Purchase of Koda @ 29.5 cts (27 Oct 05)

The stockmarket has corrected significantly and my portfolio has taken a hit. My unrealised investment would likely to go into red for the first time since Jun 2003.

Anyway, I went ahead and take a small stake in Koda (trailing of PE 6.6), a wooden furniture OEM listed in 2002. Koda's revenue has grown from $37M in 2002 to $69M in 2005 and its profit jumped from $3.6M to $5M during the same period, representing a growth of 86% and 38.8% respectively.

Aftering browsing through the prospectus and annual reports for the past two years, I decided to take up a small stake to keep my interest in this company. My feel about the management after reading the reports:

- Although the company is family run with its key management posts filled by the Koh family, the Directors are modestly renumerated. Dividends have grown during the period and with the bonus issue, it appears that the family-management-major shareholders have aligned their main interests with us, the minority shareholders through the profit shareing via dividend distribution method. Yielding a decent 3.4% at my purchase price, the pay-out is only 22%, suggesting there is room for further dividend increase.

- The managment's letters to stakeholders are toned to be humble and honest. The Chairman/ founder is direct and quick to admit its mistake in year 2003 by openly discussing it. The MD had explained at great length the financial highlights and company's strategies for the year forward impressing me with his open style.

From results announcement, it appears that the company is still on its path for further growth in the OEM markets in Europe and possibly America through its design innovation and cost advantage for next one to two years.

Will hold these 6 lots new shares tight for the coming dividend and the next half year results for decide for further increase in my stakes if the price is right.

Using SRS for Tax Minimization

To encourage saving for old age and life after retirement, our government introduced Supplementary Retirement Scheme in 2001 which uses tax deferment as an incentive for Singaporeans to plan for their twilight years.

This scheme benefits tax paying Singaporeans by allowing them to set aside a certain amount of their savings (subject to a cap of $12,750 for 2005) in special account, SRS and this amount would be entirely tax deductible until statutory retirement age, which the contributor can withdraw over 10 years and tax at 50% of the withdrawal. Any premature withdrawal (before 62 years) would be taxed at 100% and an additional 5% is imposed by IRAS.

At a glance, SRS is attractive to income earners who fall in the higher tax brackets. An immediate return equivalent to one's tax rate is achieved upon depositing funds into this account. The money in the SRS can be used to many types of investments except for direct property investment.

One consideration that one has to make (assuming there is no issue on premature withdrawal due to emergency) is how to utilise this money while parking in the SRS. Noted that any returns on investments from SRS funds is returned to this account and at thte point of withdrawal, 50% of the withdrawn amount is taxed. Hence, even though capital gain is not taxed in Singapore, by investing from SRS, the gain is in a way taxed at 50% of one's tax rate when it is withdrawn. Hence, personally I would not be overly inclined to use SRS for aggressive investment but for simple and predictable ones e.g. FD or T bill or SGS bonds. The objective will be to achieve higher returns than the savings account interest rate.

When comparing to voluntary CPF contributions, SRS may be preferred in terms of fexibility of withdrawing the money for emergency use e.g. when retrenched, when in such situation, probably the tax rate is zero due to no income, but penalty of 5% remains. However, if one's objective is for financing housing needs, then SRS is not suitable.

Lastly, one potential cost of using SRS is that it is operated by private sector which may impose service charges in the future although presently it is waived.

I shall make my moves cautiously in planning my retirement nest by investing in various asset classes and tax planning, including:

1. Predictable/ stable income instrument
- FDs
- REITS
- T bills & Bonds
- Dividend income from stable companies
- Endowment

2. Capital gains
- Stocks
- Unit trusts

3. Tax planning
- SRS

4. Personal/ Asset Protection
- Life insurance
- Housing insurance

5. Minimise commercial loans
- Finance asset with cash where possible

http://www.wallstraits.com/community/viewthread.php?tid=1275&page=1 - Forum on SRS

http://www.iras.gov.sg/ESVPortal/iit/iit-se-a1.1.10.1+srs.asp - IRAS on SRS

http://www.iras.gov.sg/ESVPortal/iit/iit-se-a1.1.6.11+relief+cpf+cash+top-up.asp - IRAS on CPF Top-Up

Information from CPF
Voluntary Contributions for Non Self-Employed via E-Payment CPF/3AC

1. For eligibility, you must be a Singapore Citizen or Singapore Permanent Resident. Payment of voluntary contributions is non-refundable.

2. The annual cap on payment of voluntary contribution(VC) is S $28,050 (inclusive of mandatory contributions(MC)) with effect from 1 January 2005. For eg: If MC = $20,000, maximum VC allowed = S $8,050 (S$28,050 - S$20,000) If MC = $28,050, no VC is allowed 3. Any excess voluntary contributions will be refunded without interest.

4. The voluntary contributions are subject to the existing tax rules. You may contact the Inland Revenue Authority of Singapore if you require further clarification.

5. To use this service, you must have internet banking service with UOB, DBS or Citibank. Kindly note that the minimum VC payment via this service is $10.6. To check if your voluntary contributions has been credited to your account, please login to My CPF Online services with your SingPass 4 working days later.

Investing In Treasury Bills - A Singapore Context

In the current low interest rate environment, a SGD saving account may only fetch as low as 0.125% while a 1 year SGD FD gives a rate of less than 1%.

One avenue to increase one's return on idle cash is to invest in T bill which has a materity of 3 months. As I discover, such T bills are issued every monday of the week and can be applied through Primary Dealer banks in lot of $1000. The yield on the latest issue on 3/10/05 was 2.23%. Interest earned from T bills/ SGS bonds is tax exempt. Apply for new issue of T bills does not involve any additional charges unless one bid for the those already in issue (charges built in the bid-offer spread).

Hmmm... how about investing in T Bills using money parked in SRS account ? The benefits would be two folds:

1. Tax savings by contributing to SRS account
2. Increase return on idle cash while waiting for cash to be deployed for share investment when opportunity arises.

Only concern about SRS account is the potential bank fee levied on transactions or monthly maintenance fee. There is published rates but the charges are waived for the moment. I think sometime in the future, it is likely for the bank to charge the SRS a/c holders due to the adminstrative work involved.


References:
http://www.sgs.gov.sg/staticindex.html - SGS website

http://www.wallstraits.com/community/viewthread.php?tid=1710&page=2 - Forum discussion

http://www.mof.gov.sg/taxation_individuals/srs/index.html - Information on SRS (MOF)

http://www.finatiq.com/helpcentre/Hcr_Basics_SRS.shtm - Illustration on SRS

QAF @ 50 cts - Rising tides & Acquisitions

QAF is a leading food company with history as far back as 1950's and listed in SGX in 1967. Over the years, its Gardinia and Bonjour brands of bread have established itself as the market leader in the Singapore, Malaysia and Manila Metro City.

QAF's foray into the Australian meat business in 2001 was an untimely one due to the drought conditions in the subsequent two years which led to high animal feed prices and impact its bottom line. QAF's 2003 results would have been its worst in recent years if not for its exceptional gains of $31M from the sales of its Shop & Save supermarket business.

While its bread business continues to perform relatively well, especially in Malaysia and Philippines, it's Australian meat business has been recovering since early 2004 and is expected to stage a strong turnaround in 2005. Hence, we are expected to see a good set of operating results for FY2005.

Noted that QAF has been on a spade of acquisition trails in the last two years, started off with a 100% in Bakers Maison for A$2.2M (NAT = A$2.2M, PAT A$85K, Mar04 results). It has also been accumulating shares in PSC bring it's stake up to 22.13% (as of Mar05) through open market purchases and right subscriptions from 2004 to early 2005.

In Mar05, it acquired a 100% stake in Oxdale Dairy for A$3.6M to enter the milk and diary business. With these new investments, QAF appears to be very keen in expanding its domain in Australian, possibly to use it as a primary food production base for eventual export market opportunities.

In June-Jul05, it made two acquisition in China;
(1) Shaanxi Hengxing Fruit Juice @ RMB63.75M. representing 51% interest and QAF's share of asset and PAT will be RMB81.3M & RMB16.7M respectively. QAF will extend a loan of RMB50M to this subs, which is in the apple juice concentrate market.

(2) Exercise call option for a 18.74% stake in Zhongguo Jilong of 100.46M shares @ 15.5cts/share. Although this price is at a 6% discount over the price at that time, as of 27 Oct 05, this share is traded at 10.5% (risk of investment writedown). The investee company is in the business of selling preserved food products, peanut oil and freeze dried food products.

(3) The third deal involving China Delisi was aborted.

As of Mar05, QAF has a 22.13% stake in PSC via a series of open market purchase and rights subscriptions. The company has stated that PSC is useful for its distribution network althought I don't see it as a reason strong enough to acquire this amount of stake as PSC does not have very consistent past earnings and has overly diversified into education and hotel business.

Nevertheless, the main attractive of QAF to me is still its Gardinia/ Bonjour bread business which is steady and cash generating. I made an opportunistic buy @ 49.5cts amid its pending third quarter results. I expect the full year results to be strong and the downside appears to be limited with Goi of Di Yi Jia and director Andree Halim buying on dip.