Singapore Post (S08.SI)

Sustainability of dividend

I like dividend stocks. The money is better in my pocket and tangible rather than getting stuck in the company balance sheet. That is the reason why I like Singpost so much. Having bought Singpost at $0.98 and yielding 6.25c dividend then, it was giving me 6.37% dividend yield. Recently, management raised dividend to 7c, amounting to 7.14% yield. While I welcome the dividend bump, I worry that it may not be sustainable. Many companies spam lots of dividend only to abruptly stop the flow of money when the cash pile depletes.

I've compiled the changes in the cash pile of Singpost over the years and displayed it in the chart below.



As one can see, there is no definite pattern in the change of cash positions year to year. However, it can be seen that the data is skewed towards net increase. Even it out over the years, Singpost has actually increased its cash pile despite giving generous dividends. Increasing yearly dividend by 0.75c will only increase cash demand to the tune of $16.1m (based on outstanding shares of 2,146,774,225). That is less than 10% of the net cash increase during the latest financial year. Therefore, I would conclude barring unforeseen circumstance, Singpost is in good position to service that additional dividend payout.

P/E and P/B valuation

For the full year ended 2014, the EPS was 6.849c. Based on the price of $1.90, Singpost currently has a P/E of 27.7. The P/E is admittedly on the high side as I am more comfortable with stocks with P/E below 20. 

Net asset value per share was 68.40c. P/B is 2.78. Similarly I'm usually not comfortable with P/B value above 1. When trawling the market for gems, I will look for P/B < 1 for safety margin and also for bargain. 

From P/E and P/B valuation point of view, Singpost is indeed overvalued. A P/E of 27 is usually accorded to company with growth potential. Even though Singpost increased its revenue by 12% for the whole year, its underlying net profit only increased by 5.2%. This can be attributed to the low profit margin associated with the Logistics business Singpost is diversifying into. Mail segment is stagnating for a few years but is sadly, the cash cow of Singpost. Can such a high share price justify the high revenue growth but low bottomline growth of Singpost? 

I would hold the stock myself since I bought it low and yield from my capital outlay is good. However, looking at valuations, Singpost is currently overpriced and there are better dividend yielding stocks out there.

Acquisitions and Disposals

In times of boom, companies had been known to go on an acquisition spree only to find that they had overpaid. Singpost, in its bid to diversify from its traditional mail business, had gone through a restructuring. The restructuring included acquisitions of logistics company and disposals of some traditional businesses, together with joint ventures and investments from Alibaba. I'm mainly concerned with the pace of acquisitions and the price that the management paid for the companies. Here's the rundown of the acquisitions and disposals Singpost did for the past year. 

Acquisitions

• The Store House1
• Paid S$121,000 for 75% of shares with net tangible asset last recorded as S$11,000
• F.S Mackenzie2
• Consideration up to S$14.8m for entire paid up share capital
• Net asset value was S$5.4m 
• Couriers Please Holdings3
• Acquisition at S$105m with prior net tangible asset recorded at roughly S$3m
• From the change in net profit after acquisition, it seems that Couriers Please Holdings added $9,417,000 to the net profit of Singpost (if assumption is correct, the P/E at which Singpost paid for Couriers Please seems reasonable)
• Famous Pacific Shipping4
• 90% holdings for NZ$3.6m with potential consideration up to NZ$8m because of potential earn-out consideration (don't really know what earn-out consideration is)
• Net asset value is NZ$816,104
• Hubbed Holdings5
• Quantium Solutions (Australia) acquired 30% of Hubbed Holdings for S$4.6m
• Quantium will get 5% more shareholdings if some pre-determined performance benchmark not met. If performance met, Quantium will pay an extra S$1.06m
• Net asset value of Hubbed Holdings is roughly S$1m 

Disposals

• Novation Solutions & DataPost (HK)6
• Entirely disposed of both assets for $24,388,951
• Net tangible asset recorded as $19,214,000
• DataPost Pte Ltd7
• Sold 90% of shares for $39,299,511
• Net tangible asset was recorded as $30,690,000 

I see that what Singpost paid was consistently much higher than the net asset value the acquired company possessed. However, I also feel that book value of company is not a good gauge for valuation the companies. Singpost itself is valued at nearly 3x P/B. Instead, the EPS of the company would be a better guide to see value. I will appreciate announcements to be like that of Couriers Please where impacts to net profits were shown. Looking at the announcement details, it would seem Singpost paid a reasonable price for Couriers Please and I would hope to extrapolate it to the other acquisitions. 

With the exception of Couriers Please, the other acquisitions were relatively small and should not impact Singpost greatly if it was a bad investment. Furthermore, the capital expenditure for acqusitions is supported by disposals of companies whose considerations were significant. 

From what I heard at Singpost's AGM, the M&A actions are not likely to stop just yet and there are more to come. Chairman was very supportive of the director that oversees M&A.

Earnings

As mentioned at the AGM, revenue rose 12% to the highest ever at S$920m. Underlying net profit similarly rose 5.2% to S$157m, highest ever.  I am disappointed that profit has not kept up with the growth of revenue. This was actually mentioned at the AGM with one lady pointing out that net profit actually decreased. CEO of Singpost reasoned forcefully that in the process of transforming Singpost, there were many charges that cut into profits. They had to strip them out to show that the core businesses were actually doing well. 

What was impressive about CEO Wolfgang Baier, was that he acknowledged the Mail business of Singpost was declining and never going back. 150 years of good business, it's not going to improve. Instead, Singpost had to transform to maintain its competitiveness. I liked his pragmatism and honesty. That is how problems get solved. Many management refused to acknowledge problems and refuse to change or improve. It was my first time attending an AGM and I was really impressed with the management, replying tough questions cordially and directly.

Conclusion

My confidence with Singpost remains strong especially after witnessing the strength of the management. On the day of AGM, it was announced that Alibaba invested a further S$279m in Singpost. Chairman kept reiterating that Alibaba was a tough investor to satisfy. Given that Alibaba had given Singpost their stamp of approval, I will likewise trust my investment in Singpost. 

I will continue monitoring the growth of profit along with growth of revenue. It has been almost 2 years where profit growth had disappointed me. Perhaps at some point, I will realise Singpost is not going to be as profitable as before, but the time is not now. 

Since buying Singpost at 2012, the dividends had paid almost 20% of my initial investment. Hopefully I will hold it till the stock pays itself. While I am not going to sell my holdings anytime soon, I think ultimately at $1.90, Singpost is overvalued and not a value buy for buyers. Dividend yield stands at 3.7% and while this is respectable, there are better companies out there that provides better yield and growth opportunities. Hence, people looking at Singpost, just pray it may drop. I may also increase my shareholdings if it ever drop low enough! (at least 5% div yield). 

1. http://infopub.sgx.com/FileOpen/SGX_Ann.ashx?App=Announcement&FileID=307340

2. http://infopub.sgx.com/FileOpen/SGXNET_Ann.ashx?App=Announcement&FileID=305964

3. http://infopub.sgx.com/FileOpen/SGXAnn.ashx?App=Announcement&FileID=326908

4. http://infopub.sgx.com/FileOpen/SGXAnnc.ashx?App=Announcement&FileID=331404

5. http://infopub.sgx.com/FileOpen/SGX_Ann.ashx?App=Announcement&FileID=356240

6. http://infopub.sgx.com/FileOpen/SGXAnn.ashx?App=Announcement&FileID=352614

7. http://infopub.sgx.com/FileOpen/SGX_Ann.ashx?App=Announcement&FileID=356716

ST Engineering (S63.SI)

Amidst the recent drop in oil prices, there are gems to be found. Some are oil-related stocks like Keppel Corp which may or may not have been oversold compared to crude oil price. Others, like ST Engineering (S63.SI) are dragged down by the pessimistic market. Upon some search on how oil price affects the business of ST Eng, I found this statement in the company's 2009 annual report:

"Oil prices have been on the uptrend since the beginning of the year and was around US$70 at year’s close. High oil prices would have a negative impact on the Group’s customers in the Aerospace sector, and this may in turn impact the Group’s performance. However, such an environment of high costs could present opportunities for third-party MRO providers like ST Aerospace, as airlines outsource more MRO work in an effort to contain costs." 

Although a report in 2009 is too outdated for my liking, I will conclude that oil price does not affect the company negatively at the very least. Due to its slump in stock price, the dividend yield had been bumped up to 4.7% from 4+% previously. Attractive, in my opinion.

However, as fate would have it, I chanced upon an article which highlighted the hidden risk of dividend stocks. In the article, SIA Engineering was cited as an example where high dividend payout did not mean that it was a good buy. This was due to its unsustainable dividend policy where dividends regularly exceeds its earnings. The shortfall between earnings and the dividends have to been patched up using its cash pile.

Following what the article did, I went to compile a list of ST Eng's financial and dividend history as below.

Financial Stats

Year	EPS (cents)	NAV (cents)	Dividends (cents)	Payout Ratio
2004	12.26	47	12.39	101.06%
2005	13.64	51.2	13.6	99.71%
2006	15.15	53.1	15.11	99.74%
2007	16.95	54.7	16.88	99.59%
2008	15.82	52.7	15.8	99.87%
2009	14.78	52.09	13.28	89.85%
2010	16.21	53.38	14.55	89.76%
2011	17.28	57.79	15.5	89.70%
2012	18.76	61.51	16.8	89.55%
2013	18.73	68.14	15	80.09%

The Earnings Per Share has been increasing steadily throughout the years with a slight bump in the wake of 2008 Financial Crisis. Dividends had been steady since 10 years ago. With decreasing payout ratio, it seemed that ST Eng had been prudent with its cash pile. This also implies that ST Eng does not need to dip into its cash reserves in order to maintain same dividend payout even if EPS drops. ie Sustainable Dividend Policy

Having bought half a lot of ST Engineering at $3.37, I would seek to complete my other half of the lot by waiting at $3.24. ST Engineering is a very solid company as I see it as a company that is effectively backed by SAF. During NSF days, almost all the vehicles were serviced or modified by ST Kinetics, a subsidiary of ST Engineering. Following Warren Buffet's advice, I would still see ST Engineering existing 50 years down the road and thus bought the stock amidst some market turmoil. 

To Hold or Sell Apple Inc.

Every buy or sell decision made in the stock market is a deliberate and conscious decision to me. This is because of the numerous factors that are unique to each stocks and also due to many conflicting teachings I had received over years.

Today, I'm particularly conflicted on whether to sell my Apple Inc holdings which I bought at $88.58 27 May 2014. As of now, Apple is trading at $102.25 - representing a gain of 15.4%. The reason I bought Apple was quite clear and it was to bank on the upcoming release of iPhone 6 and also a bet on iWatch release. The primary aim of my buy decision had been achieved but as time goes by I realised Apple had further upside in iPhone 6 sale results and quarterly results. After Apple's quarterly earning was released on 20 October where 39 million iPhones were sold and EPS came in higher at $1.42, all my reasons to hold Apple were fulfilled and stock price rose accordingly.

So is it time to sell now?

That is my dilemma which I hope to sort out here. Instead of asking is it time to sell, I should ask, "are there reasons to hold?" Therefore, I listed a few thoughts on the reasons to hold and also counter-arguments to them.

1. iWatch has been revealed to be be released in 2015 and this will provide impetus for stock price. However, it is a long wait to 2015 where macro market conditions are unknown to us. Furthermore, iWatch may be a miss or that its earning potential is not significant.
2. Apple Pay announced today may be a great integration to iPhone 6, strengthening the ecosystem of the iOS and generating revenue. That said, I think this argument is lacking firstly because of other existing paying system like Google Wallet. Apple Pay is definitely not a new innovation that can push stock price. 
3. Next quarter results should be fantastic. Given that this stellar quarter earnings did not even include iPhone 6 sold in China, next quarter should be impressive now that iPhone 6 is released in China. However, as per point 1, it is a long wait to the next quarterly results and the next 3 months may not guarantee that Apple may rise or maintain its level today. 

As you can see, for every point I had listed, I have some counter-arguments for it and there lies the dilemma. To sell or hold Apple? 

After much consideration, I have decided to keep my Apple stocks so as achieve my mantra of investing  on the stocks rather than trading them. Some people may say that Apple is losing innovation and that  iWatch may not live up to its hype, however to me, it is clear that Apple is still dominant in the smartphone market. I acknowledge that Apple may become Nokia or Blackberry one day. But the day is not today. Apple continues to sell iPhones and maintain an economic moat around its business.

Unless 1) global economy enters recession / stock market turns weak (I believe Apple product will lose its shine in recessions), or 2) when its earnings start to disappoint or 3) Stock price outstrips fundamental value, I'll still probably keep this stock.

Straco: Art of Pricing Stock Price

When looking for stocks to invest in, there should be a fixed tangible strategy in place. In that way, it is really  investing and not just a game of luck and chance (aka gambling). For me, I use the methodology set out in the book written by Mary Buffet (check out my reading list post). To scout for stocks, the company must have:
1) a competitive economic moat, and
2) a steadily increasing EPS.

Competitive economic moat refers to the high entry barrier that a certain business may possess. For example, setting up a bakery is easier than setting up a smartphone company. A bakery may need bakers, baking equipment, retail space and cashiers. A smartphone company needs the patents and technology, supply chains, distribution lines.. not to mention the manpower! Between these two types of companies, which do you think is easier to set up? Companies with high economic moat mean that their businesses are not easily threatened and margins may be higher. Choosing to invest in these companies ensures your investment has high level of security against business failure.

Mary Buffet also stated that Warren Buffet liked companies with increasing EPS over the years. The companies he mentioned in the book include Coca-Cola, Johnson & Johnson and Kraft Food. It signals the strength of management and business. Furthermore, the intrinsic value of stock can be calculated from the EPS growth.

In my case study, I'll use Straco priced on 18 Aug '13 as an example. The closing price was $0.775.
Straco (S85.SI) is listed on the Mainboard of Singapore Exchange. The company owns and manages a number of tourist attractions in China. These include Shanghai Ocean Aquarium, Underwater World Xiamen and cable car services at Xi'an. It had also ventured into entertainment business with startup of Straco Creation Private Limited.

The EPS of Straco over the years are as follows:

Year Earnings per share (cents) 2005 0.34 2006 0.39 2007 0.71 2008 0.89 2009 1.02 2010 2.15 2011 1.91 2012 2.31 2013 4.01

From the EPS, you can see that Straco has a steadily increasing EPS over the years, barring the drop between 2010 and 2012. This may be the sort of business you want to be interested in. Though Straco certainly isn't the sole player of tourism in China, it is the first few and enjoys the first-mover advantage. Furthermore, China is increasingly into domestic tourism which is positive for the company.

Once you determine that the business model and EPS growth is satisfactory, you can proceed on to estimate the intrinsic value of the company. The steps are shown below.

First Step (Finding CAGR):

Between 2005 and 2013, in which 8 years have elapsed, the EPS of the company has grown from 0.34 cents to 4.01 cents. Using a CAGR Calculator found here, find the CAGR of the EPS. 

Input the data accordingly:

Beginning value: 0.34 (starting EPS)

Ending value: 4.01 (ending EPS)

Number of periods: 8 years (years elapsed)

If done correctly, you will yield a CAGR of 36.13% per year. 

Second Step (Finding the Future EPS):

Once you have establish how fast the EPS is growing, you can estimate the EPS the company will earn in the future. First, you must determine the time frame for the stock investment. For me, I am more interested in the middle term time frame (~ 5 Years). 

With the time frame decided, proceed to calculate the future value of EPS with Future Value Calculator. 

Input the data accordingly:

Interest Rate Per Time Period: 36.13 (this value is the CAGR obtained earlier)

Number of Time Periods: 5 (your desired time frame here)

Present Value: 4.01 (latest EPS of the company)

If done correctly, you will yield a result of 18.75. This is the estimated EPS of the company in 5 years' time. 

Third Step (Establishing the Future Stock Price):

The EPS of the company is estimated to be 18.75 cents ($0.1875). Now, how do we translate this piece of information into stock price? That depends on the price-to-earning ratio (P/E) of the company in 5 years' time. Once again, we have to estimate the P/E of the company. You can do that by studying the historic values of the P/E ratio.  

Being more conservative, I set the model P/E at 8. Normally, P/E is between 10-20.

To get stock price, multiply the EPS with P/E. Therefore, Stock Price = $1.50

Fourth Step (Deal or No Deal?)

The current price of Straco is $0.775 while the predicted value is $1.50 in 5 years. This is an increase of 93% in 5 years. Also take note that the increase is not including dividends! 

Make sure to double check that the calculations have been accurate enough. Take note if there had been one-off gains in EPS and strip it off accordingly. 

When everything is done and the potential return proves to be tempting, the hardest part will be to press the buy button.

Financial Jargon

Ever saw P/E somewhere in stocks discussion forum? Or EPS in the annual reports of companies? P/E and EPS are some of the financial terms you'll find in the world of investing. Before I start my first case study, it is important to know what the terms mean. They help one to decide the intrinsic performance of a company as well as the valuation of the company in the market. Here are some of the more common terms and also what it represents.

P/E (aka Price to Earning Ratio)
The most common metric that you will find. Normally found alongside stock quotes. The number can be found by the equation: P/E =  Stock Price / Earnings
By Earnings, it is meant as Earnings Per Share
P/E ratio helps to value the stock of a company. It is done by comparing the stock price relative to the income generated. For example, if SingPost has a P/E of 26, the buyer is actually paying $26 for every $1 that the company earns. By comparing the P/E ratio of different companies within the same industry, one can find out which companies are "cheaper".
However, P/E is not a clear cut metric to buy stocks. P/E may be higher because the company is expanding fast. P/E may be low because company is in a unpopular industry. P/E will not even exist if the company is loss-making. You can use more ratios introduced further on to determine whether a company is a "good buy".

EPS (aka Earnings Per Share)
The earnings per share made by the company in a financial year. Normal stated in annual reports. Calculated according to the equation: EPS = Net Profit / Total Shares Outstanding
For example, SingPost has a net profit of $128,175,000 and has an outstanding ordinary share of 1,899,921,000. Using the formula, you'll find that the EPS is 6.75 cents as reported in the annual report. Going a step further to find P/E ratio, the stock price of SingPost is currently at $1.765 while EPS is $0.0675.
Dividing stock price by EPS, P/E = 26.14.

P/B (aka Price to Book Ratio)
Book here refers to the Net Asset Value (NAV) of the company. P/B ratio helps one determine whether the stock is priced at a discount or premium to its tangible assets. ( < 1 represents a discount while > 1 represents a premium)
Comparing P/B ratios between companies of similar industries will help determine which one is a good catch. This is especially important because there are different "standard" of P/B in each industry. For example, land developer normally trade at a discount to NAV while technology stocks trades at a premium.

Dividend Yield
When the company chooses to distribute part of its earnings to the shareholders, the money is termed as the dividend. Dividend yield is calculated by the equation: Annual Dividend / Current Stock Price
Dividend distribution is definitely not indicative of a company's strength. Apple Inc, for example, famously did not pay dividend from 1996 to 2012. The stock price was not held back AT ALL.
However, companies that give away dividend is an added bonus as the cash given back is in your pocket. Furthermore, it shows that the company does have the cash and not just "cooking the book".
SGX had once undergone a S-Chip Scandal episode where it involved a number of  China-based companies listed in Singapore. The companies had suddenly gone bankrupt and was later found to be guilty of accounting fraud. Regular dividend distribution acts as a detector to see a company is potentially fraudulent as real hard cash has to be paid out.
                                                                                                                                               
These four financial metrics are the most common metrics I use to filter out a preliminary list of stocks to invest. Google Finance provides a very good platform to filter out a list based on your required criteria. From there, you research deeper on those shortlisted companies and pick the most promising one. This is what "doing your homework" is when it comes to investing.