I did some time today to revisit one of the articles I written in the past.

It is about Noble Group, a commodities trading / supply chain company that went on a price riot in the past.

What needs to be put into perspective was the role of bonus share issues in the past and dividend returns. If we look at Noble Group from a total return perspective, the returns were very good.

Noble Group is still traded today, but its characteristics is…. a little bit different.

Back then I made some conclusions:

1. bonus shares are just a form of financial engineering, a way for the company to say keep the profits earned retained with us. It doesn’t do much, but it is a form of signalling. Good companies tend to issue more bonus shares then rights issues
2. what is important is the overall profits and cash flow. If the business can earn astronomical cash flow and the management rewards shareholders accordingly, then we have a good winner
3. compounding works well when you can spot a business that is in a good trend
4. reinvest back into the company when you believe the company deploys capital in a good way, much better than you could

Since my article 5 years ago, commodities trading have been extremely challenging, not just for Noble Group. Perhaps that article from Investment Moats should be known as a contrarian indicator haha!

The Total Return since then

Since the last article, Noble have suffered from a double whammy of challenging business conditions, management issues.

They have been issuing dividends still for 2012, 13, 14 and 15.

Last year they did a 1 for 1 rights issue at $0.11.

The share price now is $0.179. If you did subscribe to the rights issue, that would have been a 62.7% return.

However, I wonder how would the Total Return be like today?

If we were to summarize the performance we can see:

1. Share price have fallen from a high of more than $1.60 to $0.179. This is what I think we can term as impairment of capital, where it will be extremely challenging if you bought at a price of $1.00 for the stock to return to break even.
2. The share price today is lower than when I first did the data collection in 2001, where the first transaction was 1000 shares at $0.225. The difference here is that the number of shares, due to bonus shares, have increase to 15300 shares
3. There are also much dividend payouts over the years, even when earnings went south

The total return will be make up of capital appreciation and dividends.

(click to view larger image)

The number of shares were distorted by stock split, and bonus issues before and after. Dividends since 2011 have been reduced. However, based on costs it is still very good returns.

The initial costs was $225 but the recent rights issue means the investor deploys $1683 more into Noble Group.

The unrealized gain is $3569 and total dividends collect is $4467.

I was interested to know Noble’s 16 year XIRR, which is a performance indicator where we deconstruct what is the discount rate if the net present value of the stream of cash inflows and outflow is zero.

The XIRR is still crazy at 54.75%. It is crazy if you compare to some of the past strong dividend growers such as LKH, Chip Eng Seng and Sim Lian. Probably only LKH did better.

Some takeaways

I realize that most of what I learn 5 years ago still applies. What I could add on is that, while Noble Group was a good business with a management that knows what they are doing, I might have attribute too little of the result to Noble being in a secular market where it was very favorable to the business.

I thought management plays a part in the good performance.

The main takeaway is historical profile gives us an idea how cash flows do look, and management’s stance to provide shareholder returns versus how much they take from shareholders. However, business is forward looking and some secular shifts in trends affect the business so much that even with a good captain at a helm (not saying Noble’s captain is good, they have a change in leadership), they can only do so much.

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The last update for Straco was the impending revision to the ticket prices for their aquariums. That would have provided a good growth for their cash flow.

This week the full year results was announced.

Current Share Price: SG$0.80

Outstanding number of shares: 855 mil

Market Cap: SG$684 mil

Dividend per share: SG$0.025 (3.1% Dividend Yield)

Full year revenue rose from 93 mil to 127 mil on the back of significant contribution from the Singapore Flyer.

Full year net profit rose from SG$39 mil to SG$51.8 mil. This gives an earnings yield of 7.6% (note this is total net profit but shareholders’ profit is lesser at SG$49 mil)

In terms of free cash flow, Straco generated SG$59.85 mil in 2015. Based on current market cap, the free cash flow yield is 8.75%.

As a full year earnings profile Straco have continue to generate cash flow very well.

Since the acquisition of the Flyer, its capital expenditure have fallen from SG$116 mil to SG$3.8 mil. This is somewhat inline with FY2012 capital expenditure of SG$1.1 mil. This is the period where capital expenditure wasn’t earmarked for the flyer acquisition.

We can see here that the beauty of the business is very little maintenance capex needed for generating a lot of cash flow.

Straco Cash net of Debt:

FY2012: $96 mil

FY2013: $108 mil

FY2014: $19 mil

FY2015: $63 mil

Since cash flow is positive, we are seeing Straco’s cash holding rapidly restored closer to former levels.

If we backed out the $63 mil net cash, the  respective earnings yield and free cash flow yield becomes 8.3% and 9.6%.

Rise in Dividend per Share

Straco decided to pay out more dividends, rising the dividend to SG$0.025 from SG$0.02.

This represent 43.66% payout of total earnings.

Flyer Performance

The above table shows the segmental result for Straco. The GOW represents Giant Observation Wheel (what a freaking name).

The management initially targeted a 10% ROA on their investments. However, they guided that it would probably take a few years to get that performance.

There was so much freaking doubt when they first bought the flyer (which I covered here) because most flyers have been bad business as a whole, with the exception being the London Eye. That in itself have a poor operating problem at the start.

The ROA is 7.7% which is a very good results considering they are just cutting the fats.

I think it reflects more on how badly the flyer was originally managed then how good Straco did.

The net profit margin for the Flyer is pretty good as well. (Take a look at the aquarium’s profit margin, they are ridiculous)

There are likely to be more tweaking and capital expenditure on the Flyer. When Singapore Tourism Board has a view on this, it is likely they would expect some plans for the development of the Flyer, and how Straco would make use of the shops around the flyer.

I got news that Jumbo Seafood will be replacing the Chinese restaurant there and that is the kind of brand name that fits the Flyer because the Flyer currently does not have complementary amusement that they can feed off.

Jumbo Seafood enjoys lower rent primarily because they can still thrive in less prime places (read non-REIT places)

The strategy for Straco could well be having these complementary things near the Flyer so that the visitors go up. The revenue from the tickets probably worth more than the rental income.

When I chance upon a property developer’s presentation on the plans for that area, we could see that area being developed with a certain theme, and that could bode well for the Flyer’s future as well.

Overall this is a great result, despite the challenging tourism climate in Singapore.

Poor Aquarium Results

What was masked by the good performance of the Flyers contribution was that the visitorship of Shanghai Aquarium and UWX have fallen.

This is big to me considering the last time visitors fell was the year after a major Shanghai convention event in FY2011.

We keep hearing about China slow  down these few years but the impact have been minimal.

Shanghai aquarium have been in a prime location and thus rather insulated there.

The fall in visitors also happened before the unknown that is Shanghai Disneyland which will open up in mid of this year.

UWX have been rather affected by the number of visitors restriction placed by the authorities.

The cash flow from aquariums is a significant contributor to Straco, more so than the Flyer.

And since Straco have rather high operating leverage, that could work in the opposite direction when visitor-ship drops.

Summary

Taking a bird’s eye view of Straco as a business, there are still a lot of merits that I like. This is enhanced further by the execution of the restructuring of the Flyer.

It is always good that you have management that knows how to manage things, and evaluates deals that turned out to be profitable. Raising the dividends appropriately to reward shareholders is also a plus point.

At current prices, the free cash flow yield is attractive, but I wonder if the future growth is intact.

Since the current value is a summation of future cash flow, a lot of our estimation of current intrinsic value is based on future growth of the free cash flow. Here is the unknown there.

I would take a break from Straco. I remained invested but have pared down to evaluate my options. Writing this piece cleared my head. If I see no other options with a better return per unit risk, I would increase my holdings in Straco again.

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I observed this interesting article in The Edge this week titled: How much further will prices fall?

We tend to hear a lot of 2 prevailing thoughts:

1. Property always does well over time
2. Richer people are the Smart Money. They are the ones that buys at the right time and sell at the right time

This article discuss on many woes of the current market, particularly the Stamp Duties and TDSR impeding demand and that the Qualifying Certificate (QC), which requires foreign developers (including most listed companies) to sell all the units in their residential development within two years.

What was profiled is a list of shocking deals in 2015. Property prices was lower overall in 2015, but the magnitude is still manageable.

Yet this list includes a list of properties:

1. Mainly in affluent districts
2. Purchased in 2006 to 2009
3. Large floor Areas

And all losing a big percentage.

These properties have been held for 6 to 9 years and was transacted at a loss of 27.7% to 56%. If the folks hold on to them they may eventually work out over time.

What I see here is an investment that is highly risky.

Notice how I phrase it.

I did not say PROPERTIES is highly risky. I said THAT investment.

You have to make a distinction to what you invest in and HOW YOU GO ABOUT DOING IT. This is why I say to gain financial independence you need to build Wealth Machines, it is not putting your money in stocks, bonds or properties, is HOW you go about doing it with these assets.

We define RISK not as volatility of prices but a permanent impairment of capital. Permanent Impairment of Capital is when your capital goes to zero OR that it takes a long long period of time to recover your capital. The properties here fall into this.

It will take some time if they held on to break even. We are just afraid that people cannot take the pain of seeing such a big unrealized loss and do stupid things. Like sell it.

What was learnt in value based investing is applicable in property investing. Its not about the asset or instrument, its THE WAY YOU PROSPECT, EXECUTE and RISK MANAGE IT.

The other important point is, while the rich have better quality knowledge and people that they lean on to, they will suffer the same behavioral issues that we suffer.

These properties are so expensive that you have to do pretty well or are pretty loaded to purchase them. To get there you either are enterprising, have rich support or damn smart to reach that stage.

Investing is a great equalizer that how enterprising, smart or rich you are, if you failed to master it, you will suffer as well.

One of my earliest investing influences was Peter Lynch.

Peter Lynch was quite the fella. He was the fund manager of Magellan Fund at Fidelity Investments where he compounded the fund for 13 years at 29% compounded annual returns.

I read his book One up on Wall Street in my early days. It was an easy read and for the novice investor then, I can pick up many ways to prospect business to invest in.

One of the advice Mr Lynch provided was to go down various business research based on good reviews by his wife.

His advice was that: Look at places where you come into contact with the products on a frequent basis. There must be a reason you keep consuming or using them.

In Singapore, had you follow their advice, things that come to your mind would be: Food.

Singapore is known as a food paradise, and the expatriates consistently cite that, when they go back to their home country, they really miss our local cuisine!

The F&B sector thus make a fertile hunting ground for stocks that you can see, touch and taste.

Some of the famous listed names are:

1. Old Chang Kee
2. BreadTalk
3. Soup Restaurant
4. Tung Lok
5. Jumbo Group
6. Neo Group
7. Sakae Sushi
8. Ajisan Ramen (Japan Food)
9. Super Group

You must have tasted some of them before

Food that taste well doesn’t necessary become great companies to invest in

Many folks who read Peter Lynch’s materials fail to comprehend that what he means is that things that are familiar to you merely provide a good starting point for you to identify possible companies that are worth investing in.

One common mistake when picking business to invest in is: it taste good and there are always so many people therefore it must be good to invest in!

One good example is Japan Foods Holding.

Japan Foods Holding runs Ajisen Ramen. If you survey enough people, they will tell you how lowly rank their Ramen is versus what the competition out there is offering.

However, go look at their cash flow over the last few years. Look at their ROIC as well. You will be scratching your head wondering why such “poor quality” Ramen can generate such good results.

Good crowds and good food act as a good starting point, or to perk up your curiosity.

What makes it a worthwhile investment is when you look deeper, into the numbers and the story.

My process of prospecting stocks

One of the processes of how I go from an idea to putting in money or discarding the idea is this:

1. Curious about why something does extremely well.
2. Inspect its financial statements to find evidences that extremely well business which translates to good cash flow.
3. Learn more about the business, the nature, addressable market, opportunities and challenges.
4. Inspect some of the competitors to develop a better understanding why the competitors cannot measure up. In some cases, the competitior is doing just as well. In that case, compare the two counters and determine which provide the better investment opportunity.
5. Come up with a valuation based on what I learnt in step 2, 3 and 4.

We can take what we have learnt from Mr Lynch and explore further.

A hot question that I get frequently is how do you carry out Step 3 and Step 4

Understanding the F&B Story through Analyst Reports

There is the long way and there is the short way.

The long way for me is to search through Google newspaper readings, white papers and past analyst reports to form a good idea of how much more can the food and beverage market expand to, what are the headwinds these food and beverage companies face.

The short way is to be on the look out for analyst reports from brokerages, especially initiation reports.

The focus on these reports is not whether to buy or sell, but to form your picture of the food company that you wise to invest in and its competitors.

And you can learn a fair bit.

Here are some snippets of useful information that I extracted from a Voyage Research report for the Food and Beverage sector. Do click on the link if you want to run through the full report and presentation.

It will be foolish to think that all these food and beverage companies are similar to one another. Each of them has opportunities and risks because they are involved in one or a few of these portions of the value chain.

How would you know Food Empire’s competitors?

Knowing who their competitors allow you to see whether Food Empire’s cash flows, gross margins, operating margins are better than their competitors.

You would also be able to compare their valuations to see if they are cheap enough to buy.

Reports like these give you a good idea of which other companies to look into.

How is the sector average ROE, dividend yield and price to book ratio? Knowing the sector average would allow you to see whether the stock you want to buy is better or just an average sector stock.

Most importantly, what are the kind of risks or challenges that you may not have the competency to uncover?

Reports such as these allow you to realize an angle that previously you have not thought of.

If you like to find out more about the F&B sector to evaluate for yourself the outlook of the companies in the sector, you can refer to this playlist on Youtube that covers a recent seminar on the F&B sector organised by SGX.

Summary

In the USA, Food and Beverage stocks like Starbucks, Chiptole and Macdonalds have long been seen as value growth plays because of the high return on investment capital.

These great dynamics is not constrain to USA, on a single restaurant, you should be able to earn back your money in 3 years, so that makes the ROIC to be 33%.

F&B business can be challenging but the one that grows well can be rewarding.

To find out the dynamics of the Food and Beverage sector, it is worth watching this video presentation from an SGX Investor Education seminar.

This article is written in collaboration with SGX. To stay up to date with the latest news from SGX, you can like the SGX My Gateway Facebook Page.