Falcon Energy (5FL.SI)

Falcon Energy (5FL.SI) - One of the forefront in offshore marine and also O&G sector. It is divided into 5 business sectors namely, Marine, Oilfield Services, Drilling Services, Resources Division and one more that I couldn't find (LOL!). All this, you can read from their company website. Essentially, Falcon Energy feels like Nordic Group which provides O&G support services yet has a more direct exposure to oil prices through the Drilling Services and Resources Divisions.

I started searching for an O&G company as I wanted to gain some exposure to the potential oil price movements. Truthfully speaking, I did not do any deep research into oil prices. But seeing how far it has come down and the relative stability now, I wanted to capture some gains when the industry move into the up-cycle again. And I chanced upon this stock - a rare profit-making O&G company amidst the gloom and doom. Below are some of the points I like about this company:

1. Financial Metrics

Easiest go-to method to valuate a company from the surface. Was really too lazy to predict cash flows with expected oil prices etc. The ratios I calculated were really impressive till I started to doubt the going concerns of the company (the ratios were like that of a distressed company)!

Based on the time I did my calculations, where the price was at 17.2 cents and data obtained from the latest FY report,
EPS: 6.45 US cents
P/E: 1.975
P/B: 0.348
Debt/Equity: 0.9854
Dividend: $S 0.005 (2.9% yield interim)

In this set of data, it only seem that debt-to-equity ratio is high. I give it leeway as it is expected for O&G company to have significant debt, especially in these trying times. In addition, this 2016 figure is actually lower than 2014 and 2015, having paid off a sum of debt in the latest quarter. P/E and P/B is super impressive and actually needs no explanation. In the final dividend, I will guess that another half cent of dividend will be given out, ending with a near 6% yield. Warren Buffet had always like to buy stocks with significant higher book value and I actually think Falcon Energy fits the criteria.

2. Stake in CH Offshore

Falcon Energy actually owns 86.7% stake in CH Offshore, another listed firm on SGX. When I was doing this research on Falcon Energy, the market cap of the company was 139.2M while that of CH Offshore was 282M (sitting at 275M as of 06/07/16). This means the stake Falcon Energy has in CH Offshore is worth at least 244.5M! That's right, the market is selling the core operations of Falcon Energy for nothing and its stake in CH Offshore is valued at discount! This is the singular most blatant mispricing of Falcon Energy which I didn't believe. And if I calculated wrongly anywhere, please let me know to save me the money and embarrassment.

3. Share Repurchases

The company is aggressively doing stock buyback since 17 June 2016. The volume of the stock traded is not high, hence by aggressive, I meant as a percentage of the transacted volume that day. I suspect the company is doing so to meet the minimum trading price of 20 cents and since the volume is so thin, the company is able to do so easily - since there is little sellers blocking the queue. This is an situation that can be taken advantage of as the company is essentially being a guarantor of your entry price. It started doing buying back at ~16.8 cents till 19.5 cents today. In the last 2 days, it seems that there were some public support. As of now, still monitoring closely to see if the company is still going to support at current price.

 4. Conclusion

I had actually bought in at 17.7 cents on 27 June 2016, which I vaguely remember as the day Brexit occurred. I figured if it did not drop at such a dramatic event, surely it will grow when things got better. As my buy-in capital is small, I am not very tempted to take profit at current price. I hate to write this post as I do not want to jinx it (things are still going well) but in the spirit of sharing and also in the spirit of not being accused of hindsight-predicting, I have decided to write this post in the end.

NOTE: This post is not to comply you to buy the above-mentioned stock. Notice the price has actually gone up. Do your own due diligence before you take any action. To make sure you do indeed do your homework.... yes if you buy, you are helping me to prop up the share price!!


Cheers

My Stock Holdings (June)

June has been a busy period for me as I was busy packing stuff to go back to Singapore. It seemed that this month has been a volatile month due to the effect of Greece flirtation with the possibility of default.

ST Eng's price was pushed to a low of 3.24 before recovering recently to above 3.3, which is my average buy-in price. Many people in forums have expressed the opinions that ST Eng is richly valued in terms of P/E and P/B. I had see that the valuations are rich but dividend yield remains good. Given time, perhaps I'll see whether its dividend policy is sustainable and whether cash holdings is decreasing. 

Singpost also recovered its price dip to above 1.90. This can be attributed to annual dividends increasing to 7c from 6.25c previously. Also, it divested some of its traditional business for a profit and that might also had lead to price increase. There's some points I'd like to read up on Singpost given time and they are listed as follows: 

• Sustainability of dividend
• Debt obligations and dividends against earnings
• P/E and P/B valuations (Benjamin Graham had advocated sale of share when it reaches overvaluation state. Therefore, I want to see if Singpost is grossly overvalued and warrant a sale. It is unlikely though, as I regard Singpost as my crown jewel. I know falling in love with stock is no good..)
• Review growth of earnings (can be quite hard as Singpost recently changed its accounting practice)

Lastly, HPH Trust has been slowly dipping through the month of June while Bank of Ireland closed pretty high at the end of June amidst signs of Greece coming out of the talks with a solution. 

There was no dividend issued for the month of June. Hence, dividend received remains at $278.25


**Edit: Chart removed because I set it to update with latest information -- not accurate info

My Stock Holdings (May)

Many companies are reporting their financial results this month and this lead to some price fluctuations. In my portfolio, all had reported their results with the exception of Bank of Ireland. As of now, I have no intention to sell any stock in my holding based on the results. Hence barely any change in the composition of my holding.

Also, I'm scouting for good stock to add to the portfolio and will buy in when I return to Singapore from my exchange.

One of my criteria for buying a stock is that it must give out dividend. Singpost, ST Eng and HPH Trust gives out dividend in my portfolio. Bank of Ireland is an exception as I recognise that it is a high growth stock and does not necessarily need to give out dividend.

As of May 2015, I received a total dividend of $278.25

**Edit 1: Revised dividend amount to a lower value as I accidentally calculated dividends I haven't receive.

**Edit 2: Chart removed because I set it to update with latest information -- not accurate info

Hutchison Port Trust (NS8U.SI)

Hutchison Port Trust (HPH Trust) started trading with much fanfare on 2012. Listed in SGX, it is touted as the world's first publicly traded container port business trust. HPH Trust owns interest in container port assets in Hong Kong and Shenzhen - two of the busiest ports in the world. In 2013, its container berth handled a combined throughput of 22.8m twenty-foot equivalent unit (TEU).

HPH Trust is one of the thirty components in Straits Times Index (STI), having replaced F&N in 3 April 2013. As of 13 December 2014, it is also the highest yielding stock within STI at 7.8%. On 27 October 2014, the company ended the third quarter with an operating profit of HK$1.24 billion, a 3.5% increase year-on-year.

Given the high dividend that HPH Trust pays out every year, one should be prudent and check whether these dividends are sustainable into the future. The key objective of the Trustee-Manager was stated in the 2013 Annual Report as the following: "... to provide unitholders with stable and regular distributions and long-term growth in distributions per unit (DPU)" However, a quick look at the DPU since IPO was actually decreasing.

This also points out the deceptive nature of dividends yield. Dividend yield is based on past dividends and definitely not indicative of future dividends. Furthermore, dividend yield is based on current stock price and this means that falling stock price inflates dividend yield. For instance, HPH Trust indicated that it is distributing 45.88 HK cents in its IPO Prospectus and that translated to 5.8% dividend yield based on IPO price of US$1.01. However, due to the subsequent price fall to US$0.78, the yield had been bumped up to 7.5%. Hence, a lesson to take home is that stock purchase should not be based solely on the dividend yield number.

Besides the falling distributions, there are also a few points that does not paint a rosy picture of its financials. The first point is the enormous payout ratio. In 2011, the payout ratio is 167%. Next year, it increased to 199% and subsequently stood at 213% in 2013. Such high numbers indicated the distributions were likely unsustainable and that might have been the reason why distributions were falling. 

The trust might be able to give out that much dividends with its positive operating cash flow but quick inspection of the cash pile over the years indicated that it is dipping into its coffers to give such high dividends. In other words, the distributions for the past 3 years are unlikely to be sustainable. The Trust must find ways increase its profits otherwise unitholders will be looking at reduced distributions.

Another point of concern is the liabilities of the Trust. While the debt to assets ratio are pretty reasonable at below 50%, we can see that significant portion of the liabilities have been transferred to Current Liabilities recently. Current Liabilities are debts and obligations due within one year and with significant increase in that amount, a cut in dividend might be plausible in the near future. 

With all these data, is HPH Trust properly valued at US$0.69? Analysts opinions were quite differing with UBS having at TP of US$0.67 and DBS at US$0.78. However, one common point in both reports was that the management was considering whether to match cash flow generation to distribution payout more closely. Given that cash flow were negative in 2012 and 2013, distributions look to be suppressed in the mid- to long-term.  

Having bought HPH Trust at US$0.68 way back in 21 November 2013, I am fairly pessimistic about the dividend outlook. However, since I am comfortable with dividend yield above 6.5%, I will hold on to it until capital gains (around US$0.725) justify me switching out to other dividend stocks.  

Nordic Group (MR7.SI)

Nordic Group is a company that specialises in control system and automation needs for vessels. The company is mainly divided into 3 business segments: Systems Integration, Precision Engineering and Scaffolding Services. (http://www.nordicflowcontrol.com/)

Having a market capitalisation of 38.08M as of 24 September 2014, Nordic is a relatively small company. Although it is a small player in the industry, its does not really have the competitive advantage in the industry. Therefore, the reason to buy is mainly due to its undervalued stock price.

The following is the EPS through the years.

Table of Key Stats

Year	EPS (cents)	NAV (cents)	Dividends (cents)
2009	2.9	-	-
2010	2.3	9.4	0.53
2011	0.4	9.3	0.25
2012	1.1	10.2	0.25
2013	1.5	11.5	0.25

As you can see from the Table, the EPS has been improving for three years straight with the NAV increasing steadily. An additional bonus is the consistent dividends over the years. Based on the closing price of $0.097, P/E = 6.47, NAV = 0.84 and Dividend Yield = 2.58%

The low P/E and NAV ratio are really attractive, although "unpopular" stock usually command these low valuations. With the decent dividend yield, one can hold this counter for the long term and wait for the market to discover its true value. Given the small size of the company, Nordic might even be good for takeover play.

You can try to take advantage of the illiquidity of Nordic to get it on the cheap. At the current situation, Nordic has a Buy queue of $0.097 and a Sell Queue of $0.100. Try to queue low, and wait for sellers to hand the stock to you. If aiming for quick gain, similarly queue early to sell high. On some days, Nordic may have sink or spike sharply. Take those periods to grab cheaply or sell on gain.

Unfortunately, I sold all my Nordic shares recently to fund my exchange trip. Otherwise, I would have kept it for the annual dividend and/or wait for larger spikes to offload them.

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.

Basics of Buying Stocks No One Talks About

Hopefully after reading some of the books I recommended, you will have a better understanding of investments in stocks. While you may acquire some strategies to spot undervalued companies or sort out your investment objectives, you will realise that you still do not know how to buy/sell a stock. Most investment books do not provide "manuals" on how to buy/sell stocks and you will be overwhelmed when you actually open a trading account. Hence, I aim to bridge this knowledge gap. In addition, I will also touch on some confusing trading jargon I faced during initial stages of investing
.

Stock Quote

In a typical stock quote, you will find the following components: Last Done, Change, Buy Vol, Buy, Sell, Sell Vol, Vol. 

Last Done: When you buy a stock, you are buying it from a seller. Hence when a buyer's price matches a seller's price or vice versa, there will be a transfer of ownership (from seller to buyer). Last Done is just the price at which the latest transfer of stock took place at.

Change: It refers to the current price change from the prior day's closing price

Buy: Price where buyers want to buy the stock at

Buy Vol (Volume): The amount (volume) of stock that is queueing at the Buy Price

Sell: Price where sellers want to sell the stock at

Sell Vol:  The volume of stock queueing at the Sell Price

Vol: Volume Done up till the current point

Lot/Share?

1 lot = 1000 shares. In Singapore, stocks are generally traded in lots

Stock/Shares/Equity?

These three terms are often used synonymously. They represent the ownership of the company in question.

  

Trading/Investing?

In certain context, they can be used interchangeably. In others, they are as different as day and night. For example, if you want to tell a friend that you've started to gain interest in buying stocks. You can either say "I'm interested in trading stocks/investing in stocks". 

However, in investment contexts, there is a clear line between trading and investing. Trading is regarded as short term buying and selling of stocks in hope for quick capital gains. The time horizon for trading typically range from seconds to weeks. Trading is mostly focused on capitalising market movement of stock prices. 

Investing, on the other hand, focuses on the fundamental of companies. Objective is to ride on the potential growth of companies, leading to higher share price (see how I'm using stock and share interchangeably). Time frame ranges from months to years.   

Relationship between Brokerage Houses & SGX

Brokerage houses are companies that provide the service to buy and sell stocks on the local exchange, Singapore Exchange (SGX). SGX is just like a marketplace where brokerage houses are stallowners that barter stocks instead of meat.   

When you open a trading account at any local brokerages, they will also open a Central Depository (CDP) account with SGX to deposit any stocks you buy. Therefore, SGX also acts like a stock bank.

You may open a trading account at any of these brokerages: DBS Vickers, CIMB, Phillip Securities, Lim & Tan, UOBKH, Standard Chartered, iOCBC

For the full list of brokerages, go to http://forums.hardwarezone.com.sg/stocks-shares-indices-92/list-brokage-firms-available-singapore-589227.html for more information.


Hopefully, I have answered some of the common beginners' question here. I understand that one may have too many questions when starting out in investing, hence you can always drop a comment. I'll update this post whenever there is a question asked (which I highly doubt so since it's so obscure!)
Peace out~!