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

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.

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.

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.

Valuation

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.

Conclusion

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.

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.

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.

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.

Stopped the Systematic Strategies

Last week I stopped following these strategies, both the momentum and The Acquirer's multiple.

Returns have been quite bad since starting in February:

• 2% for the momentum strategy.  Its been a choppy market.
• -28% for The Acquirers Multiple.  Value investing has done badly compared to momentum, since 2009 (1) (2).  I'm sure it will come back, I just don't know when.

On a daily basis, both strategies are high beta, and follow/magnify the movement of the Russel 3000 index.  If the index is up 1%, they're usually up 2-3%.  Same for down.  Holding 'value' - at least this kind of 'deep value' - meaning companies that are nearly dead - does not protect you.  On down days, they do worse than the market.

The reasons for stopping:

• Its hard to stick with when it goes wrong for long periods.  When you manually analyse and select own value stocks one-by-one, if a stock goes down, you can try to see why.  Has something changed with the fundamentals, or the macro environment?  Or have perceptions changed?  Has the whole market dropped?  Did you make a mistake?  You can (at least) try to look at the stock with a level head and see if you should cut losses or hold.  With a portfolio of non-discretionary stocks, theres nothing to do except to have blind faith,
• Manually analysing stocks takes more time and effort, but I can choose when to do it.  In most cases my long term investments won't be affected by missing a few weeks of work.  The exceptions are if results are unexpectedly bad, or for sudden crises (eg: HK protests) - though even these take weeks or months to play out.
• It was a pain in the ass to stay up trading 9:30-10:30 Monday nights.  I found Interactive Brokers pretty hard to use, sometimes I sold the wrong amount and accidentally ended up short.  It was only one hour a week, but it was a chore, and I didn't like doing it at nights.

I think the main advantage of the non-discretionary strategies is that it keeps you in the market, so you avoid FOMO.  However they get whipsawed in a trendless market, and will not protect you agains a 1987 style crash.

In the end, I decided hold cash, while building up a dividend portfolio.  I think this suite my personality better, and I can measure progress by dividends collected, instead basing it on stock price fluctuations.

Right now I'm 2/3rds in cash.

Like a diet, the best investment strategy is one you can stick with.

Netlink Trust AGM

I attended the AGM today, there was some Q&A on 5G, the competitive landscape, and capex. 

Here are the points I took.  Things I am not sure, or did not hear well, have a question mark (?):

• Revenue/profit review.  Monthly recurring revenue per-user for Residential is $13.80, and Business is $25 (?).  Installation and Diversions are the only non-recurring revenue streams.  Diversions is from having to divert underground cables due to construction work.
• Netlink currently has an 88% share of the residential market.
• Regulatory profit targets.  Their profit is regulated and reviewed every 5 years (next review in 3.5 years).  A 7% rate of return is targeted - the target profit number will also depend on other factors such as interest rates, debt and capex.  From the target profit/revenue, the regulator determines fees per user, as the number of uses is known.  In the long run, more capex means they will be allowed more profits.
• They see a lot of potential in Smart Nation.  Have received requests from govt agencies to wire up cameras.  Most current cameras are on 4G platform, which affects picture quality.
• Competition in Business Segment.  There were several questions on SP Telecom as a new competitor.  The answers: 1) SP Telecom only competes in the Business connection area.  2) SP Telecom is both their competitor and customer.  Netlink lays cables for them in some areas.  3) The business connection segment is already competitive, with the three telcos already competing with Netlink.  Netlink has around a 1/3rd market share, Singtel is slightly above that.  4) SP Telecom is a small player in this market  5) The telcos have fibre in some areas, but not others.  M1 does not have any fibre (?)
• There were many questions on if the dividend was sustainable.  The answers: 1) Management took pains to state that dividends were only paid out of Cashflow from Operations, not from Capital.  2) In the 2018 results, the 221m dividends is for FY2018 (126m) as well as FY2019 (95m), that is why it is bigger than the FY2019 FCF (158m).  3) They have a 100% payout ratio, no plans to reduce it to 90%.
• There were many questions on 5G.  They answered may times that 1) 5G requires micro base stations 2) These are expected to increase revenue for Netlink  3) Regarding specifically if the last-mile connection can be serviced by a single access point (servicing 5-6 homes with wireless), thus cannibalising Netlink's Residential revenue, they answered they do not forsee this, as they expect home data usage to keep increasing - so it would make no sense to serve the home with (lower/shared) bandwidth connections.
• Capex.  1) Capex was 212m in FY2018, 71m in FY2019.  Expect FY2020 to be more than FY2019.   2) Generally, most of their capex is for expansion.  Sustaining capex is for their central offices' maintenance and equipment (eg: chillers, vehicles); this varies so they can't give a percentage.
• One question on why Trustee fees are paid in cash, not units like other REITS.  Netlink trust owns the trustee.  The money paid is mostly directors fees.   The trustee does not generate a profit, unlike other REITS.
• A throwaway comment that struck me is that Singtel actually has the technical capacity to service Residential, but they do not do so (or not allowed to do do?)

Non-investment things:

• Most questions and answers were worthwhile, for a beginner to understand the business and competitive landscape.  There were only a few stupid questions ("What is the purpose of this meeting?")
• Only tea and coffee after the meeting, no food.

I found it worthwhile to attend, may attend next year.

US Prime REIT

Kyith at investmentmoats has already covered this IPO's buildings and basic metrics.  No need to repeat it here.  They seem decent, except for the leverage.

But he thought they may need to raise money for expansion after listing.  I want to look further at their growth potential.

Growth Potential

Their leverage upon listing will be 37%, limiting their ability to borrow more money.

Is there scope to grow by increasing occupancy?  Not much.  In their 2020 projections that the 7.4% yield (@ 100% payout) are based on, they already assume a high occupancy rate:

Is there scope for rent increases?  Summarising the Property Market Report (Section F) of the prospectus:

Not much here either.  Note that this 3% increase is in gross rent, the percent increase in Net Property Income may be different.  In absolute terms, either all of most of the gross rent increase will be passed through to NPI.  In percentage terms, NPI may increase by more or less than 3%.

Are their buildings' markets expected to improve long term?  From the Property Market Report, we can derive an estimate for how vacancy rates will change in each building's submarket.  We only have the projected change for all of A/B/C class buildings, they did not give the projected change for A-class alone.

Some submarkets are projected to have higher vacancies (bad - red), some lower (good - blue).  The two largest buildings (by value) are red.  It's a little disappointing that the building with the longest lease is in the bluest market. On average, there is a slight increase in vacancy, more so if you weight by the buildings' values.  So generally OK, with a slight negative bias.

My take on these 5 year projections is that future supply is well known, but future demand is pure guesswork.

Conclusion

Its decent, but I can't see much scope for Prime REIT to grow beyond its average 2.1% rental escalations.

I'd like to compare it with Manulife US REIT next.

Dividend stocks: My first big bet

I bought a lot of Netlink Trust and a little Manulife US REIT in the last few weeks.  Enough to give me around SGD 6K of dividends a year.

Now I've got 70,000 shares of Netlink Trust at an average of 85.4c, and 26,800 shares of Manulife at an average USD 0.861c.

Why did I pick these stocks?

• Netlink Trust is a defensive counter, one of the few whose earnings would be unaffected by a recession. And still (barely) trading at a reasonable yield.  Long term, its residential revenue should follow the growth in Singapore household formation.  Its Non-Building Access Point's (NBAPs) should grow with internet-of-things/smart-city coming now, and 5G coming later.  I can't see any disrupting technology on the horizon, though I need to remind myself to keep a lookout.
• Manulife US Reit is developing a good track record after listing on SGX.  It is trading at a decent 6% yield with freehold buildings, unlike local REITs trading at a sub 5% yield with leasehold properties.  The risks are a recession (affects all stocks/REITs), and tax law changes (affecting any US-property REIT listed overseas).

Why did I buy now?

           Scared of missing out.

           Netlink Trust shot up on the day I placed my largest order, and I missed it.  Strong enough that my broker said it would unlikely come down that day.  After thinking about it: I am buying the income stream.  I'll still be happy if I buy at a higher price, and it comes down later, as long as I collect my dividend.  I'll be unhappy if I miss it now, and it never comes down again.  Which is unlikely, but possible - look at Vicom.  There's very few stocks giving a 5+ % yield that would also be unaffected by a recession.  The market was still offering me the chance, so I bought it.  Never regret.

The market narrative now is all sunshine and rainbows, especially for dividend stocks.  The Fed is expected to cut rates.  Worst case - for someone like me shopping for dividend stocks - is that this narrative goes on for another year.  Until the either the economy starts expanding, goosed by low rates, or we do finally get a real recession.

I am now 60% invested.  I don't feel the need to buy anything else this year, but can do so if the market drops.  December showed how quickly the narrative can change.  I am waiting.

Frasers Logistics and Industrial Trust (FLT)

The Properties

FLIT has 60 industrial properties.  By value:

• 2/3rds are in Australia.   2/3rds of those are in Sydney & Melbourne.  Minimal exposure to Perth (1 property, or about 7% of the Australian properties' value).
• 1/3 are in Germany and the Netherlands

The Australian buildings seem to be mostly small, generic light industrial buildings, with a few large warehouses (5-6 buildings).

The European buildings are large Logistics or Industrial buildings.

None of the buildings seem highly specialised.

70% of the properties by value are freehold, and another 21% have a lease of over 80 years.

The Australian Property Cycle

Varies by city and within parts of a city.

• A 2019 Moodys Report expects Western Sydney Industrial property prices to rise, due to online shopping and new infrastructure.
• A Centuria Industrial REIT (ASX:CIP) presentation shows available space declined up to Oct 2018.

To know about the cycles, you really have to be an expert on the land supply in different parts of the cities.  And predicting future demand is just guesswork.

Tenant Quality

Generally good.

FLIT lists all their tenants (how many REITs do this?).  I categorised each tenant, trying to guess their ability to pay rent in a recession:

• Reliable: Is either part of an oligopoly (eg: Coles, Woolworths), government (eg: Australian Post), or listed (showing profits for the last 2 years and reasonable debt).  In essence, no way that they would not pay rent.
• Unknown: Private companies (eg: BAM Wine Logistics, Caprice, Broetje Automation).  Even though some of them sound interesting, there's no way of knowing how profitable they are.  Most companies in the world are going to be here.
• Dodgy: Currently loss making.  So when times go bad, we can expect the company to go under.

Each category, by gross revenue (Sept 2018):

Overall, this is a pretty high level of 'reliable' companies.  If you pick a random street or industrial park to walk through, you are not going to see such a high proportion of 'reliable' companies.

The two dodgy companies are CEVA Logistics: a merger of two loss making companies which is still loss making, and Constellium: an aluminium product manufacturer with borderline profits/losses and large debt.

CEVA is a worry: they are one of FLIT's top 10 clients.  They are renting a massive warehouse in the middle of nowhere - this may be difficult to lease out again, and buildings like this are valued by their lease (...no lease, no value).

But overall, tenant quality seems quite high.

Management Quality

Sponsor Holdings: Frasers Property, holds 20% of the trust.  I haven't looked at enough REITs to see how this compares.

Management Fees (p146): 0.4% of property value as base fee, plus 5% of distributable income.
Seems reasonable.  Would be better if the fee was based on DPU.

Most management fees are paid in units: at least 85% in 2018 (note 5) and 91% in 1H19 (p10).

Trust expenses were very high in 2017, but lower in 2018 (p158).  They were 8.6% and 1% of distributable income, respectively.  I found no explanation on what these expenses were.

Pipeline: ROFR for 17 Australian properties and 29 European properties.

Past Acquisitions have been OK:

• In July 2017, 7 Australian properties were acquired.  A small number of units were issued, plus debt (pp 53-54).
• In May 2018, there was a large surprise acquisition of 21 European properties.  Funded by issuing 484m new units (an increase of 31%), mostly by private placement with some preferential offering.  Borrowings doubled, and leverage increased from 29% to 35%.  Accretive to those who subscribed.
• In November 2018, a single European property was acquired.

The numbers

Gearing Ratio is now at 35.1%.   No perpetual bonds.

Debt Expiry: They have a large chunk of debt due in 2021:

They did mention their intention to refinance the (grey) European debt (currently at 2% interest) with a lower rate later.  But I think they should space out their debt a bit more.

79% of their loans are fixed rate (p5), or protected by swaps for the lifetime of the loan.

Unencumbered buildings: (In Sept 2018 AR, footnote 10) The secured bank loans are secured over investment properties with a total carrying amount of A$969,554,000 (2017: A$Nil).  So out of AUD 3bn worth of property, 2bn is unencumbered.

They have always had 100% dividend payout ratio.

Valuation

Other Risks:

• Kyith Ng highlighted that many of their Australian rents were above market rate during hte IPO (June 2016).  I am factoring in a AUD 3-4m income to be lost because of this.
• AUD has dropped a lot recently, I am factoring in a rate of 1 SGD to 0.9 AUD.  Same as the global financial crisis.  Assume no change in EUR/SGD exchange rate.

For a target 6% yield, I would value the stock at SGD 1.10.

Dividend Portfolio

Inspired by posts like this and this, I've decided to slowly start a dividend portfolio.  I'm looking for stocks with a 6% yield -  the hard part is to judge if its sustainable.

I aim to buy SGD 8K worth of stocks per month for the next 3 years.  Plus a little more when I get my bonus.   This should give me a 300K portfolio in 3 years, with an income of 18K per year.  I expect a serious downturn in the next few years, which would make me buy faster.

I've started with:

• Cromwell Reit (10,000 shares) - not great, but had an 8% yield which is probably sustainable.
• Netlink Trust (12,000 shares) - low yield, under 6%, but very stable.  I can't see any threat from 5G, and NBAP revenue may grow from IOT.
• Manulife REIT (6,800 shares) - 6% yield, US economy still looks strong, the main risk is taxation (resolved for now, but always in the background).  Impressive Management.  [Update 21st May: Bought another 7000 shares]

Should give me enough dividends for kopi everyday.

Some REITS I've looked at but haven't bought:

• IREIT Global main tenant seems to be in long term downsizing.  Too bad, its good otherwise.
• CapitalMalls Malaysia Trust has reasonable 7% yield, as the Malaysian Retail market is currently oversupplied - could I buy for a cyclical upswing?  I decided not to as 1) The only players that seem to maintain their advantage are the 5 premier malls with 1m+ square feet.  Although CMMT's Penang's Gurney Plaza is good, it is not unbeatable.  2) Small, mixed use malls and individual strata malls are disadvantaged.  So why did CMMT buy Tropicana (mixed use) and Sungei Wang (strata)?  As mall operators they should know these problems, especially as they've seen it play out in SG before.  Why such stupid acquisitions?
• Singapore Industrial REITS have high yields, but are paying out 100% of their distributable income, even as they have short leases.  So you need to deduct 1 to 3 percent from the yield to get the 'true' long term yield.

I'll look at Frasers Logistics and Industrial Trust next.  Maybe Malaysia later - there may be some lower priced REITS there, as their industrial, office and retail property sectors are in a property glut.

Systematic Trading: Week 11

Momentum (Clenow)

On Monday night:

• Sold INSM at 27.7, GRA at 73.43, EOLS at 22.39, PYX at 16.79 and CPRX at 3.08.
• Bought EIDX (Eidos Therapeutics Inc): 132 shares at 24.78, ADVM (Adverum Biotechnologies): 504 shares at 6.59, BOOM (Dmc Global Inc): 48 shares at 69.15, TGTX (TG Therapeutics Inc): 455 shares at 7.39, and LSCC (Lattics semicondictor Corp): 256 shares at 13.19

Systematic Trading: Week 10

Momentum (Clenow)

On Monday night:

• Sold EHTH at 59..89.
• Bought CVNA (Carvana Co): 54 shares at 69.6)

Systematic Trading: Week 9

Momentum (Clenow)

On Monday night:

• Sold MRTX, XPER, LRN and CMG.
• Bought CNST (Constellation Pharma: 317 shares at 12.41), YETI (Yeti Holdings: 112 shares at 34.41), VYGR (Voyager Therapeutics: 183 shares at 21.69),  and CPRX (Catalyst Pharma: 690 shares at 5.76), 

Systematic Trading: Week 8

Although the market is up, my momentum portfolio is now down 1% from starting.  The TAM portfolio is down 5%.

Value (The Acquirer's Multiple)

No change.  Waiting to rebalance late next month.

Momentum (Clenow)

Sold LCI and NVCR.
Bought DBD (Diebold Nixdorf: 271 shares at 13.25) and TLRA (Telaria: 494 shares at 7.23).

Notes on Cromwell Reit

The European Industrial Property Market

Where are we in the property cycle?

We are late in the cycle.  The European Industrial and Logistics market has been recovering since 2013, and yields have been driven down by investment:

                Source: Cromwell 4Q18 Results Presentation, 27 Feb 2019

This doesn't mean we are at the top.  That will probably only happen now if there's a slowdown or recession.  This is the same risk for buying any stock.  Personally, I'm dealing with that risk by remaining half in cash.

The Properties

A miscellaneous collection of light-industrial and office properties across Europe, with no underlying theme.

              Source: Cromwell Rights Issue Presentation, Oct 18.

Most properties are freehold, less than 10% leasehold:

               Source: Cromwell Rights Issue Presentation, Oct 18.

Most of their buildings are generic industrial, warehouse or office buildings:

Only 2 buildings, or less than 1% of their portfolio, are customised for the tenant.  Both are leased to the Italian Police.

The largest tenant is the Italian State Property Office (Agenzia Del Demanio), who manage real estate assets for the Italian Government, at 16% of revenue:

Since their property is freehold, it has redevelopment potential.  They mention Parc des Dock St Ouen in Paris (p16), with an estimated Euro 1bn (0.45 per share) redevelopment potential over 10-15 years.

Tenant Quality

Hard to tell, most buildings are multi-let.

I'm worried about their largest tenant - the Italian State Property Office - cutting their budget, as Italy's budget deficit is too high for its slow growth.

Management Quality

Hard to say, as they've only been listed for a year.  During that time they made a rights offering to acquire more properties.  This was accretive for those who subscriber, but dilutive for those that did not.

Kyith Ng from Investment Moats makes the point that the managers are the same people from the parent, and they previously did a bad job of timing their purchases, especially with Valad Property Group.

So neutral to slightly negative on Management Quality.  The stock might be re-rated if they can prove themselves over a few years.

[Edit May 2019: Cromwell Property Group owns 35% of the REIT, which aligns their interest somewhat.]

The Numbers

Borrowing

Gearing ratio is around 33.9% to 37% (p41).   No perpetual bonds.  Their preferred range is 35-38% (p205).

Debt expires in 2020/2021.  A bit lumpy for my liking, but they said they want to refinance to 2020 debt now:

Most debt is floating rate, or only hedged short term:

• 18% of it is floating rate
• 40% is hedged for 1 year or less
• 15% for 2-3 years
• 14% for 4 years or more.
• 13% is fixed rate

Unencumbered Buildings: Around 20%, or 19 out of 92 buildings are unencumbered:

• 14 out of 60 light industrial buildings (in either France, Germany or the Netherlands) are unencumbered.  We do not know which.  
• Out of the 32 "Office & Other" buildings:
• The Ivrea, Barea and Genova properties in Italy are unencumbered (p207).  These have a valuation of 121m.
• 2 other of these buildings are encumbered, we do not know which.

Leases

WALE is 4.7 years, quite long for industrial property.
Lease expiry is around 10% per year until 2022:

I am guessing that they will not have more than 20% lease expiry an any single year from 2022 onwards.

Quality of Distributable Income

Income Support: No sign of income support in the Income or Cashflow statements.

Management fee is 4.9% of Distributable Income (p7).  Trust expenses are 6.1% - these seem to be recurring (eg: annual listing fees, legal/valuation/audit/accounting fees).  I have not looked at enough REITS to tell if these fees are high or low.

100% of management fees are paid as newly issued units.

Valuation

The trailing yield at a share price of Euro 0.51 is 7.5%.  This should increase next year as the newly acquired properties contribute.  Maybe 8%.

100% of distributable income is payed out as dividends (I would prefer 90%).
[Edit June 2019: This is only until "end of the 2019 financial year. Thereafter, CEREIT will distribute at least 90% of its annual distributable income for each financial year." p10 ]

Summary

Risks are:

• European slowdown or recession.  
• Property market cycle: oversupply caused by low or negative interest rates
• EU breakup.  Their properties and loans may end up being in different currencies.
• Rising rates would cause problems, unless they hedge more.
• They will have to issue more units if they want to expand.  Like they did previously.
• Budget cuts from their largest tenant - the Italian Government

I think this is REIT is OK at the current price, the risks are priced in.  And I think the yield is sustainable.

I bought 10,000 shares at Euro 0.495.

Systematic Trading: Week 7

US market went up slowly but steadily this week on trade deal news.  I bought 2 stocks in each portfolio on Monday (6th Apr) - now both are fully invested with 25 stocks each.

My Acquirers Multiple portfolio is down around 2%.  My Momentum portfolio is up around 1%.

Value (The Acquirer's Multiple)

Bought the next 2 stocks from The Acquirer's Multiple All Investable Stock Screener.  I will now wait for quarterly rebalancing.

Momentum (Clenow)

Bought 2 stocks:

• GH (Guardant Health), bought 50 shares @ $77.53
• TNDM  (Magenta Therapeutics Inc), bought 232 shares @ $16.66

My Portfolio

Is around 50% cash, 30% systematic and 20% discretionary.  

I'm sitting on the fence.  I want to be in the market because it can go up - I don't think we've had the final burst of euphoria that marks the end of a cycle.  Its like we're in 1998.  But we're also nearer to the end of the cycle than the beginning - and its hard to find stocks I want to buy-and-hold at these prices.  The systematic strategies help me participate in a rising market, but limit downside if the market drops like in 2008.

Systematic Trading: Week 6

The market has not been doing well, and its starting to look like a false breakout.

Nevertheless, RUA is still above its 200 MA, so I've been buying.  Bought the below on Monday night (25th Mar).

Value (The Acquirer's Multiple)

Bought the next top 5 stocks from The Acquirer's Multiple All Investable Stock Screener.

Momentum (Clenow)

Sold 1 stock:

• Sold LIVX at avg price of 5.465.  Loss of $330.

This is what the losing trade looks like:

Bought 6 stocks:

• FSCT (ForeScout Technologies), bought 91 shares @ $43.61
• TNDM  (Tandem Diabetes Care Inc), bought 57 shares @ $68.65
• EOLS (Pyxus International Inc), bought 169 shares @ $23.59
• PYX (W. R. Grace & Co), bought 140 shares @ $28.15
• AVLR (Avalara Inc), bought 72 shares @ $54.31
• NVCR (Novocure Inc), bought 83 shares @ $47.82

DKSH (Malaysia)

DKSH Holdings (Malaysia) is a distributor which handles consumer goods, pharmaceuticals, and chemicals.  They handle the stocking, transport and billing of their customers' products over region-wide points-of-sale.

Companies use them to distribute and market goods into Asia.  They handle the logistics and provide a single point of contact/payment.  The goods they distribute are varied: instant coffee,  lego,  snacks,  CT Scanners, prescription drugs, specialty chemicals.

The company operates throughout Asia, but did not break down revenues by different countries in their 2017 annual report.

Competitive Advantage

Does DKSH have sustainable competitive advantage?  Looking at its market share:

   Source: DKSH Capital Markets day 2015.

Even though it is among the top 3 players, the competitive landscape means it will be a price taker.  So no sustainable competitive advantage.  I see this as buying a reasonable company for a cheap price, not a Buffet-like investment that will compound for years and years.

Financials

Revenue and profits have grown, in line with the economy:

Why did profits drop in 2014 and 2015?  They attributed it to:

• 2014: Due to investments in Healthcare distribution centre, costs from relocation of distribution centre, and new rental costs from the group's offices which they no longer own.
• 2015: "difficult market conditions", with some infrastructure and one-off costs.

Distributors earn a tiny cut of profit when moving their customers' inventories.  DKSH has very small margins - between 0.7% and 1.5% in the last ten years.  They rely on high turnover.  So they have tremendous working capital requirements - in any particular year, Cashflow from Operations (CFO) is unpredictable, due to the change in working capital.  In most 'normal' years - years showing healthy growth - CFO is below income, due to new working capital requirements for continually expanding revenue/income.  In bad years, CFO spikes up:

Because of unpredictable WC, we cannot use cashflows to check the quality-of-earnings for a distributor.  But we can try to estimate if they are sustainable.

Long term I estimate CFO to average 50% of income in a normal year of healthy growth (averaged from 2011 to 2018).  This includes some exceptionally good years where CFO was negative.  It excludes bad years like 2008-09, when profit drops and CFO shoots up.

The Balance Sheet is normal for a distributor: low fixed assets, low long term debt.  

In summary, in 2018 they had:

• Profits of RM 32m.  Profits are leveraged to the economy.
• LT debt of RM 32m.  ST debt of 29m.  Total: 61m  Interest payments were 8.2m, already included in CFO.
• Dividend payments were 16m, not part of CFO.

I estimate long-term CFO roughly at 16m (50% of profits) when things are going well. CFO increases sharply when the economy goes down.

Auric Acquisition

DKSH announced they are buying Singapore's Auric for RM 490m (SGD 157m).    Might be a good price, as Auric was previously privatised at SGD 207m.

From what I can make out:

• They are paying 18X earnings for it.  Auric's annual profit is estimated around RM 20m.
• Lets say they take a (SGD) loan at 7%, that would give additional interest payments of 34m.  Assuming those earnings are backed by cashflow, we have an additional 14m/year left to pay off.
• They can still pay this out from their CFO.  Though theres a chance they have to cut dividends.

Risks

Main risk is cyclical - if a recession occurs, revenue decreases and profits drop like a rock.

The longer term risk for its consumer goods distribution is e-commerce.  DKSH says that they currently sell to or partner with leading online retailers, such as Tmall, JD.com, Qoo10 and Lazada.  They have invested in 2 e-commerce companies: eSweets (a China online seller of sweets) and aCommerce (a Thai eCommerce service provider).

Valuation

A price of MYR 2.50 would give it a trailing PE of 9.1.

Why is it so cheap?

• Falling profits in 2014 and 2015
• Market may be wary of the expensive Auric acquisition announced in December.
• The stock was removed from the Sharia Compliant List in Nov 2018, forcing Islamic funds to sell.

I think most of the risks are priced in.  The main risk remaining is a recession - that could see the stock drop 50%.  If I buy, I'd probably sell at a PE of 15 - which is a 50% upside.

Bought 16000 shares at average price of MYR 2.483.  Total cost SGD 13385

Systematic Trading: Week 5

Last week SPX closed above the much-watched 2800-2815 resistance area.  Its not convincing yet - this week we'll see if its a false breakout.

Following my system, I'm buying stocks, as the Russel 3000 index has been above its 200 MA.

Value (The Acquirer's Multiple)

Bought the next top 6 stocks from The Acquirer's Multiple All Investable Stock Screener.

Momentum (Clenow)

Bought 6 stocks:

• FSLR (First Solar), bought 73 shares @ $54.27
• CMG  (Chipotle Mexican Grill), bought 6 shares @ $648.90
• CDNS (Cadence Design System), bought 65 shares @ $61.37
• GRA (W. R. Grace & Co), bought 52 shares @ $77.40
• MSCI (MSCI Inc - not the MSCI index - the company that provides indexes), bought 21 shares @ $190.17
• PCAR (Paccar Inc), bought 59 shares @ $67.70