Thursday, 28 April 2016

Stocks I would recommend to friends (Which pictures and stock picks!)

I get this question alot

1. I just started working
2. I have 10-20k
3. Where do I park my money, without caring too much about it?

Of course, the actual answer is to shove it in some savings plan, or cpf 'shudders'. If you are not sure where to get a savings plan, just sit in a square outside raffles mrt and get swamped by insurance agents in seconds.

But if you don't want to take the difficult path of buying stocks yourself, here is my recommendations that I would give to my friends based on investments that

1. Have predictable earnings and dividends
2. Have low downside risk
3. Doesn't do anything.


Recommendation 1: Corporate bonds



I would recommend DBS 4.7% preference shares which gives a nice 3.06% cash yield 
(a simple way to think of cash yield is that if you invest $107.6 now, the dividends and $100 you get back when DBS redeems it at par will give you 3.06%)

This mainly because of its
1)Long call date (4.57 years till you have to decide what else to do with the cash)

2)Too big to fail quality (if DBS can't even pay if preference shares, which it has to pay before its dividends then the whole Singapore is in trouble)

If you want to stretch for more yield Genting 5.125% would be great (5.5% cash yield), just that the company has an option to call it back in 1.5 years. The great thing is that casinos are simply money generators. The simple dumb model of casinos are....

1) You spend alot of cash to build the casino
2) you spend little cash maintain the casino
3) you wait for the cash to roll in, even if the cash doesn't roll in your maintenance is so low, that you have excess cash.


As you can see, it spends loads of cash to prepare for its opening in late 2009, after that the casino just literally spews out cash.

Recommendation 2: Vicom

This stock does nothing. Its a bit on the high side atm with a 3% dividend yield only, but if you want a sleep easy stock, this is it. No one covers it, so no one cares about its earnings, which has not been the most exciting. It business is just slapping 'certified' on cars and collecting a cheque which it then gives to you.


Its free cash flow per share vastly outstrips its dividends per share too, ensuring that your dividends are safe, unlike reits


Look at the growth of the cash pile! This company literally has no idea what to do with it!


Recommendation 3: STI ETF when the index is below 2.8k

Look at the nice line!



Actually, the perfect buying price is when the index is at 2.6k. But if you can't wait 2.8k is fine too

But besides drawing lines, usually when the STI hits 2.8k its price to earnings ratio is at 12x, slightly cheaper than its 5 year average of around ~13x, of course ifs earnings keep falling (like it is now) you may want to stagger your buying (dollar cost average). Also 3% yield

Recommendation 4: Singtel when it hits 5% yield ($3.5)

Despite being the bluest chip of the blue, I actually hesitate recommending Singtel, because Singapore telcos have really been earning above average roe than its peers, and its 4th telco entry may lead to a structural decline. Sure you can say Singtel is diversified, but it still gets 50% of its operating income from Singapore


Of course Singtel is never going to back to the levels of 7% yield anytime soon (that was as the smartphone boom has never taken off yet). But if you take levels from 2013 onwards, then investing at 5% yield seems pretty comfortable.

Disclaimer:  Yes I know that the returns I'm promoting are pretty pathetic, but if you have friends that literally know jack shit, these are my top few picks that are most likely to gain steady returns, without suffering much volatility. 3-4% a year isn't saying much, but hey the STI has returned an amazing -8% if you invested in it 5 years ago (April 11)

Wednesday, 6 April 2016

The dangers of investing in reits (With pictures and stock recommendations!)

Too long didn't read (TLDR) version: I'd advocate buying AAreit, Starhill Global, Frasers commercial trust on their
- Attractive valuation
- Cash flows being able to meet dividend payments
- Lower risk of private placements that dilute your shareholdings
- 6-7% yield
There are plenty of blogs/newspaper articles going about how reits are the best source of stable passive income for shareholders, will settle your retirement plans, a godsend, the 2nd coming and will take care of our nation’s problems.
(Obviously these people have not heard of DBS 4.7% preference shares, or a stock called VICOM)
This then leads to a horde of people dumping cash in reits and uttering the oft-quoted line ‘it generates a steady stream of passive income’ and act all investment-savvyish.
Don’t get me wrong, these people have done extremely well in the initial rush of reits listings (think 2011)
 
If you invested in the Phillip's real estate income fund since inception, you would have gotten a 4.8% annual return + 5% yearly dividends to boot, resulting in a 10% annual gain that puts fund managers, your cpf, your weight gain to shame
But the problem is that now when reits become extremely commonplace, and that the initial 'pop' of a new category listing is over, buying reits with the thought of 'wow 7-8% yield', 'hurr durr reits are super steady and gib monies' doesn't cut it anymore.
Here are some of the dangers that investors should watch out for before investing.
1. Unrealized losses are STILL losses
Ok I cheated, this really isn't something you look out for but its a mindset you should keep in mind. By just claiming 'never mind lah, will still get dividends' isn't a right mentality, not when your reit dropped 20%,and it only paid out 7% yield (when you bought it). 


Even if you include dividends, being down 20% should show you that reits aren't just something you chuck in and collect cash. Buy the wrong one and it becomes something like giving your spendthrift friend $100 and being happy to receive $80 back.


Sabana Reit: Down 30%, while paying out 8% yield (if you bought it a year ago)
 

Keppel Reit: Down 18%, while paying out 6% yield

2. Check the sustainability of dividends
After a reit sinks and yield moves to a tasty 9-10% yield, some investors may think 'how much higher can the yield go?', prices have to rise. t
Problem is that yields can decline by payouts decreasing and not just by increase in prices.

Sabana: on the way down

For me I would like to look at property income & operating cash flow per share to compare against the dividends paid per share. If the company operating cash flow doesn't even cover its dividend payments then its a big red flag for me.
Just remember, reits are supposed to pay dividends out of their earnings. The problem about these 'earnings' along with property companies is that they can come from a variety of sources such as 'revaluation' and 'other property income'.
Companies can't pay you dividends with a newly revalued floor tile of the property they own (although I would love to see that) so its always better to check the operating cash flow on the sustainability of dividends
 

3. Check its net debt to assets
Ok so as a reit, if you are forced to pay out most of your cash in dividends, you can't really build your property empire unless you raise funds from outside sources such as Mr debt and Mr placement.
The problem is that MAS has recently put a cap of 45% for a reits debt/assets ratio. Unfortunately this means companies hitting that debt limit has to raise cash by Mr placements, which means diluting you, you poor shareholder.
Lets take a look at some examples:
Cache logistics trust
What happened: private placement (Only to accredited investors, not you buddy) of 100m @94 cents, 6% discount to current price, nov 3 2015
Debt to Asset ratio: ~40%
How you lose: Stock fell 3% after announcement, # of units increased by 13% (means you get a smaller slice of the dividend pie)
1 month return after dilution: -9.5%

Frasers commercial
What happened: private placement of 96m shares at a discount, 24 july 2015
Debt to Asset ratio: ~37%
How you lose: Stock fell 3% after announcement, as usual dilution of your dividends yada yada

1 month return after dilution: -18%

Ascendas reit
What happened: private placement of 90m shares 10 Dec 2015
Debt to Asset ratio: ~37%
How you lose: Stock fell 6% after announcement, as usual dilution of your dividends yada yada
1 month return after dilution: -7.5%

In addition, all the stocks that undergo a private placement went thru short term pressure of selling and underperformed. -7.5% does not seem much, but it did occur within a single month.
Also this 'loss' would have exceeded the yearly dividends that areit distributes, by putting of your purchase AFTER a private placement, you could have some a fair amount of cash
Even if the company states its for 'accretive purchases' you can generally avoid these scenarios by searching for companies with a low debt/asset ratio, so they would raise debt first before private placement which sticks the bill to you.

4. Beware the 'new' reits
Similar to what happened in the oil and gas sector in 2013-2014, where you see names such as pacra and posh rush to list before the window closes, the same thing can be said for reits that IPO-ed recently, (4 years ago or less)


There might be quality stuff over there, but for me I'm quite sceptical of things with no track record and claims to pay a high dividend.


Price performances of 'bombers' for new reits (since 2014)
sabana -40%
far east hospitality -24%
oue htrust -17%
 




5. We have never seen reits in a 'normal' yield environment
Since 2011, we have been stuck in a yield-chasing environment where people will chuck money at lives, breathes and pays 5% yield. Unfortunately this "should" not continue forever and we may see a sudden shock to the sector.
 
 


Anyone remember the taper tantrum? Prices tanked 17% over a few days and never recovered
 
 
Recommendations:
 
By setting up a screen and ranking stocks based on
  1. Debt/asset <38% (I don't want to get dilution, 38% is usually a danger level)
  2. Operating cash flow vs dividends per share (cash in should be more than cash out, to show that mgmt. can afford to pay growing dividends)
  3. Price/Dividends per unit (inverted dividend yield to measure cheapness)
  4. Price/Nav (same valuation method as property stocks)
  5. Positive dividend growth (negative dividend growth comes as a double whammy of both lower prices and yield
  6. Yield: yes I look at it last
Here are my few picks so far


Aims capital reit (buy at 1.3)


  1. Debt/asset = 31%
  2. Operating cash flow vs dividends per share: 7% buffer
  3. Price/Dividends per unit: -1% undervalued vs 5 year historical
  4. Price/Nav: -2% vs historical
  5. Positive dividend growth: yes
  6. Yield: 8.4%
Frasers commercial trust (bought at 1.25)


  1. Debt/asset = 36%
  2. Operating cash flow vs dividends per share: 2% buffer, due to recent placement
  3. Price/Dividends per unit: -16% vs 5 year historical
  4. Price/Nav: 2% overvalued vs historical
  5. Positive dividend growth: flat
  6. Yield: 8%
Starhill global (bought at 0.78)


  1. Debt/asset = 35%
  2. Operating cash flow vs dividends per share: slim -0.83% buffer
  3. Price/Dividends per unit: -10% vs 5 year historical
  4. Price/Nav: 3% overvalued vs historical
  5. Positive dividend growth: flat
  6. Yield: 6.6%
 
As you can see, the reits above are not really cheap, it was during the great Singapore sale, but I happily missed like the oblivious person I am.

Also some of them don't really have a high buffer for paying out dividend income. (Unlike most mapletree reits, but those are overvalued in my view).

In addition, I have not taken into account industrial factors (like omg there's a huge pile of offices coming on stream in 2016-17). But, if I have to choose 3 reits this would be it.