Quick Updates: Mapletree Commercial Trust and Gold

Mapletree Commercial Trust owns a popular mall and 2 business parks in the southern part of Singapore.  I bought a small 2-3% position during the 2020 crisis, but never had a chance to buy more.  Turns out to be lucky.  They recently announced a disastrous merger to bail out their HK based sibling.  I don't like the new properties injected (office and discretionary retail), and its too small a position to investigate all these properties scattered around Asia.  I sold it today, taking a small 18% profit, excluding dividends.

For me, its changed from a "buy-and-hold-forever" stock to a "buy-if-cheap" stock.  The number of good companies on SGX grows smaller day by day.

Bought a 4.5% position in gold when it was oversold the past few days.  Hoping to get up to 10%.

Quick Update: Kazakhstan

Riots have erupted in Kazakhstan sparked by rising gas prices, but fanned by inequality and corruption.  This is the risk in investing in poor, one-party states.  The situation may be more stable today after Russian troops restored order.

Kazatomprom stock has fallen around 20%.  I believe the unrest will not directly affect Kazatomprom's output.  I think the Russians will take control, and Kazakhstan will become a Russian satellite again.  Back in the USSR.

Peter Zeihan gives a maps and history of the events, with the above prediction, plus some of its affects on oil/gas markets:

My best guess is that hes right.  It is unfortunate for the Kazakhs, but a poor, empty country of 20m people next to Russia can not be free.

This Al Jazeera interview (starting 11:30), suggests that President Tokayev has taken power from the unpopular Nursultan Nazarbayev, who was retired but still influential behind the scenes.

I've kept my Kazatomprom stock, too late to sell now, the bad news is priced in.  Not buying more as I'm already at my max position size.

Total Energies

Though I've avoided the oil majors so far, Total Energies looks like the best of them.

Business

Excluding 2020, half to 2/3rds of their profits come from oil and gas production:

E&P includes gas production.  The "Gas" in "Gas, Renewables and Power" is midstream/upstream.

As I'm expecting higher oil prices, I want companies with high exposure to oil and gas production.  50-66% is a bit on the low side, but still OK

Reserves

I want to see reserves not depleting over time.  I also split reserves between oil and gas because oil is worth more (in BOEs):

Source: Total Energies' Universal Registration Documents. Search for "Proved Reserves for"

Looks good.

Geopolitical Risk

Their reserves and production are spread around the world:

Source: 2020 Universal Registration Document p68

30% of their gas in from Russia - there's a risk the Russians kick them out (for whatever reason), or they are forced to stop trading with them from US pressure if Russia invades Ukraine.  Even if France did not obey, Total would lose access to swift, and I don't think thats an option today.

Not much dependence on the Persian Gulf, which is always a potential warzone.

ESG Risk

This is the biggest long-term risk to the Oil Majors, and the hardest to predict.  I liked XOM and Chevron before minority shareholder activists Engine 1 added 3 members to XOM's board (1) (2).  Unfortunately the French Government no longer has a stake or golden share in Total, so I don't know if the same thing could happen to them.  I think the French Government have a lot more control over their corporates than the US does - more like Singapore or Norway.

Although Total has been investing more into renewable energy, 75% of their capex will still go to hydrocarbons with natural gas slowly replacing oil.  By 2030, they aim for a sales mix of 30% oil, 50% gas, 15% electricity and 5% biomass and hydrogen, with petroleum product sales decreasing by at least 30% over the period 2020-30.  

Their numbers seem realistic.  I like that they talk straight and are not pretending to be a non-petroleum company.

Valuation

At a share price of Euro 45, based on their annualised 9M21 results, its going for 9.4X earnings.  Valuations don't tell us much since they all depends on the oil price anyway.

The dividend yield is 5.8%, which is covered by their 1Q, 2Q and 3Q earnings (payout ratios of 60%, 94% and 41% respectively).  The dividend was maintained throughout 2020 (which I am not so keen on - I do not feel comfortable with a loss-making company paying dividends while pretending to be a bond).  They have no plans to raise dividends.

French witholding tax on dividends is 28% from 2020 onwards.  Singapore residents should pay only 15% (p13), but it depends on your broker and is probably too costly and time consuming.

Conclusion

This company is OK.  Its hard to find good oil producing companies, so I'll keep it on my watchlist.  The witholding tax is a killer.

2022 Roadmap

 I agree with Felix Zulauf's views.  This is my current roadmap:

• 2022 will be a volatile year unlike the ever-rising markets of 2021.
• Govt fiscal and monetary policy effects have fallen yoy.  He expects a correction in 1H22.  Maybe 15-30%.  Oil could get to $50.  Tech and "risk-on" assets continue to do badly.
• Then the Fed will panic and we get a resumption of the bull market into 2023/2024.
• This will be inflationary, commodities "go wild", oil could go to $200, CPI could be 10%.  Tech and risk-on assets will do well.
• Eventually inflation forces the Fed to raise rates.  Causing the worst bear market in our lifetime.
• He "would love to see gold break the 1720 lows to shake out the weak money....High 1600s, low 1700s would be a good entry point."  He would buy for the coming correction in 1H22, but sell during/after the correction.  Longer term he expects a massive gold boom in 2023/24 with the big bear market.

I think this is a good way to picture the future: a pullback after 2021's excesses, followed by an inflationary boom, followed by $200 oil crippling the world economy.

Its a blurry picture and the dates keep changing.  I previously thought we would have a correction in 2H21 - that didn't work out.  Lets see if this time is luckier.

One thing that could destroy this outlook is war.  The Chinese invade Taiwan, brining a new dimension of risk to the Asian & German economies and global US corporations.  Or the Sunni/Shia resume killing each other, driving oil up beforehand.

Predicting the future is more about what *can* happen rather than what will.  Long term predictions are more intellectually gratifying than useful.

I think its time for me to take another stab at buying gold.  I use Hedgeye to time my trades in the short and medium term.

Goodbye, Aidan

One day, while signing up to some investment forum, I looked around the room trying to think of a username.  A picture of our cat hung on the wall.  So I became BlackCat.

This is his story.

Early 2005.  My wife selected a black kitten from the SPCA.  On the taxi ride home, holding his box in my lap, I opened it and he stared into my eyes.  I knew he would be mine forever.

When we got home he was terrified.  We left him in a room to settle in.  He hid behind the curtains with his little feet showing.  I sat there for an hour to get him to come out.  My wife named him "Aidan".  I called him "cat".

He was scared of everything.  He would hide from the vacuum, from thunder, from any stranger at the door.  When I showered him he would howl like I was murdering him.  He hissed at the vet, who put multiple warnings under his name.

He loved us.  When you held him he purred loudly, you could feel the purrs go through you.  When he was purring in your arms, only the two of you existed and nothing else mattered.

He was demanding.  At dinner time he would meow loudly, a harsh "WAAAHHH", until I put the food bowl in front of him.  He would stand over it and scoff it down loudly.  Somehow, he loved strawberry leaves and yogurt.  He would meow with a psycho look until you gave it to him, then after he gobbled it down he would demand more.

Affectionate, demanding, loud and scared.  Through 14 years he was there for us, through a parade of different jobs, through ups and downs.  Whatever happened, I could pick him up, feel him purr, and everything would be OK.

Late in 2018 he began peeing outside the litter box.  The vet did an MRI scan and said he had a large tumor.  Couldn't tell if it was cancerous, and couldn't operate because he was too old.  "I'm sorry I can't tell you anything good.  Spend some time with him."

We put him in diapers.  Gradually he got slower, walking with a drunken gait.  After his back legs stopped working he would drag himself around with his front legs.  He still loudly demanded food and scoffed it down.  He was stubborn.  When I came home from work he would demand loudly to be picked up.  He rocked sideways with excitement when I reached for him.  I'd put him in my lap and he'd purr and fall asleep.

Last weekend, I had to hold him up to eat his food.  I knew.  I think he did too.  On the last night, he was lying down, couldn't move.  I fed him some yogurt - I can still see his little pink tongue licking it off the spoon.  The vet came the next day.  I held my hand over his little head as he went to sleep for the final time.

Thank You, Aidan.  You bought us joy.  RIP Aidan 2005-2021.

What I'm doing now...

Nothing.

My crystal ball says the inflation rate is decelerating (not deflating).  And every man and his dog is talking about inflation now:

I've stopped buying commodity stocks while I slowly deleverage by adding cash.  Maybe I get another chance to buy if we get a correction in 2Q22.  The crystal ball is blurry and changes a lot.

I still think we're in for a decade of inflation.  US debt is too high.  This is just a short reprieve.

NorNickel, Whitecap, Total Energies and Deterra Royalties look interesting.  Plus maybe ASX and MOEX.

This blog will probably be quiet for a while.

Some Risks of Digital Core REIT

A couple of bloggers said great things about this upcoming IPO.  I agree and think its a reasonable yield, with good growth prospects from freehold properties in a hot sector.  I'll be subscribing.

But since I'm a pessimist by nature, lets talk about the downside.

Taxation

The biggest long term issue.  Avoiding the 30% witholding tax goes against the spirit of the law.  Lets face it, the US does not need Singaporean (or anyone else's) money to build buildings, and there's no benefit allowing foreigners to own local property.  They may as well tax us.  There's an ever-present risk that unit holders wake up one day to find 30% of their dividends taxed.

For those who miss the IPO, maybe you'll get a chance when that happens (or when the market prices it in).

This same risk applies to any SGX-listed US REIT, so I personally wouldn't hold more than one of them.

Inflation

US inflation is hot, over 5% pa for the past 6 months.  Inflation is expected to continue rising due to increased residential rent.

Digital Core's rental escalations are only 1-3%, with a WALE of 6 years.  If we get inflation spikes, we are stuck with today's rental for 6 years.

Management Incentives

The manager's fees and bonuses are based on total property value and net income:

This can incentivise management to do dilutive acquisitions: management fees increase when total income increases, even if per unit income falls.

The fact that Digital Realty will still hold 39% (or 33%) of the REIT helps to lessen the risk of them diluting its value.

Still, I'd prefer to see incentives based on "per unit" measurements.

Summary

Taxation is the biggest issue, and I think it'll will always be hanging over the head of this REIT.  The others are normal REIT risks, see how they fit into your portfolio.

Position size accordingly.