Monday, March 30, 2020


Safran is a great business whose share price has been cut in half.

Its "Fly-by-the-hour" and maintenance revenues make it partially a proxy for air travel.


Safran is in the Aerospace industry, their 2019 segments are:

  • Propulsion.  Building (OE), maintenance (MRO) and spare parts for jet engines.  Almost half of company revenue.  56% of their propulsion revenue is from services (maintenance and parts), the rest is from OE.
  • Aircraft equipment, defence and aerosystems: 37% of company revenue.  1/3rd of this segment's revenue is from maintenance.
  • Aircraft interiors: 9% of company revenue.  One quarter of this segment's revenue is from maintenance.  From the 2018 Zodiac acquisition.

The crown jewel is jet engines.  In the narrow body market, their CFM-56 engine (co-owned 50/50 with GE) is the world's best selling aircraft engine, on the back of secular LCC growth.  They look to continue this dominance as they transition the old CFM engines to the new LEAP, which will work on the Airbus, Boeing and Comac planes.

Their only competitors in narrow body are P&W, and possibly a Chinese supplier for Comac.

2/3rds of 2018's Propulsion revenue was from CFM. So around 1/3rd of company revenue.  Could not find a profit breakdown.

In the wide body market, Safran has been involved the GE90 through its 23.7% stake.  This revenue will fall, as it is replaced by the GE9X, in which they only have an 11% stake.

In the mid range market, they have an 8% stake in the GENX engine, used by the B787 Dreamliner.  This revenue will probably increase in future, as B787 sales continue.

They target different margins for the operating segments:

Contract Liabilities

This is the by far the company's largest liability.  What are they?

Prior to 2018, "Fly-by-the-hour" revenue was recorded when paid, and lumpy costs (eg: 5 year overhaul) were artificially smoothed out:

Source: Safran IFRS 15 workshop (p6) 

For 2018 onwards, with the adoption of IFRS 15, revenue is adjusted to follow the real costs:

Payments in advance (in excess of revenue) are recorded as contract liabilities, against the new cash (asset).  When the lumpy costs occur, they are charged, and the corresponding contract liabilities  are reduced (along with the cash used to pay for them).

Financials and Liquidity

How long can they last in the current crisis?  Without external funding.

Their balance sheet is passable.  Against an adjusted (p15) PBT of 3.7bn, net debt is around 4.6bn.  The main liability is 10.4bn of contract liabilities, we don't know how many years later they are due.

For the income statement:
  • 25bn revenue, 21b costs, 4bn profit.  A 14% operating margin.
  • Of the 21bn: 14bn of the costs are variable (6bn raw materials, 5bn subcontracting, and 2bn external services).  1.6bn is D&A - ignore it.   6bn are personnel costs, take them as fixed.  Interest cost is neglible.
Last week they announced:
  • Net debt is has now decreased to 3.2bn
  • Dividend is cancelled
  • Cash is 3.1bn, of which 2.8bn is accessible within 90 days
  • They have an undrawn 2.5bn revolving credit facility till end 2022.
  • 2.8bn of debt is due this year, they are arranging a new 3bn credit line up to 2 years.  My guess is that this can be done, unless banks run out of money (everyone takes loans at once).  This is not a credit crisis like 2008.
In the worst case, I think this can last them at least 5 months.  Its a blind guess, no one knows how much things can choke up, from the airline customers to Boeing and GE, all the way down the supply chain to the company who makes the rivets.

Their finances are not as conservative as I'd like, a company with so many accrued contract liabilities should have more cash.  Still, leverage is low, and they are not as indebted as the typical US company.  A bit hard for me to make a decision, for three reasons:
  • There's a possibility the covid crisis lasts more than 5 month.  Will be a while before people book holidays again.
  • Many airlines will go bankrupt.  Demand for planes drops off a cliff.
  • There may be supply issues along a complex supply chain.  If any one part fails (one company under lockdown), the whole aircraft is unfinished.  Its not like a Big Mac, where you can still make one without pickles or sesame seeds.
I am undecided.  They can probably make it through, but not sure.  I'm sure that if they ran into problems the French government (or even private investors) would finance them, but I would want to buy shares after it happens.


Longer term:


Doing it based on their peak (pre virus) 2018/2019 earnings for cashflows.

  • On earnings, a price of EUR 90 is 22X 2018 earnings, and 15X 2019 earnings.
  • On company calculated free cashflows (p24), a price of EUR 90 is 22X 2018 FCF and 20X 2019 FCF.
I would probably buy somewhere between 12X and 15X peak FCF.  Around EUR 49 to 68.


Great company.  Not sure if I would buy at current valuations.  They can probably survive a covid slowdown/lockdown without external funding, but not 100% sure.

I think the bear market is not over yet - one month is too short.  Later on, the stock price may be lower, and we may have a better idea about how well they can survive.


When reading company materials, they use the word "recurring" for any operating income.  This includes OE, it does not just mean services.

They don't seem to release detailed quarterly results, which will make it harder to track their financial position in a few months.  Track their press releases instead.

2018 had substantial contract liabilities added (p87), which will make the CFO seem better than it really is.  Not sure about 2019, as the detailed cashflow statement is not release yet.

Sunday, March 29, 2020

Grupo Aeroportuario Centro Norte

Its worthwhile to look for travel related companies with high leverage hammered by the coronavirus. Ones that can survive.

This idea came from Lyn Alden's free newsletter.

Grupo Aeroportuario Centro Norte (OMA) operates 13 international airports in Mexico's central and northern regions till Nov 2048 (28 years from now).  1/3rd of their revenue comes from one airport in the wealthy industrial city of Monterrey.

65% of their revenue is from aeronautical services (passenger and aircraft charges), 20% from non-aeronautical (eg: leasing, hotel, industrial park, baggage services, F&B, and industrial park), 15% from construction (due to capex).  The first 2 are dependent on passenger traffic.


This is a regulated business.  Every 5 years, the airport operator submits a plan (MDP), which projects the traffic loads.  The maximum allowed rates charges for aeronautical services are determined by this.  If the rates are too high for one year (ie: because the operator underestimated traffic), then the government can 'claw back' the excess profits in the next year by lowering rates.  So upside is limited.  Conversely, the company may request adjustment on maximum rates due to natural disaster or recession (5% GDP decrease in 12 month period).

For non-aeronautical revenue, a substantial amount is royalty based (with a minimum and maximum bound).

The next MDP is to be submitted in 2021.


Balance Sheet looks very clean:
  • Total (not net) debt of 4.5m pesos is less that last year's operating income (before interest/tax).  
  • Apart from that, they have cash of about 3.4bn pesos.
  • 1.2bn current liabilities.  So that leaves 2.2bn cash left over.
  • No operating lease liabilities on the balance sheet (IFRS 16 adopted in 2019).
  • Only 2% of their debt is USD denominated, the rest are in pesos (as is their revenue).
Income statement looks straightforward:

Construction costs are the costs of construction (building improvements on the concessions' lands); these are added in revenues then deducted in operating costs (netted out). 

How long can they survive with zero revenue?

  • The first expense line "cost of services", seems fixed (page F-69), so keep it.
  • Remove concession taxes, technical assistance fee, and D&A.  
  • Keep construction costs (part of 5 year plan), and interest income/costs
We get around 2.5bn pesos.  With 2.2bn pesos cash, they should be able to last 11 months with no revenue.

Capital Expenditure

At the end of 2018, they projected 2.1bn pesos capex in 2019, and a smaller 0.5bn in 2020  (p122):

The 2bn is actually to make up for shortfalls in the 2016-2018 period.

However, at the end of 2019, they only invested 1.3bn (p1).  Giving a shortfall of 0.8bn in 2019, and expected 0.6bn in 2020; total 1.3bn for next year if they stick to the plan.  If they do stick to it, then they can only last 10 months without any revenue.  Still not too bad.

Capex for the next five year plan is expected to be 14-15bn pesos.


"In the future, we may face competition from Aeropuerto del Norte, an airport near Monterrey operated by a third party pursuant to a concession. Historically, Aeropuerto del Norte has been used solely for general aviation operations. The state of Nuevo León has requested in the past that the Ministry of Communications and Transportation amend Aeropuerto del Norte’s concession to allow it to serve commercial aviation operations. To date, the Ministry of Communications and Transportation has not amended Aeropuerto del Norte’s concession"

A positive risk is that the concessions may be renewed for another 50 years, though under new conditions.


At 80 MXN per share on the BMV exchange, thats a PE of just under 10 (pre virus).


Mexico has a 10% withholding tax on dividends.  Not sure if this is waived for Singapore residents (Article 10).

Friday, March 27, 2020

Sold Boustead. Waiting and looking for things to buy

Sold Boustead a few days ago at 59c.  Its a low beta stock, so convert it into cash which can buy something that goes up more.

The only stocks I have now are my dividend portfolio, and IAG which has fallen too much to sell (I would consider buying it now if I didn't own it).

I have SGD 250K invested, and 500K in cash.

I think the bear market is not over yet.  I am following Hedgeye for market timing.  They called market crash before it happened.

For the dividend portfolio, I will continue to slowly buy dividend stocks if they drop further. Targets are FCT and MCT.  My trades are recorded in InvestingNote.

For the rest, I am building up a list of stocks to buy.  I'll post them here on this blog, for the liquid ones.  I will buy when Hedgeye calls a turn.  This may be one or 2 months after the bottom - following this strategy means I may end up buying after some big up days.  Can't expect to get the bottom.

Tuesday, March 24, 2020

Interactive Brokers


IBKR is a fast growing international stockbroker.  They make most of their money from interest (2/3rds of revenue in 2019), and the rest from executing trades (1/3rd).  Trading commissions were only 7% of PBT in 2019 - that was an exceptionally bad year for trading - the average from 2015 to 2018 was 23%.  They also do some market making, which is negligible.

Institutional customers make up half their accounts and 65% of their total customer equity.   Over 60% of their accounts are form outside the Americas.

Competitive Position

I don't know who the players are for institutional investors, but assume its competitive.  For US retail investors, a market share estimate does not even include IBKR as its such a small player.  So numbers wise, they have a small share in a highly competitive market.

Their main product, IBKR pro, is for sophisticated traders/investors.  The user interface is complex and hard to use.  But they are one of the few retail brokers that allows you to trade a wide range of markets, currencies and instruments around the world.  IMO, they are not really a direct competitor to the other US brokers, but more occupy a high performance niche.

Despite being low cost, operating margins are amazing:
With these margins, they must have some competitive advantage.

Balance Sheet

Looks good.  Debt and operating lease liabilities almost zero.  2.8bn of cash acts as a buffer around 27bn of cash and securities in client accounts (Financial instruments are not included in cash, as they are mostly options - p86).


Like a bank or finance company, lending money is inherently a risky business.  One where the risks often don't appear on the balance sheet or cashflow statements.

Stockbroking risk is shorter term, as you mark-to-market every day.  But you have to deal with wild price swings:
  • In 2015, when the Swiss unpegged their currency, IBKR lost 137m (down to 115m in 2019 after some debt collection).
  • In 2019, there is an unusual loss of 42m (possibly up to 50m) for margin to "a small number of brokerage" customers who positioned in a US stock that had a drastic change in price (TSLA, maybe?)
These losses look OK in light of their cash and profit numbers.  A normal part of doing business.

However, financing businesses are a black box.  In every crisis a few go bust, and its hard to tell from the financials which ones.  If I buy, size this position accordingly.


Main growth driver is new accounts, which has been in the teens (number of accounts), or twenties (customer equity):

Source: 2019 Goldman Sachs Conference

IBKR is also a platform used by other stockbrokers ("introducing brokers").  The new Chinese broker Tiger, which they own a stake in, performs its trades through IBKR.


Most profits are from interest:

Short term profitability is affected by:
  • Interest Rates.  Lower rates mean "lower net interest income from customer deposits due to interest rate spread compression".  Management stated that 2019 profits would be 22m lower with a 0.25% decrease in rates.  I guess that with rates at zero, interest will be 130m to 200m lower.
  • Market volatility.  "Historically, our profits have been principally a function of transaction volume and price volatility... rather than the direction of price movement."  More volatility means more trades.  2019 was a bad year due to low volatility.  Now the VIX is over 60....yeah, they probably didn't want that much volatility...but lets assume trading revenue goes up to 2018 levels, which is around 200m higher.


This may be a Buffet buy-and-hold company.  No debt, minimum capital required, may have a sustainable competitive advantage.  What price would I pay for it?

  • For a company growing 15-20%, I'd catch a falling knife at 12X earnings. Thats $25.
  • In a more normal market, maybe 12-15X earnings would be fair.  Thats up to $31.

Alternatively, since the majority of earnings are from interest, wait till we see signs of interest rates rising.  Right now, we probably get a recession, then one or two quarters of growth (off a low base)... then we start to expect interest rates to rise.


Glowing report on IBKR from SumZero.

IBKR used to have a larger market making operation, but have reduced it due to HFT.

Sunday, March 22, 2020

Sold CAH and MCK

Sold because we are still in a bear market.

These are low beta stocks that "only" lost me around 20%.   Loss of ~ USD 7K.  They are reasonably valued and good companies - I may buy them back later.

Now I only have 2 stocks outside my dividend portfolio.  Queued to sell Boustead today (another low beta), but probably missed.  IAG has fallen too much for me to sell - worst timed investment ever.

My portfolio value is around SGD 750K, with over half cash.  I will concentrate on finding things to buy when the recovery comes.  We have zero interest rates, fiscal stimulus, and $30 oil...there is going to be a boom.  Just need to wait for the virus to clear up, and the market's volatility to burn itself out.

Monday, March 9, 2020


Straco builds and operate tourist attractions.  They run two aquariums (Shanghai and Xiamen) and the Singapore Flyer. 

Successful tourist attractions are immensely cash generative when things go well.  In 2014, Straco bought the Singapore Flyer from receivership, and turned it around within two years. 

The Aquariums produced the over 90% of the company's PBT in 2018.  Even though the Flyer is profitable, it is still appears to be under-utilised.

The Shanghai aquarium lease lasts till 2037 (plus renewable for another 10 years).  Xiamen is till 2034.  The Flyer is till 2035, with an option to renew for 15 years.

Ticket sales are 90% of revenue.

The income and cashflow statements are straightforward.  The biggest cost is staff, followed by (depreciation + operating lease).  Then repairs plus maintenance.

In normal years, this business spits out money.  In 9M19, net margins before tax were 50 percent!  EPS for the 12 months till 3Q19 were 4.91c.  EPS for 2018 was 4.85c.

All their attractions are currently non-operational.  Annual operating costs in 2018 was 63m, around 8c per share.  Mostly cash, with about 1c/share depreciation.  And mostly fixed costs (staff).  So we could see the company losing 0.58c per share (cash) every month until their attractions re-open.

As of Feb 2020, net cash is 12.6c/share.  After subtracting all liabilities.

I see the coronavirus as a chance to buy the dip.  I think the virus will die down in summer (June).  Assuming 2020 is a write off, they still have 13 years for Xiamen, 16 for Shanghai, and 14 for the Flyer.  Then I would just sit back and collect dividends, or wait for it to re-rate (eg: 12 times earnings ex cash).  The price may shoot up if we get another acquisition and the stock is re-rated as a growth stock.

Bought 31000 shares at 51c. Thats 8X normal-year earnings, ex cash.


  • External events can affect visitor numbers.  Gulangyu island was listed as UNSECO world heritage site in July 2017, and the government tried to reduce the number of visitors, which declined over the next two years.  OTOH, the opening of Disneyland Shanghai helped increase visitors to underwater world.
  • CEO Mr Wu Hsioh Kwang has been an astute and cautious capital allocator.  But he is 69 this year.  Not sure if his experience, judgement and intuition can be replaced ("It was the same feeling I got while standing in Pudong in 1990....").  He and his wife own over 50% of the company.
  • As an S-chip, I would limit purchase to 2% of my portfolio.  There's a risk of China devaluing its currency, and in a crisis they may not allow money to be transferred out.
  • The Singapore Flyer stopped in November due to a "minor" problem, but we have heard no news yet.  The company has not provided any updates, timetable, or detailed description of the problem.  The stock market hates uncertainty, but the company does not communicate well.  We start to wonder if its a "bigger" problem.

Monday, March 2, 2020

Update on Frasers Logistics and Industrial Trust

I looked at FLT 10 months ago, but it never reached my buy price.  With REITs starting to fall, I look again.

July 2019 Acquisition

They acquired another 12 properties.  9 in Germany, 3 in Oz.  Its a significant acquisition, adding 21% to FLT's existing assets.

The numbers look good.  All freehold.  8.6 years WALE.  Slightly DPU accretive.  Better lease expiry profile (p4).

But the one of the tenants may not be so reliable.  Hermes Gmbh is now a top ten tenant, leasing two buildings.  Its a large logistics company that claims to handle 1 in 3 B2C packages in Germany.  Couldn't find any financial info.  But they are owned by Otto Group, which has 177m in profits, zero cashflow from operations vs 172bn in debt (pp 104-106).

Grading the new tenants as reliable, unknown or dodgy (weighted by property price): 37% would be reliable, 44% unknown, and 18% dodgy (just Hermes Gmbh).

FCOT Merger

Just evaluate this as another acquisition.  Its actually 2 acquisitions: the FCOT merger, and an acquisition of (the remaining) Farbourough Business Park. 

Gearing will be 37.4% after the 2 acquisitions.  A bit high.

FCOTs properties are quite big compared to FLTs:

Lets look at the larger ones individually.

China Central Square

This is a is a Grade B office building in the Singapore CBD, with a small retail component.  90.8% occupied (93.9% for the office tower).  WALE is slightly short at 3.7 years (p4).

For grade B offices in general, you need to wait for Grade A rents to rise, after which there is a lagging spillover effect onto Grade B    (1) (2).  The company expects Singapore office rents to be capped in the next 6-12 months (p35).

WeWork is a tenant.

Alexandra Technopark

A technology park building in Singapore outlying area.  WALE 3.5 years.  97% occupied.

FCOT noted (p36) that Singapore Business parks have a 12% vacancy rate , so not expecting positive rent revisions.

Farnborough Park

A business park.  Wale of 6.6 years, 99% occupied.  Long WALE.

The others

Both buildings where WeWork is a tenant have above average vacancy rates (7% for China Square, 18% for Perth).  May not be easy to replace them if they go bust.


The buildings don't seem so good as FLTs existing portfolio.  The Singapore buildings have short WALEs, and don't seem to have potential for rent increases.  The Australia buildings look OK, hopefully Perth is at the low point in the cycle.

How would I value this?

First, I expect the AUD to remain at a low level of SGD 90c.  The Australian Government shows no sign of wanting to raise rates, due to housing prices.

So if the merger fails, I expect DPU of SGD 6.8c.  At a 6% yield, I would pay SGD 1.13.

If the merger goes ahead, they project DPU of 7.38c:

But this is proforma (going back in time, as if the acquisition had been done earlier).  I adjust for a my lower AUD exchange rate, to get 7.14c.  I also deduct WeWork's contribution to get around 7c per share.  So at a 6% yield, I would pay SGD 1.16.

Sold Gold Companies, TLT, bought GLD

Shaken out - can't trade such a volatile market.

From now I post my trades in InvestingNote.  I will post thoughts here that require longer writing.