Tuesday, December 3, 2019

Gold Royalty Companies

Gold financing companies are a leveraged play on gold prices.  These companies sponsor gold miners and receive future streams of gold royalties.

A brief look at the 4 major royalty companies:

Silver Wheaton

Only 52% of their 3Q19 revenue was from gold, with 46% from silver.  Didn't bother to look any further.

Franco Nevada Corporation

Franco Nevada is a large company, with 56 producing streams, plus 237 in exploration & development.  (This excludes another 81 energy streams - are they becoming so big they have diffiiculty funding sizeable precious metal streams?).  2/3rds of their 3Q19 revenue is from gold.

They are well diversified.  The two largest projects make up 26% of revenue, the largest 4 make up 42%.  Half their revenue comes from Latin America.

Debt is roughly 2 years' CFO.

For valuation, TTM EV/EBIDTA is 37 (at a stock price of USD 99).  Very expensive.  If I annualise their latest 3Q19 earnings (due to the gold price being higher in the last quarter), EV/EBIDTA is a more reasonable 24.  This shows how leveraged to the gold price this type of company is.

Correlation with gold price: Its daily return has a correlation to GLD of 0.65  over the past 10 years, and 0.73 over the past 6 months.

Royal Gold

Another large company.  They have 7 producing royalty streams, plus 35 producing royalty interests.   78% of their 1Q20 revenue is from Gold.  

They are conservatively geared: debt is 60% of CFO.

They are very concentrated: Their top two streams make up 44% of revenue, and the top 4 make up 65%.  41% of their 1Q20 revenue is from Canada, followed by 22% from Chile. 

Based on annualised 3Q19 earnings, EV/EBIDTA is 22 (at USD 118 stock price).

Its daily return has a correlation to GLD of 0.65  over the past 10 years, and 0.54 over the past 6 months.

Sandstorm Gold

A mid-tier company, with 23 producing streams, plus 167 in exploration & development (appendix iii).  At least 2/3rds of their net income was from gold in 2Q19.

They are conservatively geared: debt is slightly over 1 year's CFO.

There is some concentration risk.  Their largest 2 projects make up over 30% of CFO, and the largest 4 make up nearly 60%.

A large boost in gold production is expected in 2022:

This projected increase is from their Hod Maden mine in Turkey.  They have a lot riding on one project.  There is execution and political risk here, with a lot of upside.

Based on annualised 3Q19 earnings, EV/EBIDTA is 15.6 (at a stock price of CAD 6.92).

Its daily return has a correlation to GLD of 0.57 over the past 10 years, and 0.69 over the past 6 months.

When do we buy gold?

Gold goes up when interest rates go down.  Because it reduces the opportunity cost of holding (interest bearing) cash.

Gold is the Anti-Dollar.  You buy it if you think USDs are going to be worth less in future.  And you would hoard it if we had negative interest rates.

I see gold as a way to short the S&P 500.  If it has another sharp sell off, like in 4Q 18, the Fed will cut and gold will go up.  Gold is uncorrelated with the stock market (GLD and SPX have a correlation coefficient of -0.29 over the past 10 years, and -0.03 over the past 6 moths).

I've bought a small amount of FNV, RGLD and SANDS two nights ago.  Altogether makes up 2% of my portfolio.  I may increase it slowly, later.  This is a trade with a 6-12 months timespan - I do not want to hold gold as a long term investment.

Some links:

1) https://www.stockgumshoe.com/reviews/extreme-value/solving-ferris-extraordinary-upside-in-rare-13-gold-stock-tease/
2) https://seekingalpha.com/article/4231139-skin-game-key-differentiator-capital-intensive-sectors

Thursday, November 14, 2019

Sold Wharf REIC (HK.1997)

Sold this stock yesterday for an SGD 600 loss.  Two reasons:

One: China is not stimulating.  They are still in a downturn from the 2016 credit expansion.

Source: CEIC

Maybe they need lower US rates in order to stimulate.  China is short USDs (too many USD denominated loans, plus a current account deficit), they need to borrow them, and high rates hurt.

Source: hedgeye webcast (6th Nov)

Or maybe the CCP is just waiting for the US election to be over, before giving global stock markets some juice.

Either way its not here yet. I should have waited for the stimulus to start first.  Wharf REIC is a cyclical China play, and we need cashed up Chinese tourists buying LVs and Rolexes for it to take off.

Two: protests are getting worse.  On Sunday, a student was shot.  School holidays have started.  Protesters are now trying to disrupt the city's transport on weekdays - previously the effect was limited to weekends.  Parts of the city look like CNY on weeknights.  People are leaving work early most days, and even many normal restaurants and shops in the CBD are closed.  The protests will not die down, as I initially expected.

Tsim Sha Shui: 8pm Tuesday night

I was too early.  This may be a better trade in 3 to 6 months.

Tuesday, November 5, 2019

Bought CSE Global, Gazprom and a European Bank

Made three trades in the past month.

Bought CSE Global at 46c.  They are a technology company, primarily servicing the oil and gas sector and secondarily, government infrastructure.  Most of their work is project based - they talk about recurring income, but I'm not sure how 'recurring' it really is.  I bought because it was fairly cheap and it 5% yield is probably sustainable.  I can collect it while I wait for oil sentiment to improve.  Key numbers to watch are its order book, and receivables (they had a big problem with them in mid-2017).  Its 2% of my portfolio, due to its lumpy (project based) earnings.

Bought Gazprom at USD 6.91, a Russian gas giant supplying Europe and China.  It was cheap, paying a 7 percent yield (before 10% Russian withholding tax, plus ADR fees).  It should grow dividends to a 50% payout ratio, as their capex winds down and sales increase.  This idea is from Sven Carlin, here.   I'm not analysing it, as its a big company, not transparent, and theres no advantage to me doing so.  Its also 2% of my portfolio, with 2 big risks.  One, geopolitical risk (eg: wars) means gas to Europe may be disrupted, even if its cheap. And two: Putin decides this company should belong to the Russian people, once again.

Bought call options on a European bank.  This bank has gone through several rounds of capital raising and NPL disposal.  Its cheap, trading at half tangible book value, where similar banks from the same country are trading at 70+ percent.  It will probably pay a 5% yield (@ 50% payout ratio).  If it reaches 70% of tangible book by June 2022, my money gets multiplied 2 and a half times.  If not, then zero.  Its a 1% position.

[Edit 8-Nov: Bought more options, expiring in Dec 2021.  Another 1% of my portfolio].

Last month I finished buying Manulife US REIT, its now around 10% of my portfolio.

Saturday, October 19, 2019

Rolls Royce Update

Rolls Royce has been my worst investment, still down since I bought it 4 years ago:

Time to review this position.  If I was not holding it, would I buy it now?

The Story and the Numbers

Rolls' story is that they are slowly building up a large customer base, which will provide them with a continuous stream of payments from maintenance when flying their engines.  Do the numbers reflect this story?

Start with their cashflows.  Working capital swings wildly from year to year, so exclude it.

For the last few years, CFO (ex WC) is ~1.5bn.  With 1bn of CFI, they have 500m of cash to spare.  We can't tell how much of the CFI is sustaining, and how much is new investments.

Looking at the CFO in more detail:

For the last 2 1/2 years, operating profit is near zero.  CFO is much higher, the difference being D&A (orange) and Net Contract Assets (yellow).  The latter are the regular payments made to Rolls under Long Term Service Agreements.  Rolls charges by Engine Flying Hours (EFH).  These items have been paid for, but not recognised as revenue/income, as they are considered to be pre-payments for a 5-year scheduled shop visits (major refurb).

For the last few years we are starting to see EFH pre-payments make up a significant portion of Rolls' cashflows.

Engine Problems

Rolls has had some engine problems with its Trent 1000 (dreamliner).

  • Still causing significant customer disruption.  Fixed blades for the C variant (~50% of the fleet) may be successfully rolled (to target < 10 planes grounded) end of year.  New blades are being designed for the B variant.  New problems were found with the Trent TEN (about 1/3rd of the fleet), currently redesigning the blades, work will continue through next year. (pp5-6)
  • Cash cost for the B/C variants is expected to be ~500m in 2019, reducing to 100m next year.  
  • Cash cost for all Trent variants is 219m in 1H19 (p14).  Cash costs are included in the CFO charts above (as part of Operating Profit), so we will get a boost from their absence in future.


Rolls has long had a target of 1bn FCF by 2020.  This includes 2-300m of inventory reductions in 2020 (p18), so lets make it 750m recurring FCF.  That is 39p per share.  At a current price of 712p, its trading at 18x FCF - not cheap.

Rolls has a 'mid-term ambition' of 1 pound FCF per share (around 2bn in total).  There are 3 ways they'll achieve this (pp9-10):
  • Reducing their manufacturing (OE) cash loss per engine.  They reduced it from 1.7m to 1.3m in 1H19.  They may be aiming for 400K by 2023.  They aim to manufacture 500 engines per year (p17) over the next few years.  If they hit 1m/engine, thats an additional 150m per year (over 1H19 numbers).
  • Improving their aftermarket cash margin.  Mostly from an increased installed base of engines (more EFHs) - this is the bulk of CFO that we saw in above charts.  They expect an additional 150-200m from this.

Service Visits (SV's above) are unscheduled smaller visits, which are recognised when they take place.  Margins for SVs vary be engine type: Trent 700s have higher margin, Trent 900/1000s are lower (p10).
  • Reducing fixed costs: R&D, (Commercial & Administrative) C&A, and capex

It looks like their largest 'improvement' comes from cost-cutting.  They give the projected savings as a percentage of sales, but I think this is too fuzzy and far away to look at now.


Would I buy this stock today?  Its a question of valuation.
  • Right now, I think they can reach 1.7bn FCF (88.5p per share) in a few years.  Based on their 1H19 cashflows (920m, annualised), with continual OE margin improvements (plus 150m), increased EFH (plus 200m), and a removal of Trent 1000 costs (plus 438m).  Check 2019 Cashflows again when full year results are out - capex (CFI) will probably be higher in 2H.   
  • At 15X FCF of 88.5p, this would be 1327p, almost double its current price.  Roughly USD 17 per ADR.  Even if we cut FCF to 1.5bn, there's 50% upside.
  • Rolls story is plausible, and backed up by cashflows.  The new management looks like they will deliver the 1bn FCF/year they promised, though I think they were caught off guard by the scale of the Trent 1000 problems.
The risks are a recession (reducing EFH), or more engine faults.  A recession would invalidate all the above numbers.

If I wasn't holding now, I would buy into this.  Though I'd probably only buy half, this late in the cycle.

Friday, September 20, 2019

Manulife US Reit acquisition of 400 Capitol

The recent announcement seems OK.  Not good, not bad. just OK.

It is a Class A office building in Sacremto downtown (CBD), possibly a "trophy", being the "tallest building in Sacramento...forming an integral part of the city’s skyline. The Property is widely considered the premier building in the market and is downtown Sacramento’s address of choice for premier law, financial service, accounting, and professional service firms."

Average of 2.3% rental escalations per annum.

Committed occupancy is 94.9%, though the small print says that excludes one tenant that has exited since then.

Manulife says that rentals have space to move up:

The 2019 Q2 Cushmand and Wakefield report that I found gives Downtown Sacremto's asking rent as  $3.18 (p3), which would be $38.16 per year.  Maybe the newer report has higher rent.

One of their major tenants is a bit dodgy:

WeWork signed the lease in 2019 Q2 (See p3).  I do not know if the lease length is a long one, adding to the 5.9 year WALE.

The property had a lower occupancy rate of 84% in 2018 - this was before the WeWork lease.  Manulife gave a proforma calculation of how it this acquisition would have affected their results if it had been done in 2018:

Almost no change.  So if WeWork stopped paying rent tomorrow, it is likely that DPU after the acquisition would be unchanged from before it.

Longer term, I think its a good property and I'm surprised they were able to buy another CBD property, rather than suburban.  Shorter term, I don't think its as good as they make it out to be. Vacancies were higher last year, and with WeWork as a tennant, the numbers might not reflect reality.   Perhaps the seller leased to WeWork to increase the valuation before selling.  And perhaps Manulife rushed a bit in order to grow to be included in the Nareit:

Its a valid business strategy to grow bigger to be included in the Index.  Size matters for REITs, and inclusion in the index will boot their valuation, reduce their cost of capital, allowing them to acquire more.

I think Manulife REIT is still decent and, and one of the few SGX-listed REITS not overvalued.  I will be subscribing for the preferential shares, and will continue acquiring it.

Sunday, September 8, 2019

Bought Wharf Reic (HK.1997)

Bought 2000 shares of this company last week, on news of the extradition bill being cancelled.  This action decreases the chance of bloodshed (Tiannamen 2.0) - there's a chance both sides can talk now.

Wharf REIC derives 2/3rds of its profits from Harbour City.  It's a massive shopping complex, with separate buildings for luxury, children, sportswear and dining.   They account for 10% of HK retail sales (excluding F&B).

Their numbers are excellent.  Gearing is below 20%.  Their property's lease is for 800 years.  Its a very simple business where the rental just flows through to the profits.  Its trading at a trailing PE of 7 to 8.  Thats at a payout ratio of 65% (its not a REIT).

This is a cyclical stock.  Leases are short: 1-2 years, which is good in a rising markets, but bad when things go south.  Management is projecting a "high single digit and even "double digit decrease" in retails sales in the second half, which may affect rents that are based on tenants' sales.  This stock can be taken as a proxy for Hong Kong tourism, and Mainland Chinese luxury goods spending.

Why is it so cheap?

  • The global slowdown, and slowdown in China specifically.
  • HK protests

I am buying this stock, hoping that, in one to two years time the protests are forgotten.  Tourism and shopping returns.  Maybe China will stimulate its economy more  stimulus (they have been surprisingly cautions so far), so that more people can travel and buy LVs.

The main risks to this story are:

  • The downturn continues and we get a recession, despite best efforts of the Chinese government.
  • Political risk.  Harbour city avoided a protest, but this may have made mainland Chinese angry.

This is not a buy-and-hold forever stock.  It only forms 2% of my portfolio, and thats as much as I'll buy.  Long term, HK is not a place to park my money.  Unless the government can improve the lives of its citizens (primarily by decreasing property prices), it will remain a powder keg.  And after 2047, the Chinese government does not have to honour any 800-year property lease.

I got this idea from Kyith at Investment Moats.

Saturday, September 7, 2019

My Macro View

I think of macro as a way to explain what can happen, not what will happen.  To see all the possibilities in the future, and make sure you will be OK either way.

The US economy is in a slowdown.  This may or may not turn into a recession.  Previous slowdowns in 2012 and 2015 and did not turn onto a recession and proved to be buying opportunities.

The cyclical downturn started before the trade war in both the US and China.  The trade war is not the cause, just the icing on the cake.  We can get a cyclical upturn without a resolution to the trade war.

Both the US and China will do everything possible to avoid a recession.  Trump to avoid losing the election.  And Xi to avoid a revolution.  Whether the Fed's cutting rates and China's stimulus (for the n-th time) is enough remains to be seen.

No resolution to the trade war.  The differences between China and the US are too big and cannot be negotiated.  This is a cold war.  Longer term, US companies will disengage from China, and there will be two parallel, seperate supply chains.

Long term:

  • I think China's economy will not implode, but will drift downwards as they restructure.  Whenever it looks like it is about to collapse, they will pause restructuring and stimulate.  Stop-start, stop-start.  A glide slope.
  • The Eurozone will a probably break up.  Countries so different should not have a common currency.
  • Theres a small chance of the USD shooting up due to their shortage.  Probably accompanied by emerging market crisis.
Things I think the market is not pricing in now:
  • Oil price recovery
  • For HK/China stocks, a cyclical upturn due to Chinese stimulus.
  • Bank stocks (both SG and US) are low, due to the expectations of low rates foreverrrr.....  If this changes, lets say 6-18 months out, like it did in 2016 after Trump's election, bank shares are worth a look.
  • A crash, due to the market being too high combined with political risk, maybe exacerbated by systematic traders.
In general, markets are high now, I would not buy into "the market" (the indexes).

I am looking at REITS and dividend stocks, but there's not much out there thats reasonably priced.