Monday, January 30, 2023

Sold my last S-REIT

Sold my last holdings of Frasers Centerpoint Trust.  Small capital loss of less than 1K, offset by 12K dividends.

They announced they are buying a 25% stake in Serangoon Nex (85 years remaining lease), funded by debt.

Its not a bad deal, not like MapleTree Commercial Trust's disastrous merger a year ago.  But its not a great deal either.  Their pro-forma calculations show a negligible 0.5% increase in DPU if the transaction had been performed Oct 2021.  Leverageis expected to rise from 33% to 38.8% (Section 6.4).  

The negatives:

  • Serangoon Nex is already crowded with 99.9% occupancy, so I don't see how they can extract more value from it.
  • The company announced they are taking on a 410m revolving loan - they did not give the interest rate; revolving loans are usually variable.
  • Increasing Leverage from 33 to 38.5% for a mere 0.5% increase in DPU doesn't make sense.
  • Sibor has risen from 0.5% to 4% in the last year.  This has to affect Singapore property values, increasing FCT's leverage.  eg: A 10% decrease in property values would lead to Leverage increasing from 38.5% to 42%.  Now we are moving a bit close to MAS' 50% gearing limit.
  • How are they going to make future acquisitions, like Northpoint South Wing?  They're gonna have to fund it entirely by issuing new shares.

The positives:

  • Serangoon Nex is a good long-term asset.  Its a hub with 2 MRT lines and a bus interchange.  The mall is always crowded.
  • On OCBC report stated (p2) that the new debt is taken at an "interest cost of less than 4.3% locked in for three years."  I think they are talking about the pro-forma calculations, which would mean these calculations already take into account high interest rates, and the results may be better if the Fed pivots soon.
Overall, the numbers just aren't great.  Buying a property yielding high 4's percentage points (gross), while taking on debt in the low 4's percent is barely a win.  Increasing leverage raises their risk and reduces their ability to bargain hunt when opportunities arise.  Since they are paying all their distributable income as dividends, they'll never decrease their debt and future growth is limited.  Their dividend yield is sub-5%.  I won't get rich holding a stock like this.


Need to find another way to get rich, holding SGX Reits won't cut it.  They have too much interest rate risk, and too little growth potential since they payout all profits as dividends.  I think theres better risk/reward in holding dividend companies that have fixed their debt 10-30 years out (eg: WMB, KMI), or cash rich companies that are paying out some of their profits as dividends (eg: Delfi:SGX or United Plantations:KLSE).

I still think we are in a multi-year inflationary bear market, and there will be a chance for me to buy more later.  I would rather own a company yielding 3-4% with a 50-60% payout ratio, than one paying out everything while yielding 5-6%.


I've now finished spring cleaning my portfolio.


The stocks that I have left are ones I'm comfortable holding through the cycle.

Tuesday, January 10, 2023

Gotten shorter

Got a lot shorter yesterday.  I think the market falls this quarter.  This is the max short I'm willing to go.

I moved a pile of cash into my IB account, so I have some leeway in case the market moves against me (ie: my longs go down and my shorts go up).  Risk Management means "try not to die".


Edit: Jan 13th: Went another 2% short, couldn't resist.

Friday, December 30, 2022

SEGRO REIT: exposure to rising interest rates

Quick look at a promising company, its a fast growing UK/EU industrial REIT whose share price is now tumbling.

For debt heavy REITS, one of the first things we look at is interest rate sensitivity.

As of end 2021, they had 3406m pounds of debt vs 15bn pounds of property.  Thats reasonable.

Their debt was well spread out:

Source: 2021 Full Year Results Presentation, slide 44.

And its all fixed rate too.  Looks really good:

Source: 2021 AR, p197

Wait, whats this?  After applying derivative instruments, they had a 1.5bn of variable rate debt:

Thats around 45% of their 3406bn debt being variable.  How can this be?

They have converted 1.9bn of their fixed rate debt to floating rate debt using derivatives....WTF?

~1bn of this only expires after 2026.  So they are not getting out of it anytime quickly.  ~600m expires from 2022 to 2026.

This is why their interest rate sensitivity is so high.  A decrease of 17m for a 1% increase in rates (p203) is about a 5% decrease in CFO.  If we expect UK risk free rates to rise to 4.5 to 5.25% by 2023, while they were under 0.5% in all of 2021, thats a 20-25% decrease in CFO.

I'm throwing this into the "too hard" basket.  Their debt has changed since then, and 2022 results will be out on 17th Feb.  But probably not worth looking at yet.  If I buy a REIT I want predictable cashflows, not a bet on interest rates.

Friday, December 16, 2022

Lessons Learned Trading Bear Markets

Trading bear markets is tough.  This post is about me finding a strategy to short bear markets, in a timeframe suitable for me.

My original plan was to simply short and hold into the depths of the bear market.

I had not counted on how sharp the bear market rallies would be:


Source: Wifey

I haven't covered my shorts, and I added to them last week.  But the last vicious bear market rally has given me some sleepless nights.  My shorts moved from a 70K profit to a 20K loss in 2 months!  I learned that prune juice helps constipation.

My timing wasn't great.  The chart below are my shorts (pink arrows) and coverings (blue arrows):

I can't trade day-to-day in the short term.  And its uncomfortable hodling shorts for the long term.  So I need to trade in the medium term - around the bear market rallies.  How can I do this when bear market rallies are unpredictable?

  • Simply wait for the BMRs to occur, and as they do, add more.  Add a little at a 5% rally, more at 10%, more at 15% and some at 20%.
  • If the BMR doesn't occur, don't short.  Take the attitude that I'll short if the market gives me the opportunity, but I don't have to.  I always have the choice to happily sit in my dividend stocks and cash, waiting for valuations to go low enough or for the macro outlook to change.  We get the worst results when we feel compelled to do something.
  • Take some profits when it feels great.  When the market has dropped like a rock for several weeks, your profits are exploding night-by-night, and you are the king of the world...take some profit - maybe 1/3rd or half of my short positions.  I guess everyone learns this instinctively as they trade.
  • Don't look at my percentage allocation (eg: shorts vs longs).  Successful short positions shrink, so at the bottom of a crash, they'll be small positions, just when I should be covering (making them even smaller).  Don't have a "target allocation".

We may be halfway through the bear market now.  As we get closer to its end, hodling shorts becomes a really bad idea.   I need to trade around the bear market rallies.  And start taking profits.  Wait for the next leg down...

With the last few days drop, my shorts are now profitable again.

Maybe this bear market rally ended last week:

Source: Keith McCollough

Saturday, November 26, 2022

China reopening, oil, and doing nothing

I think China is reopening.  Rising cases occur when you reopen:

But official deaths have not gone up.  A quick google search shows a median of 18 days to die from covid, so we should know the death rate by now.  The latest numbers have 1 covid death yesterday:

Source: Worldometers.com

There's 2 risks to the reopening:

  • China numbers are bullshit, so no one knows what the real hospitalisation/death rates are.  Low level officials will make up whatever numbers they think are desired.  And I'm sure no one reports bad news to Xi.
  • Everything depends Xi.  He can reinstate zero-covid tomorrow.
We're getting a lot of confusing scenes out of China.  Protests, lockdowns and confusion.  It will be localised cycles of easing and tightening as they try to flatten the curve.  If they don't lock down soon, it will be too late, and they will have to let it spread.  So there's a small chance Xi imposes a harsh lockdown soon, and a bigger chance - growing larger by the day - that they just let it spread and try to slow it down.


My "China reopening play" is oil.  Zero-covid reduced demand by an estimated 0.5 to 1.5m bpd.  Long term I think oil goes up anyway, but China makes me buy it now.  Bought more CNQ and Equinor in the last 2 weeks, now its a 9% position (at buying price).  1% more to go.

Its a very oily portfolio: 10% in oil producers, plus another 35% in things correlated to oil (Gas pipelines, palm oil and LNG).

Also mechanically adding to my shorts as the S&P500 goes higher.  And the existing shorts are also growing bigger as the market gets higher; my shorts are now in the red:


Need to remind myself not to get too short, else the bear market rally will rip my face off.


Can't find anything to buy with the remaining 30% cash.  Despite a year-long bear market, stocks aren't cheap enough yet to catch falling knives.  I wait, either for things to get cheaper, or for the macro tide to turn so I can buy cyclicals like capex commodities.

Its hard, sitting in cash, foregoing dividend income, not going long or short.   I try to imagine myself as a multi-millionaire in the future, after the current bear market, recession and subsequent commodity bull.

Doing nothing is the hardest thing.

Friday, November 18, 2022

Bursa Malaysia (KLSE)

 Malaysia's stock exchange looks cheap based on historical earnings, lets look further.

You can't buy it with Interactive Brokers, I trade KLSE stocks with a Singapore broker.

TLDR: Everything depends on KLSE trading volume, which is unpredictable, I think this stock is too expensive now.


Malaysia is a developing country.  Its a commodity producer, and I expect commodities to do well this decade.  It also exports electronics and mid-tier microchips, so may benefit from manufacturing leaving China.

Business and Revenue Breakdown

Most of their revenue is from trading:


And most of the trading revenue is from Securities trading:

So Securities trading is the only thing we have to think about.  Derivatives trading revenue is constant, and Islamic Trading is small.  This is a company with one single business.

Financials

Good financials.  All stock exchanges seem to follow the same pattern.  As of Sep 2022:
  • Large net cash position (plus some Investment Securities), no debt
  • CFO is basically PBT plus small depreciation and small working capital.
  • 40% profit margin (after all expenses, including tax) in 9M 2022.
  • Minimal Capex with high dividends:
  • The dividends are too high:
  • They are paying part of the dividend out of accumulated "cash and investment securities".  As of 3Q22, "cash and investment securities" is worth RM 565m, or roughly 9% of their market cap (@ 6.40 per share).

Conclusion

This stock exchange is a cash generating machine.  The only question is how much you'd pay for it.

Everything depends on whether we think the big jump in Securities Trading revenue in 2020 and 2021 can be maintained.  This company is easy to understand, but hard to value.

If I had to catch a falling knife, I'd probably be willing to pay 12-15X normal earnings.  Based on 2017 to 2019 earnings, the price would need to drop significantly, to around RM 3.70 to 4.00.  Not buying it now.

Saturday, November 12, 2022

Bolsa Mexicana de Valores (Mexico Stock Exchange) : BMV

Theres a big hole in my dividend portfolio from selling my REITs.  I'm looking at several small listed stock exchanges: most of them have low debt, churn out cashflows/dividends, and their costs are not affected by inflation.  They are cyclical, so the current downturn might be a chance to buy.


First is Mexico.  It has a young, growing population, and benefits from NAFTA's (re)industrialisation.  But the Mexico stock exchange is near dead, with a matching share price.

Business and Revenue breakdown

Despite its name, the Mexican stock exchange only accounts for a small amount of BMV's revenue.  I breakdown their 2021 revenue below to get an overview of their business.

SIF ICAP

16% of revenue.  SIF ICAP is an inter-dealer broker handling transactions between financial institutions.  They deal in govt/corporate bonds, and OTC derivatives (customised contracts that aren't traded on an exchange) such as interest rate swaps and forwards.

2/3rds of SIF ICAP revenue is from Chile, the remainder from Mexico.

Historical revenue:

Information Services

16% of revenue.  70% of that is from BMV market data, 30% from VALMER (Operations Valuation and market Reference, eg: used to value bonds).

Market Data historical revenue:

Valmer historical revenue:

Equities trading and clearing

13% of revenue.  From stocks traded on the BMV.  This includes foreign listings on the BMV.  eg: Apple or an S&P500 ETF, listed in Pesos.

BMV has a problem with their stock exchange.  Only 144 companies are listed, very few for the 15th largest economy in the world.  3 companies delisted this year, at least one of those wanted to re-list in the US.  One company listed this year.  The usual complaints are about low liquidity.

In 2018, a competing privately-owned stock exchange BIVA, was setup with lower listing requirements aimed at medium sized companies.  At its debut it had 52 listings, now it has 88 listings (not sure if they are all equities, or some bonds).

The value and number of BMV IPOs in recent years is below.  With only 15 listings since 2018, its growth is trailing BIVA:

Listing and Maintenance fees

13% of revenue.  In 2021, almost all of it were Maintenance fees.  This is recurring, unless companies delist.

Only 1/3rd of the maintenance is from shares. While half of it is from corporate or govt bonds:

Derivatives Trading and clearing

7% of revenue.  These are derivative products listed on an exchange.

Central Depository

33% of revenue.

A Central Depository allows every trade to be recorded, so ownership is recorded by them instead of your stockbroker.  After you make a trade,  the confirmation is sent to you independently by them.  This makes if hard for your broker to commit fraud, and theres no risk of loss if your broker goes bankrupt.  This process is slower and more expensive than just relying on your broker (like Interactive Brokers) to hold your stocks.  I do not know what percentage of individual trades go through the central depository, and what percentage go through a broker.

The Central depository records holdings from the above segments:

  • SIF ICAP (probably only Mexican, doubt it does Chile)
  • BMV.   Probably BIVA too (?)
  • and Derivatives.  

Financials

The financials seem almost too good to be true!

  • Operating margins (after all expenses, including taxes) are exceedingly high:
  • As of 3Q22, cash on balance sheet is greater than all liabilities (not just debt).
  • Cashflows follow profits closely.  Depreciation and working capital are minimal:

  • Minimal Capex:

Valuation

Reasonably priced now, not really cheap.  At MXN 36, its trading at 12-15X recent years (probably peak) earnings:


Currently at a 5% yield (before witholding tax).  The dividend payout ratio is usually around 80%:

Conclusion

Pros:
  • Excellent financials and profit margins.  
  • Mexico has long term growth potential with as NAFTA's low cost manufacturing hub.
  • Stock exchanges are a good hedge against inflation.
Risks:
  • The Mexican stock market has structural problems (low liquidity, leading to lack of investor interest, leading to lack of listings).  Note the downward trend in Maintenance fees from 2019 to 2021.  From a Mexican's point of view: if I lived next to the largest economy and stock market in the world, I'd probably want to list and trade there too.
  • Competition from BIVA.  I estimate that long term this might affect 25% of revenue ("Equities trading and clearing", plus some "Central Depository" revenue).
  • I don't know about competition or cyclicality in the SIF ICAP segment.
  • Not yet cheap, but reasonably priced.

Misc

Singapore residents pay 30% witholding tax on dividends through Interactive Brokers.

Article on VIC from 2020.