Saturday, January 30, 2016


A quick look at Singtel.  I like them because their revenues are recurring, and they are in a markets which are a natural oligopoly.  Was attracted by their high margins - in 2015 operating margins from Singapore and Australia (after tax) were 21% - high for any industry and surprising for a utility or "dump pipe".  

The stock price has dropped recently.  Based on their earnings/cashflows, at what price would I buy?


Singtel is a holding company.  FY 2015 EBIDTA (ending March 2015) is broken down from:
  • 26% from Singapore.  Singtel is the market leader and incumbent.
  • 29% From Australia.  2nd largest operator.
  • 47% from regional associates and JVs, when broken down:
    • 9% AIS (Thailand)
    • 6% Globe (Phillipines)
    • 21% Telkomsel (Indonesia)
    • 10% Airtel (Africa, India and Bangladesh)
Overall about 2/3rd of revenue and profits are from consumers, the remaining from commercial.


Their business model is to use cashflow spun off from existing businesses to buy new businesses.  They have to balance this with paying out dividends to shareholders, and capex requirements to maintain and expand their networks.

CFO is mostly from Singapore/Australia:

CFI (outflows) are comfortably below CFO:

The largest part of CFI is buying Property, Plant and Equipment, which is quite steady over the years.  Acquisitions vary:

The dividends have been generally covered by cashflows, but this may be a problem going forward:


The main risks are:

Currency fluctuations

Page 108 of Singtel's March 2015 Annual Report gives a Sensitivity Analysis:

I'm not sure about this.  The Telkomsel number is just 10% of their profits.  And I can't make sense of the Optus number: Optus operating income was SGD 2853m in FY2015 (p2 of Appendix 1):

How can a 10% weakening of the AUD result in a less than 10% weakening of results?  Furthermore, Optus' CEO Allen Lew has been quoted saying "Our suppliers bill us in US Dollars".  The Sensitivity Analysis probably understates the impact by including the effects of currency swaps.

I'm expecting the AUD to drop another 20% vs the Sing Dollar from now (30% from the time of the 2015 results).  We are halfway through a decade long commodity decline.  By my calculations, assuming 30% of Optus' expenses are in USD, this would give in a 42% decline in Optus' SGD profit! (vs 2015 results)


Singtel's margins were stunning 10 years ago, but since then have consistently fallen to be similar with Optus:

IDA has announced intentions to allow in a 4th Mobile operator.  I believe the market is too small to support one.  The previous time this happened, Virgin Mobile closed after 9 months.

New Industries

There's a risk from Singtel moving into different industries (e.g.: cloud hosting, security) which are different from their core industry.  These industries are usually a lot more fragmented and fast moving than rolling out telecoms infrastructure.  I don't think GLCs can compete in fast-moving, unstructured industries that rely on a first-mover advantage and network effects.  These are the guys you watch Netflix view Facebook over - they can never be Netflix or Facebook.  Better to be a dumb pipe.  For example, why did they buy HungryGoWhere?


I like them because they have recurring revenue/profits, in an oligopolistic industry with some barriers to entry.   Not cyclical: their revenues/profits did not fall in 08/09.  And with Netflix and Cloud computing, the long term trend is for more and more mobile, home and office data usage.

The biggest risk is currency.  I'd wait for the AUD to drop further, or for the market to factor it in. People forget it was 20% below the SGD for several years in the 1990's and early 2000's - commodity cycles are long.  As a rough guess: factoring in a 40% decline in Optus' profits and 30% decline in Telkomsel's profits from FY15 levels, I get profit reduced by 38%, giving a share price of  $2.25 at 15X earnings or $1.80 at 12X earnings.

Monday, November 30, 2015

Rickmers Marine

Rickmers Marine

A REIT-like structure, holding and leasing 16 panamax container vessels (3400-5000 TEUs). Their fleet is new: all but one vessel was built in 2007 or later, and they have a 25-30 year lifespan.

Rickmers stock price has plunged after it suspended dividends, due to lower revenue from declining rates.  How much of this is already built into the share price?

First off, Rickmers has a loan covenant waiver that they need to extend, due end of this year.  If they can't, all bets are off, and they'll have to sell vessels.

If they extend, then we value Rickmers by its ability to generate free cashflow and pay off debt.  Or maybe just survive.  Here's the relevant 3Q15 numbers for back-of-the-envelope calculations .


  • Revenue 27m
  • Depreciation: 8.7m
  • Vessel operating expenses: 9.6m
  • Misc fees/expenses: 0.9m
  • Finance expenses: 3.3m

Vessel operating expenses seem to be pretty constant: they vary by at most 10% over the past 8 quarters.  Future revenue and finance expenses are the two big moving parts here.

Revenue has dropped as their fleet's long term contracts have expired. 11 vessels are now on short term contracts:

Three vessels we re-leased this quarter at around USD $6200, which is the market spot rate.  This rate has dropped sharply recently, and is now at the GFC levels of 08/09:

So everything depends on the rate.  In their 3Q conference all, Rickmers' management states that this rate is just above cash breakeven.

Container Shipping Outlook

Depends on demand and supply.  I can't find any optimistic numbers on the container shipping market:

a) Bimco (Nov 2015): 
  • Supply: Estimated new supply exceeds demolitions for the next few years:
  • Demand: In our last report we discussed if a potential gap in the market was the reason for 6-12 months’ charter rates for ships sized 1,000-4,250 TEU to significantly increase over the first five months of 2015. Today we can see half of the gain is now gone, and the rise in time-charter rates seemed to be more of a short-term imbalance rather than a long-term improved market.
  • In the 3,000-4,000 TEU segment...There is still more than sufficient supply of tonnage within this segment during the remainder of the year so we expect the rates to remain stable in the USD 6,000's depending on the exact vessel design. 
c) Rickmer's 3Q conference call:
  • More than 30 vessels are currently idle in Asia and ready to sail now.

Another trend is that new container ships are far larger (up to 20k TEUs), in a bid to drive economies of scale.  Some of the 3000-4000 TEU ships are now being used as feeder vessels (including the Laranna Rickmers, leased to Simatech).


They have:
  • 325m bank loans (USD Libor + 1.7%).  46.5m short term, 279m long term.  With 50m cash to offset the short term loan due.
  • SGD 100m (~USD 80M) "Series 1 Notes" issued May 2015 S100m: 8.45% PA, matures May 2017.  Currency risk unhedged now.
A large chunk is due in 2017: 

Their USD bank loans (in Q3 around 2+% interest) will have to be refinanced in 2017.  I would expect interest rates to be higher in future, lets say 3 or 4 fed hikes.  About 1% or so, giving a rate of 3+ percent (if they can refinance under the same conditions....the covenants).

But the loans come with restrictive covenants, and they may choose to refinance by their MTN program instead (of which only 100m out of 300m has been used).  This has a high interest rate at 8+%, and there is also a refunding risk every 3 years.  (I assume they would hedge currencies if they take on more SGD debt).

I calculate that, if the market rate stays at $6300/day, by the end of 2017, they need to refinance USD 135m plus SGD 100m.  Assuming they use the MTN and get the similar rates, thats about USD 17m per year interest.  Or 4.3m a quarter, an increase of 30% over 3Q15.  Manageable.  

Can they survive?

Probably.  It all depends on the rates.  If they plunge below cash breakeven by 2017, Rickmers may not be able to secure financing on favourable terms.  Or on any terms at all?  Either demand needs to recover, or ships need to be scrapped.

Historically, have container rates gone below cash breakeven for long periods before?  Need to do more research.

As value investors, how would we play a cyclical industry?  Wait for the industry to bleed for a while... my guess is - for long lived assets it will take years.  Then buy companies with strong balance sheets and cashflows, if any.  Easy to say, hard to do.

Monday, October 19, 2015

Rolls Royce: Aircraft and Engine retirements

Roll's recent profit warning was due to the transition from old engines to new one.  Old planes are being retired, reducing maintenance income, while Rolls is still waiting to ramp up production in new engines.

I need to get some idea of the numbers of aircraft being retired in the future.  Is there more to come?

First, lets look out the different aircraft models based on range and payload:

Ignore Narrow body aircraft at the bottom left, which are irrelevant to Rolls.

Jumbos, in the top right, are large 4-engined planes.  They are now a niche product: for polar flights, freight, or busy slot-constrained airports.  They are only profitable when full, which is risky for airlines as they can't scale down.  Passengers also prefer greater frequency with smaller planes.  B747s are being phased out for passenger use, and the is A380 only successfully used by mid-east carriers.

Soonest to be replaced will be the B747s and A340s, due to their fuel-guzzling 4 engines.  Followed by the B757, now also out of production.  They will be replaced by the B787, A350, future B777X and future A330neo.

Its not a 1-1 replacement.  Larger aircraft are more profitable (when full), but more risky to operate.  For example: an A350 gives better per seat fuel milage, but may be harder to fill, so could be substituted by 1.x B787's, allowing the airline to scale down the route when necessary.

How long do planes last for?  The lifespan of a Wide-body averages 25 years.  It depends on the individual plane's model and milage - some last 35 years.  Freighters tend to last longer.

(Source: Avolon white papers 2015 and 2012.

To estimate the number of aircraft retiring, I searched the production list for all aircraft in the "Wide Body" and "Jumbo" categories above.  I only took currently 'Active' aircraft, ignoring 'stored' ones and did not distinguish between passenger or freight (or the occasional military).  Then I added 25 years to the each plane's first flight year, to estimate when it would retire.  The resulting graph gives the number of Rolls Royce engines due to retire in red and non-Rolls engines in green:

Again, it is number of engines, not planes.  And its only a rough estimate, as each plane could retire up to 10 years earlier or later.  So we can't predict the timing of any more earnings surprises in the future.

What we can tell is:
  • The numbers expected to retire are around 50 engines from 2014-2016, 150 engines from 2018-2022, and 150-200 engines from 2023-2026.
  • The predicted retirements match favourably with engines coming on line in the next few years.  Around 780 A350's are on order, but their rollout is constrained by Airbus' production rate.  Its currently 3 A350's per month (i.e.: 72 engines per year), expected to raise to 10 per month (240 engines per year) in 2018.  And maybe 13 planes/month (or 312 engines per year) after that.
  • Plus another 350+ B787 planes (700+ engines) from the current order book, lets say over the next 9 years.
Based on the order book and the projected number of engines retiring, Roll's problems of retiring engines are temporary.  In the long run, there is no evidence that the number of engines maintained will drop, and it will probably increase.

Bought Rolls Royce

Bought another 2073 RYCEY ADRs, at $10.4255.  Total cost USD 21,621.

Thats priced at roughly 13X earnings.  Rare to find inexpensive blue chips in year 6 of a bull market.  Now I have a full position in this counter.

Now around 85% in cash.

Monday, October 5, 2015

Bought USD

In late 2011, I sold my Perth property and converted the money to SGD, because:
  • Commodity booms are cyclical, and we were 9 years into one.
  • The property's price had risen 4 times in 14 years, (non-mining) wages had only risen 50-100%.
  • I was expecting a recession.
The last didn't happen, and I was 2 years early, but the decision proved correct:

Today I converted a significant amount of SGD to USD.  This decision is a lot less certain.

Holding SGD is a little bit of a risk (not a lot), as its lumped with Emerging markets.  The risk is if China devalues the Yuan significantly, due to capital flight and the unwinding of the carry trade puffed up since 2008 by endless rounds of QE, and they start to lose control (1) (2) (3).  But holding USD is a risk if the US economy falls or if we get QE4....QE for-ever....

I don't know what will happen - Nobody knows nuthin'.  But its too much of a risk to hold all my money in SGD, better to balance a little.  Maybe I'm right.  Or maybe I'm the last sucker to make this trade.

Now I'm holding:

In the big picture, I'm still holding cash waiting for the stocks to fall.  And still avoiding commodity currencies like the plague.  Not trying to make money yet, just trying not avoid too much risk.

Friday, August 28, 2015

Rolls Royce: Cashflows

A look at Rolls earnings and cashflows.  Same as for any company I want to buy. 

Earnings vs Cashflows

First, ignore the Net Financing.  These contain large profits or losses from their currency hedges (mark to market), irrelevant to their underlying business.  All the earnings below exclude this.

Lets see how past earnings and cashflows compare:

The stated earnings “smooth-out” the Cash Flow from Operations (CFO).  Sometimes they are higher, sometimes lower.  For the next two years, CFO is expected to be below earnings as large numbers of new Trent 1000 and XWB engines are built at a loss.  When this happens, revenue and profits from future maintenance and long term contracts are recognised at the initial point of sale and held on the balance sheet as assets under Accounts Receivables.  In detail:

All these assets are held under "Amounts Recoverable from Contract" under Receivables.  TotalCare Assets (in blue below) have risen to form the majority of these:

This is a risk, given given the uncertainty in estimating the revenue and costs of long term contracts.  Rolls gave an model example for a single contract (slides/transcript):

The resulting profit (and difference from cashflows) is modelled as:

The modelled profit/cashflows over the product's lifecycle (building many engines over the decades):

In Roll's 1H2015 presentation (p24), the cashflows for their newest engine show that they expect it may be a drain on cashflow for a few more years:

I don't think there is anything funny going on, but earnings will be below cashflows for the next few years, and I need to understand this if I'm going to hold the shares. As investors, we have no way of knowing how aggressive their accounting is.  Their accounting practices were reviewed by the FRC in 2014, where they agreed on the treatment of TotalCare.

The expected free cashflow for 2015 is between -150m to +150m (p17).  Essentially zero.  I'm guessing it may be negative for a few years after that.

There may be write offs risk if flight hours decrease suddenly (e.g.: SARS, financial crisis) or planes are grounded.  If that happened, I'd regret buying the shares before the write-off, instead of after.

Cashflow Generation

A look at Cash Flow from Operations and Cash Flow from Investments.  Major acquisitions/disposals and one-off events for CFI are annotated:

Both annotated acquisitions are for non-aviation businesses.  Without them, they would have generated cash every year.  Hopefully the new CEO will stop.

In the long run, ten years or so, if Rolls wants to develop a narrow-body engine, that would take considerable investment.


I like the company.  If the A350 is a success, earnings should trough in 2015, though free cashflow may be negative for a few years after.  Biggest risk is a recession, financial crisis or SARS/911 type of event, which could affect their revenues and may lead to write-offs.

Saturday, July 11, 2015

US Natural Gas (part 2) - valuing Advantage Oil and Gas (AAV)

Continuing my previous Nat Gas post.   Steps showing how I value Advantage Oil and Gas, a low-cost Canadian natural gas producer.  Since Natural gas prices are highly cyclical, I am trying to normalise them based on the futures market (see Market Based Forecasts here in a paper by Aswath Damodaran).  The futures market is best predictor of market prices as they know more than anyone else.

Heres the details:
  • What are AAV's realised prices compared to the benchmark?  The company gives their realised price and the AECO price (in CAD/mcf) in their quarterly results:

          Showing just the discount:

          Around 0-30 cents.  The discount to the Benchmark is pretty small, unlike in the Marcellus.  Sometime even negative!  Lets take 20c.  Though theres a risk that the discount may widen if too many companies start producing in the low cost Montney area.
  • Look at the Natural gas futures prices.
         Source - (as of 6-Jul-2016).  Great source for simple AECO and NYMEX prices.
         AECO price is in CAD/GJ, which is approximates very roughly to CAD/mcf (100 GJ = 94 mcf).  So multiply by (100/94) to get mcf price.
  • Look at AAV's projected production.  In 2017 they project 245 thousand mcf/day, which is an 1.83 times their 2015Q1 daily production.  From the above futures chart, CAD 3.07 (per GJ) is about CAD 3.26 per mcf.
  • Based on their 1Q2015 profits, project what their profits would be at different gas prices in 2017.  I am using a discount of 20c.  Usually I would go through the income statement and guess which of their costs are fixed (e.g.: General & Admin) and which are depend on production volumes (e.g.: operation expense, DD&A).  But for AAV it didn't make much difference (mostly variable costs), so I just multiplied their profits proportional to the expected production increase.  I get:

Highest I can get is CAD 3.90 at the 2019 price.  At USD 6 plus (~ CAD 7.80) , the stock is overvalued. My ballpark figures can't even get close.

[Edit: 4th Aug:
   Producing gas cheaply is not enough, you also have to deliver it to customers.  Canada has a small population of 35m.  Monty, in West Canada, has historically exported gas to East Canada and the NorthEast US.  Both are under threat by prolific US production there, especially in the Marcellus.  I think that Canada's Montney gas production will rely on LNG exports to Asia.
   Thats a big uncertainty. I don't know enough about the industry to buy gas producers in a new emerging area.]

Price/EBIDTA or Price/Cashflow

Most analysts I've seen use price/EBIDTA or Price to Cashflow (not sure which cashflow...) to value Oil and Gas E&P companies.  You get much lower multiples, because these denominators exclude Depletion, Depreciation and Amortisation (DD&A), which is the largest component of costs for most Oil and Gas companies.  For AAV's 1Q 2015 results for example, DD&A was around 2/3rd of their expenses:

It doesn't make sense to exclude DD&A from the valuation, and also exclude the Cash Flows for Investment needed to drill new wells to make up for the depletion.  Especially when shale wells deplete so rapidly.  For example, AAV's 2015 June investor presentation (p5) shows hyperbolic decline curves for wells drilled in different years:

I cant see why analysts use price EBIDTA or price/cashflow metrics.  This applies to all oil and gas E&Ps, not just AAV.  I just don't get it.