Investment Moats

Noble Group: What the charts don’t tell you about Noble’s total return

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I recently did a short exercise with some of the stocks listed on the Singapore Stock Exchange. I want to see how dividends, splits, rights and bonus shares affect certain stocks. So I created a SGX Singapore Stocks Factsheet Google Spreadsheet to keep track of some of the stocks [You can review them here >>]

I covered a wide range of stocks from dividend stocks with predictable cash flow like Starhub, CMPacific, SMRT, First REIT to blue chip stalwarts like Keppel Corp, DBS, SIA Engg to the really small value stocks like Boustead, Kian Ann, Adampak.

While doing the exercise, one of the stocks that grip my attention was Noble Group.

Noble Price 11 years

Here is a chart of Noble’s stock price since 2001. Notice that the stock price then was at 22.5 cents. This is during the 2001 to 2003 bear market. During this period, Noble went through some great growth. Like all stocks it went through another major bear market in 2007-2008 where it drop from $2.80 to $0.40 again.

Right now the price ended up  at $1.15. Looking at then price chart you would think that this stock is better for trading than investing in. If you had sold it at the high of $2.40 or $3.20 you would have gotten a really good deal.

Does that mean its not good to buy and hold?

Noble’s Bonus Shares and Stock Splits

(Click to view larger image)

Which is where my factsheet comes in. Basically, I simulate what will happen if you bought 1000 shares of Noble at the start of 2001 and what is your returns like.

The result? If you kept Noble since 2001 at a cost of $225, your dividends would be $2903 and your unrealized gains would have been $18517. The total return is approximately 9520% which is made up of 8230% unrealized capital gains and 1290% dividend gains.

Why was there such a wide gain?

Firstly, Noble since 2001 have had 6 bonus issues. Bonus issues typically do nothing much. Instead of paying out a cash dividend, a company like Noble pay you stock dividend.

Does your average share of the company increase? Not necessary, the pool of money to pay out as dividend is kept within Noble so that they can reinvest to make you more money. Since this pool is divided equally among all shareholders by increasing every one’s share of the company, the share of company stay the same, but you get more shares.

Noble also have one stock split of splitting up its share in 2004 to 4 shares. This does nothing on its own as well. Stock splits just means that instead of having 1000 shares at $4, you have 4000 shares at $1. The rational is to make the price of each share look lower so that people are more attracted to it.

The magic comes about when Noble make more money subsequently down the road. Your bonus shares that was issue to you these 10 years means you are entitled to more of the company’s return.

So instead of getting $1000 for each $1 earnings per share if you have 1000 shares, you would get $15300 for each $1 earnings per share because now after all the splits and bonus shares you have 15300 shares.

What we can learn from this

  1. You can only gain this kind of astronomical returns if you invest in a company that generates increasing profits. The bonus shares and splits are not magic. Having more shares but when profits are falling or for the matter turned into losses would just make this a bad investment. The business, economics and operation matters if you want to hold a company this long.
  2. Bonus shares and good dividends appears to be indicative of management that have confidence in their business and prefers you stick with them. In my brief exercise, not many would carry out a bonus share issue. Strangely those that issue bonus shares turn out to be rather sturdy companies that grows.
  3. The price you buy matters but it is important to know the value you get. Why we kept advocating buy 50 cent 1 dollar is to buy value buys at reasonable prices. Comparing 2 commodities investment then, you may get more value simply because Noble choose to reward their share holders more.
  4. I tried changing the first buy price from 22.5 cents to $3 or $6 and  turns out you still make money! You only start losing money if you have bought Noble at $22 in 2001. That to me is pretty amazing.
  5. Compounding and time value of money will work if you spot a company that grows its earnings and reward you.
  6. Reinvest only in companies with good business, sound management that consistently shows a willingness to reward share holders. Management retires and business environment changes. Noble is in a stage right now where the chairman is struggling to find a successor. We are entering another difficult operation condition. Your dividends will ensure that you receive rewards while waiting. A change from the policy these 10 years (cutting bonus issue and dividend policy) would signal that you need to relook into it.
  7. Hindsight is a bitch. This exercise just shows me I missed a great deal.

I hope I gotten my figures right. Drizzt can get pretty wrong sometimes. Do comment if you think I have gotten it wrong.

Do you guys have similar companies like this that have so many corporate actions? How did they end up eventually?

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Singapore Airlines SIA Stock Analysis: Are airline carrier stocks weak against high oil prices?

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This isn’t like my normal analysis but I will try to do abit of this kind. SIA really grabbed some of my readers attention because of its recent price movement.

Technical Chart of SIA

SIA stock price looks to be peaking and judging by the movements at the SMA this is a time to evaluate taking profit or selling to collect lower.

But I got a gut feel the likely movement will a gyration between $13.00 and $15.00

Many investors would be interested in this counter. Its one of the most well operated Airline and its got a good set of subsidiary including SIA Engineering.

Current Valuation of SIA

SIA have not finish reporting FY2011 but this work year have been great in that they rebounded from a much disastrous 2010.

I forecast that baring any big changes in the 4th quarter,

Operating Cashflow for FY2011: $3809 mil

Operating Cashflow FY2010: $1966 mil

Average Operating Cashflow for past 10 years: $2350 mil

Average Operating Cashflow for past 3 years: $2612 mil

Current Market Cap at $14.02: $17581 mil

Current Cash Holdings – Debts: $7332 mil – $2243 mil =    $5082 mil

Current Enterprise Value (EV): 17581 – 5082 = $12499 mil

EV/EBITDA FY2011: 3.28 times

EV/EBITDA FY2010: 6.38 times

EV/EBITDA Avg 10 yrs: 5.31 times

EV/EBITDA Avg 3 yrs: 4.78 times

I think if we based on FY2011 forecasted cashflow it’s a bargain at 3.28 times operating cashflow. But the question is how common is $3809 mil.

A more realistic forecast should be taken with last 3 or 10 years operating cashflow and it is 4.78 times and 5.31 times respectively.

I think it is still a good price to buy as I don’t think Singapore Airlines will be a going concern for the next 5 years.

Free Cashflow for past 10 years

FCF-DIV

Here is something interesting. Take a look at FCF-DIV. That is essentially operating cashflow minus capital expenditure minus dividend payout.

Mark of a good dividend company is always to payout their dividends from free cashflow (FCF).

So it is a surprise to see that FCF-DIV is negative most of the time.

Average FCF 10 yrs: –$599 mil

Average FCF 3 yrs: –$266 mil

It is a small free cashflow bleed but it means on average they been bleeding that for 10 years.

Debts issued /retire

What is astounding is that it should be balanced with more debts issued (darker blue line) to pay for this free cashflow shortfall but the trend is that they are retiring more debts then issuing!

Because of this Total Debt (purple line) have been reducing to nearly 1 billion. Which is very very safe. That is pretty much covered by an average of $3 billion cash holdings.

Cash Holdings

So if they are bleeding free cashflow and not issuing debt, why is the Cash Holdings (green line) climbing like mad!

Other Investing Cashflow

What I realize is that SIA got a large injection every year from items in the Investing Cashflow (light blue line)

This is a consolidation of:

  • Purchase of intangible assets (negative)
  • Proceeds from the disposal of aircraft and other properties (positive)
  • Disposal of short term investment (positive)
  • Investments and Acquisitions in associated companies (negative)
  • Disposal of subsidiary (positive)
  • Dividends from subsidiary and investments (positive)
  • Interest on investments and deposits (positive)

Without this category, they would not be where they are today. I cannot pin point the exact figures but dividends and disposals of subsidiary like SATS and SIA Engineering makes a whole lot of difference.

Here is what I got:

2007 they got a particular high surge in this area of $2781 mil. This is made up of:

  • $1586 mil Disposal of  aircraft and fixed assets. In particular SIA building
  • $382 mil Disposal of long term investments
  • $509 mil Disposal in joint venture company
  • $280 mil Dividends, Interest

2009 their other investing cashflow was rather low ($484 mil). This is made up of:

  • $893 mil Disposal of aircraft and fixed assets.
  • -$457 mil Acquisition of subsidiary
  • $252 mil Dividends, Interest

As a summary factoring this amount, you can then see why cash holdings have been climbing.

Dividend Analysis

FY2011 Dividend Yield based on $14.02:  2.17% ( $382 mil)

That is not a very attractive yield, but a look at dividend payout trend (green line) have shown that it is climbing before dropping like a cliff in FY2009.

On an average the last 10 year pay out is $500 mil which is around 2.84%

Average last 3 years pay out is $900 mil which is around 5.12%

On an average Free Cashflow + Other investing cashflow for 10 years is $1123 mil and 3 years is $1300 mil

That is 6.3% and 7.3% yield respective.

What this means is that paying out 5% base on current share price is safe for SIA based on the operating scenario for the past 10 years. They will still be adding 200 mil to cash.

As a dividend investor, this stock might be not good if you are looking for regular income payments. Its gonna pay you only in spurts.

Capital Expenditure

Rather unique is for an airline stock, Capex have been reducing. What does this mean? Does this mean that asset base is shrinking? Or does that mean cost and efficiency of new aircraft is improving?

Either way, CAPEX have to pick up sooner rather than later and I believe it is not a concern for SIA.

Gross and Net Profit Margins

The cost of operations have been increasing steadily. That together with the influx of low cost carriers and high oil prices have eroded gross margins. The gross margins have based at around 30%

However, Net Margins have been eroded still.

Higher Fuel Expense Track Oil Price

Seems everyone is certain that higher oil prices and high capex is the bane of an airline stock.

But rising oil prices and fuel prices is not new. Oil prices have been rising and peaking at 2008. This should be reflected in FY 2009 figures.

True enough there is a dip in revenue, profit and income not to mentioned a surge in total expense.

But what about in FY2010? 2009 saw a dip in oil prices but the problem for SIA is not high oil prices but falling air travel due to recession creating low business activity.

Judging by this, which is worse? High oil prices or low business activity? I should think it’s the latter based on the figures.

The rational is this: If you know that fuel cost is a major expense and fluctuating prices will do you in, you will hedge in advance.

The problem in 2008 is probably the rate of change in fuel price is such that hedging becomes less effective.

The greater danger: Recession and Low cost carrier. That is what happened in FY 2010.

Conclusion

I think operation wise, SIA is very sound.

  1. Its at an attractive valuation
  2. Its dividend payout is low but really if they tackle their problems they can pay an average 5% yield
  3. Dividend payout is inconsistent. There is room for large dividend payout speculation this year.
  4. Using free cashflow to analyze its ability to pay is problematic. Do factor in other investing cashflow
  5. Economic Moat is shrinking with low cost carrier entry. What SIA needs to do is ensure that Tiger Airways, which is a subsidiary becomes the most competitive low cost carrier.
  6. But eventually it means margins will shrink since low cost carrier have lower margins
  7. Technically, 20 day and 50 day ma cutting 200 day ma. If you have fat profits it might be wise to take some off the table. If you want to get vested, wait a while to get in.

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

4 Potential Dividend Stocks that might spring to life in 2011 – SIA,Starhub,CDL Hospitality and SMRT

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When the easy money have been made, one strategy is to hold stocks that were beaten down but still above the 200 day moving average. Here are my picks:

SMRT

This dividend yield stock yields 4.1% and have been in correction mode for sometime due to higher operational cost.

I don’t think fundamentally there is anything wrong with SMRT but the upside is limited. We are looking to hold this in a muddle through economy but the chart pattern looks very similar to when its at $1.30.

I can live with a 4.1% yield if there is enough capital appreciation.

Starhub

Starhub is a stock that I am vested at an average of $2.17.[Starhub Analysis >] Would I buy it now for yield? I think if it’s a 20 cents dividend current yield is 7.8% if its 18 cents current yield is 7%. I think its hard to find that kind of yield with the defensiveness of the business.

We look for a continuation to possibly $2.90 for a 12% capital return and 7% yield.

CDL Hospitality Trust

CDL Hosp is the REIT that many missed including me the one that just goes up and up. Currently trading with a 4.1% yield, I think if the economy does ok it will still be going up. The consolidation of the 3 moving averages could possibly be powerful.

At most cut when it breaches $1.9.

SIA

Quite Possibly the one with the lowest yield at 2% but technically it looks like this carrier share is going higher after this breather. There is a huge fight at this 15 bucks level and lets just say that if it loses, do sell it to collect at even lower price.

Conclusion

These stocks are not high yielders, but that is not why I raise them. I have a feeling they could yield a good combination of capital appreciation and decent yield.

If you would like to track the yields and fundamentals daily, do follow my dividend stock tracker here to see more stocks and their prevailing yields.

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Safety in Reits? Don’t count on it:Analysts

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I’m bringing you this article that caught my attention on the business times. Certainly for dividend investors the opportunity in REITs have been getting good these few months with some REIT having yields up to 9-10%.

While searching for top yielders are important, it is worthwhile to choose based on growth prospects and value prospects as well.

Personally i would rather hold down a REIT if it is a growth story but irrationally beaten down, rather than an outright high yielder. You might stand to earn more from the attention the market gives it and the capital appreciation rather than a high yielder that gives the same yield that stagnates.

Yields are attractive but they are subject to movements in cyclical property market

(SINGAPORE) High yields and strong results are making real estate investment trusts (Reits) stand out in a volatile market. But there is debate over their potential as defensive plays, with some market watchers cautioning that Reits are not necessarily safer bets because of their link to the cyclical property sector.

Most Reits turned in impressive results for the quarter ended June 30, 2008. The 18 which reported their performance before last Friday all achieved higher distributable income and distribution per unit (DPU) over the same period last year.

Distribution yields reported by the Reits, based on annualised DPUs and last Friday’s closing prices, ranged from 4.8 per cent to 11 per cent. Reits which offered yields above 10 per cent included MapleTree Logistics Trust, healthcare-related First Reit and Lippo- MapleTree Indonesia Retail Trust.

Overall, the Reits had an average distribution yield of around 7.8 per cent, offering a spread of over 4.6 percentage points above the 10-year Singapore government bond yield of 3.14 per cent on Friday. Compared with one-year fixed deposit rates which start from around 0.8 per cent, the Reits offered an even wider spread.

Analysts say Reits have largely performed in line with expectations. Their good performances have won them fans – with many trading at discounts to net asset values and thus offering relatively high yields, OCBC Investment Research said in a recent report that investors could ‘take a fresh look at S-Reits as defensive vehicles offering stable cash flows and high yields’.

However, others pointed out that Reits still may not match up to traditional defensive plays, including high-yielding blue chips like telcos and banks. While Reits do offer high distribution yields, the sector is influenced by movements in the property market, which tends to be more cyclical compared with, for instance, the telecommunications industry, or even banking, they say.

Distribution yields are also a function of Reits’ unit prices, so yields may look high simply because unit prices have dropped, explained one analyst. Considering both capital gains and distributions to investors, Reits have not done as well compared to around a year ago, he added. The FTSE ST Reit Index has fallen by more than 10 per cent since it was launched on Jan 10 this year.

Reit fans, on the other hand, argue that few sectors are completely resistant to economic slowdowns. Also, some Reits may be more resilient because they can lock in leases over several years, which helps stabilise earnings.

Where there is agreement among most of the market watchers BT spoke to is that Reits will continue to generate steady operating results. For those which have locked in leases or are able to gain from higher rental reversions on lease renewal, ‘there is a lot of predictability in terms of their earnings and distributions,’ said Daiwa Institute of Research analyst David Lum.

With credit conditions staying tough, however, much of the earnings growth will have to come organically. Reits may still acquire properties but they will have to be more selective, analysts say.

Analysts’ top Reit picks include Suntec Reit. ‘With 32.6 per cent of total office net lettable area up for renewal in FY09, we believe Suntec is well-positioned for rental reversion with current $14 psf signing rents versus passing rent of around $6.30 psf,’ said a Citi Investment Research report last week.

CapitaCommercial Trust was another popular choice. Goldman Sachs reiterated its ‘buy’ call on the Reit, favouring its strong organic growth and ‘leadership among office Reits’.