HTL Acquisition of Domicil - 30 Sep 05 @1.29

HTL requested for a mid-day suspension on the trading of its shares followed by announcement of the acquisition of Domicil.

My first reaction is, why the acquisition??? I thought they should be busy increasing its sales in leather and tannery to filled up the increased capacity in China!

Domicil is a leading luxury home furniture brand in Germany with a sales of EUR 22.7M and Adjusted EBITDA of 1.4M. What "Adjusted EBITDA" is that?? Intercompany rental?? Without the adjustment, it is in a loss position of EUR118K. The acquisition costs EUR19M compared with net asset of EUR9M and funding from bank loans. Extra $$ paid for global IP rights - a whopping EUR10M? Bank loans again?? I though you should be reducing your gearing? The sales of Docimil had been quite flat from FY02 to 04. Hey, I don't like this deal!

This acqusition remind me of the loss HTL suffered when it went into retailing few years back. I hope it is not history in repeat.

Probably there will not much market reaction to this deal when open for trading on Monday. If this acqusition does not prove to be a wise one over the next few quarters, I will be looking to reduce my stake and divest to other companies. How about Koda? Will try to do a detail study sometime...

China Paper @ 26.5 cts

List in July 2004 at an IPO price of 36.5cts. The highest price was hit on its debut of 43 cts and eversince it has been drifting downwards.

China Paper was established in Shandong in Linyi City selling papers for for mainly3 main type of uses: 1. general print and writing, 2. packing papers used for wrapping and 3. Semin finished toliet papers in the China Market. It also sells paper chemical products although it consumes 70% internally.

At the time of writing this post, I was very tempted to increase my stakes in this company due to attractive valuation. However, on 21 Sep 2005, the company announced the resignation of its auditors, Ernst & Young Hongkong and appointment of a never-heard-of auditor, HLB Hodgson Impey Cheng.

Although as usual, the out-going auditor confirmed that there is no unusual circumstances that need to be brought to the attention to the members of the company, this is a major shake in my confidence in the company. China companies are generally preceived to be less developed in terms of corporate governance (no doubt they need to compile with the SGX listing requirements) and lack of transparencies. Hence, having a reputable external auditor would definitely mitigate the risk of any hanky-panky going-ons in the company. And as a listed client, which generally sought after by audit firms, I do not believe any major auditor firms would resign without a proper reasonale behind it. According to one source, the disagreement on audit fees was quoted as the reason by the management, but I have my doubts as I feel that as long as it is negotiated on a reasonable terms and good faith, the company and the auditors should be able to find a charge acceptable to both parties. Immediately after the news release, the market reacted by falling to a low of 25 cts the next trading day.

My principal on investment, if don't feel comfortable, do not buy no matter at what price (unless the comfortabilty - price level reach a level which I can accept).

For now, since there is uncertainity for me on the corporate integrity, I guess I would just hold my 5 lots bought at 29.5 cts while watching over the next 3 to 4 quarters to assertain if any unusual things are going on at the company. No more activities on this counter at this moment, but hope for continued dividend at the year end.

REIT Investments

REIT investment was introduced to Singapore in late 2002. The first REIT to list here was CapitalMall Trust. This REIT was only successfully listed during its second attempt after the first attempt failed due to unfamiliarity of such instrument in the local market resulting in low subscription interests then.

Since then, REITs have grown its popularity among the investment community here due to its high yield at IPO of 6-8% p.a. and the investors here becoming more knowledgeable. Following CMT's foot step in listing, AREIT, Fortune, CCM, Suntec, Mapletree and Prime have followed suit.

The returns for pioneer investors in CMT & AREIT have been very rewarding as the trading prices has grown from IPO price of 96 cts and 88 cts to $2.35 and $2.24, representing 145% and 155% capital appreciations respectively while the yield has grown to est 11% and 10.9% based on IPO price.

The good thing about REITs is the DPUs are relatively predictable due to long period of the lease tenors and the fundings fixed (equity and loans) for the investments. A REIT can grow by asset enhancement of its existing properties, e.g. converting certain idle space into leaseable units or dividing the space into smaller lease plots with higher rental/area or simply increasing the rent due to improved human traffice flow or good economy, and more importantly by new asset acquisitions which can be observed by both CMT & AREITs.

The best point in time to invest in a REIT is at its IPO with a reasonable yield to be expected, which I deemed to be minimally 5.5%- 6%, watch it grows over time due to the strategy as above which should gradually grow its yield. At this yield, there is a chance for trading price appreciation as the existing REITs are trading at 4.2% to 5.5% yields. Moreover, setting a minimal yield gives the investor a safety buffer against unrealised loss in capital if the IPO does not perform as expected. Having said that, REIT investment should be held for long term to enjoy the full benefits of capital appreciation and increasing yields. This is an investment not to be missed out in one's retirement portfolio.

But what is the pitfall of REITs investing? As REITs are funded by a portion of loan, it is vulnerable in a raising interest rate environment especially for a prolonged period. REIT usually tries to mitigate this impact by fixed the interest rates for certain portion of its loan and increasing rent (on the pretext that higher interest rates are due to better economic conditions). But I doubt increasing rent can catch up in time to reduce the impact of the interest costs. I view the location of the underlying proporties of the REITs as very important as a good location is not unlike a toll bridge. As REITs operates in the property market, it may be affected by the supply glut (esp in the case of AREITs), which is a point to watch out.


So when is the best time to sell a REIT? I keep pondering over this question and currently, I still prefer not to take profit on my REITs purchased at IPO (and lower) prices. This is due to very high yield (>10%) that I'm getting now and that the REITs are still in an acquisition mode. Existing investors always benefits from new acquisitions (no matter how small) as long it is done at yield accreditive prices. CMT has announced plan to grow to S$5B asset base compare to less than S$3B now over 3 years after which it will start looking for overseas assets. Hence, the future looks bright for exisiting investors.

I recently subcribed for Mapletree logistic at 6% IPO yield and took profit at 45% gain. Why did I sell? Firstly, this is a relatively small REIT, about S$200M+ in assets. So any large acquisition is unlikely to be done at fast pace (compare to AREITs) as its capital base is small. Also, at such a small size, new loans taken up would be quite subtantial over the existing loans and the average cost of funding is likely to be skewed towards the new loans (and bear in mind that the interest rates are expected to be increasing in the mid term). So a quick snag at a price yield of <4.5% for reinvestment elsewhere is a prudent move although holding at 6% IPO yield is not too bad a deal either, take your choice!

I gave Prime REIT a missed due to its projected yield of only 5.12% at the IPO of 98cts. Not much room for capital appreciation at the current price. Also, it only holds a minority stake in the Ngee Ann City which means the effect of asset enhancement may not be felt so much and translate to DPU. Anyway, it will be interesting to watch how this IPO is going to be traded over the next few months to assess how the market preceives this REIT.

I will also be keeping watch on Suntec REIT for now, assessing the impact of the recent apprehensions about the proposed acquisitions and the loss of a major office tenant in 2 years' time.

Dividend Yield Investing

I view dividend investing as an important part of long term investing strategy other than investing for capital appreciation.

When I first embarked in my journey of investment, I was all focused in getting into the right (hot) stocks which the market might chase after or situational stocks which punters might have rotational plays. This type of investing or rather, speculative approach, has been a very expensive lesson for me.

As I began to take count of my investment gain & loss, I realised that investing for capital appreciation is not predictable even though you may have put in a lot of studies on the business fundamentals. Even if you rightly predictable (or guessed?) the profitabilty of the business, the market may still continue to ignore the stock and you may never achieve the level of returns that you wanted.

However, looking for companies with attractive dividend yields may be an easier exercise than finding the next hot stock. In screening for dividend yield investee, the key question is substanabilty of the current dividend payout. On the topic of substanability, one has to look closely at the operating cashflow and the capex requirement.

Why does a company pays high dividend? Dividend yield makes up of two components; (1)dividend amount, (2) stock price. Hence, a high dividend yield stock can only be either paying a high dividend amount at reasonable stock price or reasonable amount of dividend at low stock price. Therefore, one has to examine these two components of a stock in order to make a better investment decision.

In Singapore context, the stocks that are generally paying historically high are in the transportation, shipping, hotel, property developers and 'public goods' providers.

Transportation stocks
Examples of listed transport company are ComfortDelgro, SBS and SMRT.


How?
Criteria?
when should take profit?
e.g. REITs
when is best time to invest?
Warren buffet on investment
why my choice for dividend
growth vs dividend
fixed dividend vs growing dividend e.g. DBS pref & OCBC
reinvesting dividend, my strategy
type of industry e.g. transport, shipping, REITs,
consistency of paying div, special vs regular dividend, management ownship, cashflow management, capex, share buyback vs dividend

Jackspeed @ 15.5cts

Jackspeed was listed in Nov 2003 at an IPO price of 30cts.

At the IPO, 33 million new shares and 6.6 million vendor shares were offered, with a subscription rate of 200.4 times. First day trading closed at 32 cts.

All time trading high was 42.5 cts in Mar 2004 and all time low to date was 14.5cts in Aug 2005.

Total shares in issue is 131 million, giving it a market cap of S$20.3 million at 15.5 cts.

Jackspeed caught my eyes as the first kind of company, a manufacturer of automotive leather trim to be listed in Singapore (noted that some of my company's cars leather seats are also fitted by Jackspeed). Automotive markets are growing in Thailand and Malaysia, especially Thailand which benefited from the the shifting of car manufacturing bases from Japan. I requested for a copy of Mar 2005 annual report and it was promptly sent to me within 2 days. So this provided me with some reading material over this weekend.

Now let me examine Jackspeed more on its history of business, financials, and future for growth before I go on to examine its valuation and hence investment potentials.

The company was establised in 1993, started as a trader of automobile parts and accessories, founded by Liew Ham Chow (Chairman & CEO), Liew Nyok Wah (his brother) and Chua Poh Chuan (Shareholder). Since then, the Group has grown into a manufacturer of automotive leather trim with one production facility each in Singapore, Malaysia (cater for Europe market), Thailand and Indonesia.

At the IPO, Liew Ham Chow, sold 2.2 millions of his holding (2.24% of pre-IPO share cap) and retained 38.4% of post-IPO share cap. Since then, he has not sold anymore shares. The other vendor of 1.1 million shares was Neo Gim Kong who resigned as an exective director on 31 Aug 2004. The rest of the shares were sold by non-management pre-IPO investors, Sirius Capital Holdings and Tan Wee Teck, who retained 9.15 million (6.98%) each after IPO, but names no longer found in 2005 AR substantial shareholders list.

In addition to the manufacture of custom-fit automotive leather trim for car seats, Jackspeed also provides leather wrapping for other automotive interior products such as steering wheels, consoles, gear-shift knobs and hand brakes. Besides serving the automotive industry, it also cater to specialised industries such as marine and aerospace, providing leather upholstery for pleasure crafts, helicopters and planes for private client. Jackspeed has achieved several international certifications and the 'Jackspeed' brand was one of the winners of the Singapore Promising Brand Award in 2003.


Revenue has been growing consistently over the past years, mainly due to the CD growth in Europe and growth in the OEM market in Malaysia that compensated for the fall in the Singapore Sales. CD provides almost all of the operating profit as OEM has very low OP of 1.8% (FY2005).

In Mar 2004, the company has annouced the secured of a 3 years contract OEM RMB55M from Naza Automotive (KIA) and expansion of its production capacity in Malaysia (S$1.5M from IPO proceeds is intended for production expansion in Malaysia). Jackspeed was also awarded by Airasia to supply and fabricate leather seat covers, aircraft interior reburishment and seat cushions for an undisclosed amount. This contract, in my view, is not substantial by amount, but an important breakthrough to the commercial aircraft industry due to the growing regional budget carrier market. Its contribution is an area to watch in future result annoucement.


The Europe market (mainly UK) is expected to continue to grow, as explained in 2005 AR due to the increasing lifestyle preference in Europe for leather seats in cars over the fabric types. In FY2005, Jackspeed acquired 100% of the Thailand ops (from 40%) which could explain the reason for sales increased in 'Others' geographical market. The average OP margin is expected to drop slightly for Mar FY2006 due to increased contribution from OEM(low margin but high volume), althought the CD growth in Europe is expected to mitigate part of this decrease. Although mentioned in its Prospectus about its intention to expand into the PRC market, no development has taken place to date. On the other hand, the company is faster to move into the Australian market, a big but untested market (not mentioned in IPO) by setting up a subsidairy in Jan 2004 to tap its OEM & CD market.

The prospectus cited following risks relating to its business:
1. Raw material price fluctuations, mainly leather >59% of the operating costs
2. Low barrier of entry for CD & RAM market - mitigated by long established relationship with customers (70% of 2003 sales from repeat customers)
3. Heavy reliance in automobile industry
4. CD market is subject to changes in policies of car distributors & car manufacturers
e.g. loss of supply contract established since 1998 for BMW trim leather in early 2003 due to Performance Motor began to import fully fitted cars instead of fitting in S'pore. Company currently still supply trim leather to Kah Motor, Tan Chong Motor and StarsAutor.
5. Changing new car models which subject company to tender process for the new fittings. End of lifecyle of certain car models have affected the CD revenue in Singapore over the past few years.
6. Substitutes for leather trimmings which may affect the company's production method
7. No long term supply contracts with 6 mains customers, consistuted 70% of 2003 sales.
8. Expanded production capacity in Malaysia, need volume to keep up the capacity after the contract with Naza is over (high overhead costs) - preceived risk by me

Jackspeed's Mar 2005 shows an operating cashflow of $3.3M and spent $1.9M on purchases of fixed assets, mainly in expanding the production capacity in Malaysia. Less capex is expected un FY 2006, having incurred most in FY2005. The company has also reduced its bank loan by $3.1M, hence reducing the interest costs considerably, and is in a net cash position of $6.8M or abt 5 cts/share, largely due to the balance of IPO proceeds. The balance sheet seems to be relatively strong with net current asset of $11M. In FY2005, a total dividend of 0.9 cts was paid, giving a yield of 5.8% at current price.

A strong point for this company is its niche market which there seem not to be many large competitors, and the company is quite sucessful in Malaysia, Thailand and Europe. Its recent move into new market Australia is yet to show results, but if proven sucessful, could increase my confidence for its market penetrations in other new markets. Also, the directors are modestly renumerated ($429K) and dividend payout is expected to remain generously due to high share ownership by the CEO.

Noted also that in June 2005, the executive director cum COO, Chien Ming Chen has redesignated as non-executive director and subsequently resigned as director in July 2005. The CEO is now wearing 3 hats of Chairman, CEO & COO. Not sure if there is an internal disagreement and what kind of implication for the company at management level.

Apart from the changes at management level, the risk of losing any major customers (due to change in procurement policy, or new car models) is my top concern and the company has to reduce its dependency in those major CDs. I would want to watch out for the 1HFY06 results in order to assess if its diversify plans are on track and cashflow remain strong. At the price of 15.5 cts, it is a reasonable price, but the margin of safety should be more unless my concern can be addressed.

A company to watch with patience.