric times, to bring down mammoths, to build pyramids and today to create new markets. The pie is never fixed. Google, by putting the best brains in the world into one firm is trying to solve some of the world's biggest problems. Like creating self-driving cars so as to free us to do a lot more productive work while commuting and at the same time reducing accidents and traffic jams. This came about with collaboration, not competing who gets more fat bonuses from Google's advertising revenue via its search engine.

Google and the rest of the tech firms are at the forefront of game changing innovations. Alas, our schools are ill prepared for what's coming. Next post, we talk about adaptability: how to learn to relearn and the best skills to impart to our next generation!

All three parts are out!

Sunday, May 01, 2016

Teach Less Learn More - Lessons Learnt Part 1

Despite this being an investment blog, education posts written in 2011 and there after had delivered one of the highest pageviews as a result of our obsessively competitive education system and the interest it generated. There had been various changes since then: it was announced that PSLE would move away from the three digit scoring system, schools would be more holistic building on the TLLM (a.k.a teach less learn more philosophy) implemented almost a decade ago amongst other changes. Hence it might be a good time to give an update here.

Let's recap a few topics:

1. Parents vs System
2. Teachers
3. Philosophy (new topic)

Parents vs System: this topic had been debated to the death, yes blame the kiasu parents. But the solution is not asking all the parents to stop being kiasu. That cannot be the case and as parents, the solution is also not about stopping tuition for our kids, as to try to stop condoning the system and to try to cut the financial umbilical cord to tuition centres. This seemed to be some parent's mentality. If I do my part to not support the tuition industry, then the system has to change. Sorry it doesn't work that way. Tell the ladies: try not wearing high heels to stop condoning heels which are bad for ladies' feet, bad for stability and bad for the wallet. It doesn't work. Not letting your kids go tuition when he needs it in this day and age just makes it a handicap, akin to purposely tying one arm behind in a boxing match.

Just to share another interesting revelation here. The education system in Singapore, in effect, is an epic battle between parents and their resourcefulness, it is not about the students, who's really smart and who's really good at math or science, or reciting poetry. As our young kids are made to learn more and more difficult concepts at younger and younger age, the key determining factor becomes how much resources the parents can put in the ensure their kids win. Unfortunately, it is much less about the kids' true capabilities.

Just take primary school math as an example: today an 8 year old Singaporean school kid is made to learn very difficult math concepts using fractions and algebra when their minds are not developed for these concepts. Just to elaborate, we have math problems requiring algebra to solve but the system refuses to introduce 'x's and 'y's and instead uses bars and pies to try to mask the difficulty. Needless to say, there is a very high degree of idiocy in giving such problems in the first place. I am sure we will get to 'x's and 'y's, perhaps differential equations and Laplace transformation for Primary 3 in a few years at the rate we keep introduce tough topics. 

Good luck parents of the future! Hence the solution to make these poor children "able to do" these problems involve rote learning and memorizing steps without them truly understand the concepts. This requires major investments into either tuition or parent's involvement (time and effort) or both,  to make sure the kids keep regurgitate the rote steps to solve these math problems.

This is so silly, agreed?

This is like a video game where the parents throw money, time, resources to train their kid i.e. the character so that they can go fight other computer characters and prove their worth. Of course, the kids at this age simply move like the computer characters, fully controlled by their parents. Some really good and smart kids soon realize the game and become motivated to fight on their own, but this is like A.I. achieving consciousness, ie the computer begins to think and move by itself and understands its own existence. Alas we are not there yet, most of our kids are simply moving from command to command, having not awakened. Hence we parents end up just training ourselves to be the gamemasters for our kids. This is the result of our f**ked up system.

Just to give the analogy a bit more meat, for some parents, the following game probably rings a bell. Animal Kaiser is a popular arcade video game where the player collects tonnes of cards in order to beat the opponent. These cards are of grave importance, some cards give the animal special powers, or even divine help, which is crucial during battles. Here, in the analogy, the parent is obviously the player, the kid is the animal character in the game that is going to fight all the other animals. And the tonnes of cards, which requires money, time and effort to collect represents the resources that parents pour into their kids to ensure they win this animalistic epic battle. 

Animal Kaiser & Our Education System

So yes, in Singapore we are all stuck in this big Animal Kaiser education war. Our kids are all animals, training hard, controlled by their gamemasters (a.k.a parents) in this meaningless fight. Does it help them when they go to real world? Does the special powers exist elsewhere outside the game? What are we trying to achieve here?

Things really have to change.

For things to change, it has to be changes made to the system. Change cannot be asking the parents to stop what they are doing. Just like we cannot ask all ladies to stop wearing heels. We must change the system. Yes things are finally moving but unfortunately the changes are moving too slowly. We saw the PSLE changes and what not, which might help, but perhaps most importantly, we have to upgrade our teachers.

Teachers are the most important players in the system.

In the previous posts we discussed that teachers used to be quite well paid some 20 to 30 years ago. I remember my teachers when I was a student were relatively well to do. During those days, their vocation was a profession, they were respected members of the society. Hence they also had the luxury to buy good properties during those days and benefited well from Singapore's property rise over the years.

Alas, today's school teachers are not having such good fortunes. Public school teaching has become a job that is not well paid, very taxing and yet thankless. Parents are ruthless, demanding and oblivious to the consequences of their actions when they condone their kids' wrongdoings in school. Teachers are unable to tackle unreasonable parents given the change in their social status. This is a sad problem.

It is said that the crux of a successful education system ultimately depends on the quality of the teachers. We have destroyed this. We turned teachers into commodities and hence are now suffering the consequences. Is it a wonder now that we have to resort to a billion dollar professional tuition industry to educate our kids?

For things to change, we need to attract talent back to the teaching profession. A big part of the answer lies in raising the salaries of teachers. Ironically, in Singapore, money talks loud and we have to pour money to solve this problem which created the issue of having parents to pour money in the first place. The answer is as follows:

If we doubled or tripled the salaries of teachers, subsequently tightening the requirements such that only the best graduates can be teachers, automatically, the society would recognize this to be a noble job, giving it the same recognition in due time. However this is also easier said than done, most countries had not succeeded except some Nordic countries where they dictated that teachers needed to be PhDs and are paid really well. Subsequently, they raise the education standards, really making sure no child is left behind.

The Nordic education system which extends to early childhood education is said to be the best in the world.

Of course, the ability to pour money to solve the problem ultimately depends on the government's coffers. If the government has no money, then how can they double or triple the salaries of teachers, who usually represent a huge number in the workforce? But Singapore government has money. We can definitely pull this off if we wanted to.

Next, we talk about our system's philosophy.

Meanwhile a happy Labour Day to all!

All three parts are out!