Divestment of Cache Logistics and Keppel DC REIT

I did a portfolio update back at the end of last month about what I intended to do with the existing holdings. I did a write up mentioning how I would close out the Keppel DC REIT and/or Cache Logistics Trust positions if share prices ran up. And so it happened for Keppel DC REIT right after the announcement of strong results, the next morning the share prices surged, rising from $1.06 to $1.08 in a day. This was in contrast to the languishing REIT universe, perhaps due to the impending interest rate hikes.

My take on this is that until the rate hike is announced, it is likely that the REITs will continue to stay weak and subdued, with fear stemming from the uncertainties of the rate hike timing. Markets hate uncertainties, and will punish those assets perceived to do badly in the worst case scenario. 

Here are my opinions on why we observed the diverging sentiments Keppel DC as opposed to other REITs.

Keppel DC REIT

Keppel DC REIT is probably perceived to do well comparatively against the other REITs, given its strong balance sheet and fundamentals. The phenomenon we noticed I believe is due to funds moving out of REITs which were perceived to do badly in rising interest rates into cash-rich firms or companies with strong fundamentals. As I had mentioned in a previous post, in an environment of rising interest rates, REITs with a strong interest coverage ratio, with lower average debt costs and low gearing would do comparatively better than other REITs. This are the 3 key criteria I look out for in REITs in a rising interest rate environment, and Keppel DC REIT checked all the boxes. For the reasons on why Keppel DC REIT, check out my previous post here.

So if I felt that Keppel DC REIT would do well, why did I divest? Well, on hindsight, it was more of a mis-timing on my part, with REITs doing poorly all around, the expectation that this rally was short-lived led me to believe that Keppel DC REIT would test the previous high of $1.08 and fail to break out. So I took profit at $1.075 and soon realised a few days later that it was a mistake. I had also wrongly predicted that the REIT would stay weak until the rate hike, which is widely expected to be announced in September, therefore in turn allows me an opportunity of a better entry to get back in. However, the stock defied gravity of negative REIT sentiments to surge on, even continuing to surge after it went ex-dividend. I don't believe in buying higher prices which may be prone to huge corrections after a strong rally, and so there was I, kicking myself for letting go too early.

Cache Logistics Trust

Cache Logistics was a disappointment on many fronts. I had wrongly predicted that prices would rise from the previous low of $1.13/1.135 towards the high of $1.20 which happened many times before, clearly obvious in its share price chart.

I had also ridden on this for a couple of times successfully, buying at $1.15 back in October 2014 to selling at $1.19 within the same month. I repeated my tactics in early 2015, buying Cache Logistics at $1.145 per share, and selling at $1.20 after holding for slightly more than a month. And then most recently in mid March, I took advantage of the FOMC meeting jitters to buy at $1.15 again and selling the shares at $1.20 after Cache Logistics results were announced.

This time, I tried another time, putting in 3 times the usual amount of capital and waiting for a strong rebound in prices. The moment came a few weeks later, but the strength in the rally was clearly weakened by the hidden selling pressure. I had realised this as early as towards the end of June, when selling pressure continued to pile onto Cache Logistics Trust, selling into strength of any uptick in prices. This was unlike the uptrend movement I experienced previously, and this got me a little suspicious. A quick check with insider trades of Cache Logistics Trust revealed the following.

As if the already weak sentiments of REITs are not enough, there were many insiders selling their stakes into the market, BNY Mellon was one of the major sellers along with sponsor CWT Limited and C & P Holdings selling rather large stakes as well. A quick check further earlier in history showed CWT and C & P Holdings did sell stakes before, albeit always together, but at much lower stakes than recently. The situation was further exacerbated by BNY Mellon and the other investment firms selling their stakes all within a day. The large amount of shares suddenly introduced into the market has allowed more shares in circulation, which means any buying pressure would be absorbed by the large amount of shares sold into the market. I had observed liquidity of Cache Logistics shares had always been lightly traded, with only about 4 million shares traded in its highest volume day, usually the average was about 500k shares a day worth of volume. This time volumes were higher, (highest almost 8 million shares traded!) which validates my observation.

If we look at the recent volumes to the right of my cursor, average volumes are noticeably higher since the beginning of June 2015. This is in contrast to the volumes experienced to the left of my cursor in the earlier periods.

Furthermore, the recent quarterly results revealed weaker fundamentals which I have not expected. The distribution was announced to be the same steady amount of 2.140 cents this quarter, but do not let the numbers fool you into another quarter of steady DPU (distributions per unit). This quarter's distribution includes the contribution from the recently acquired Australian properties as well as a partial capital distribution from the divestment of the Kim Seng warehouse on top of the usual income from its existing properties. One would expect distributions to be much higher than the usual 2.146 cents the previous quarter, but alas the distribution was a disappointing 2.140 cents. This is after it has geared up to an uncomfortable 36+% gearing, which leaves little room for growth in future DPU. Further investigation into the announcement of the Australian properties acquisitions revealed nothing was mentioned about the properties being yield-accretive, instead mainly focusing on how this diversifies the portfolio of assets geographically. Therefore, I can conclude the acquisition resulted in Cache Logistics be ing much higher geared with no net improvement in distribution, something I am very disappointed with. The results also revealed the lower distributions to be due to the conversion of properties from single tenanted to multi-tenanted, and the resultant higher expenses of the conversions. One good point to take from this, however, is that the conversion expenses is likely to be a one-off expense and not likely to affect the sustainability of the DPU.

Perhaps I am reading too much into it, but the price movement of the counter persistently showed it was clearly rather weak, failing to breach the first hurdle, the resistance of $1.16. In the earlier sessions, it was not too long before the resistance was breached, before easily gaining ground towards the stronger resistance of $1.20. As we can see from the price chart, the resistance of $1.16 was tested 3 times but failed to break through. I had tried to sell my holdings at this level multiple times, but to no avail. So I did the next best thing, I sold my entire stake in Cache Logistics at $1.155 to preserve my capital as I have a feeling once the stock goes ex-dividend, there will be persistent weakness in the stock. Will that happen? Only time will tell, and I will be ready to get back in once the price is right.

I did not gain much from the trade, but it was a worthy lesson for me. Doing the proper research into insider trades as well as diversifying instead of putting all your eggs in one basket even when you feel pretty sure that it is going your way is inevitably taking on a large risk. Only one man has been able to do that, and do it so well, and that man is Warren Buffett. I definitely cannot say I did as deep a research into a company as he did, so its much better for me to diversify instead. I am perfectly alright with lower but yet decent returns.

Shale oil drillers' lifeboat won't last much longer

Before last year oil price crash in 2014, many oil producers bought insurance on their selling price of crude oil at approximately $90 or more, most above $100 per barrel. This was to protect oil companies from oil price shocks like the one the world suffered in the past year. Now this insurance is expiring this year.

Maybe this year is what OPEC is waiting for. The year where majority of the oil price protection would give way, and many oil companies, particularly the smaller ones, would be vulnerable to the low oil prices. We can imagine OPEC eagerly waiting for this moment where many of the shale oil producers start to fail and disappear from the market, enabling OPEC to consolidate further market share from the US producers, while enduring low oil prices which were hurting their country's economic budgets. But it is probably worth it, as they renewed their efforts to continue pumping supply into the market even at depressed prices.

The purpose of buying such hedges was not so much of the protection of the margins, but more of the buying of time for these shale oil producers. The transfer of risk to counterparties has allowed producers to focus on cutting costs and on more efficient oil-producing regions before the day of reckoning is about to begin. For many companies, this allowed them time to cut back on the number of oil-producing assets, particularly the inefficient ones, which were more vulnerable to the tighter margins that is to come.

For oil exploration company SandRidge Energy Inc, the protection from such hedges was so crucial that it had made up at least a whopping 60% of the company's income for the quarter!

Now with the insurance expiring this year, such oil producers could buy insurance at the current price of around $50 per barrel, which may not make sense, unless the oil prices continue to decline. Or perhaps they may not protect against the prices, and focus on delivering profits on the already squeezed margins. Whatever the decision made, the true test for oil companies is beginning to unfold.

Some oil companies may, however, continue with hedges, as they see it as a form of insurance and part of the business costs, to protect from sudden shocks of the oil market.

Unfortunately, the situation may be about to get worse. With the hedges expiring, the risk grows and creditors would be much more cautious when it comes to lending more debt to oil companies, particularly so since it is likely oil producers would be facing a tighter cash-flow from then onwards. This is a double whammy for shale oil producers, which may need not just fight for margins and market share in the already weak oil market, they have to contend with the tighter credit lifeline. 

How I hoarded $20k in 9 months

9 months is a significant milestone for many, from the birth of a beautiful baby from conception to the faces of proud officer cadets in the passing out parade after months of tough training. 

It is of no exception for me, as I have managed to save $20k of savings from my salary alone over the same period. This is excluding CPF contributions, allowances to parents, contributions to the company stock plan as well as miscellaneous spending.

For better understanding, many would ask what my current salary is, given it is the main contributor to my savings at the moment. As a fresh graduate of almost a year into my working life, I am considered to be an average wage earner amongst my peers, getting about $2k after accounting for CPF, stock plan contributions and allowances to parents.

So in 9 months, simple maths would mean that I had managed to save about $2.2k per month. Now, that is funny you might say, how was I able to save even more than how much I take home from my day job? And to add to that, I have not even accounted for miscellaneous spending, which would result in me saving slightly less than $2k per month.

First, the year end small bonus did help a little, but that only added about $1k to overall savings, after the pro rated adjustment as I started work only from the second half of the year onwards.

Second, I was able to limit miscellaneous spending, partly because I am not seeing someone currently, and that helps me to save a fair bit. Spending at lavish restaurants and clothes are basically limited to only moments that call for celebrations and limited by necessity respectively. I am currently living with my parents so that cuts down on a major cost, i.e. rental and that also takes care of utility bills and dining options. The next bigger expenditure would be lunches during workdays, which I have always brought my own lunch to work wherever possible. Same goes with my breakfast, eating a simple bread and spread suits me better than having an oiler alternative in my company in-house canteen. On days without home-cooked lunches, spending at the in-house canteen is relatively cheaper, limited to $3, as compared to my peers working in town, where prices of food range from $4-5 to the high tens.

Third, where we put our money to work provides an invisible helping hand to our finances. We might not think that the income is substantial, but do not underestimate the power of compounding returns. Do refer to my previous post on the power of compounding for more information.

http://a-dividend-simpleton.blogspot.com/2015/05/with-great-discipline-comes-great.html

Where we put our money would depend on which gives us the biggest bang for our buck. On the back of miserable interest rates provided by bank saving accounts, it may seem a daunting task to get higher returns for our money. Fortunately, OCBC's 360 account had provided me with probably the best solution so far. Most of my idle cash is currently with OCBC, where I feel is the best interest paying account for my situation at the moment. Do refer to this post for more information.

http://a-dividend-simpleton.blogspot.com/2015/05/ocbc-changes-terms-of-ocbc360-account.html

It has been less than a year with OCBC360, but it has been largely rewarding so far. It has been providing very good returns for the almost no risk taken. Seriously, where can we get that kind of deal? It has been so significant that I found myself considering whether the opportunity cost of taking funds out of the account to invest into certain counters for a potentially higher return, BUT this involves taking substantially larger risk!

Fourth, my investments has helped to play a role in providing some spare cash to cover for much of my expenses. I would consider myself lucky to have my strategies working out so far, and am currently reviewing all strategies as I go along. However, the risk aversion in markets currently is a tricky environment to navigate and I think there has to be a greater consideration for risk management has to be part of my future strategies.

And there you have it, this was how I did it. It requires quite a bit of discipline and patience, but delaying instant gratification would definitely provide for a stronger platform to grow your wealth much significantly in future when the power of compounding kicks in. If Dividend Simpleton can do it, so can you!

Portfolio Update - June 2015

*As of 30 June 2015

	Counters	No. of Shares	Average Price (SGD)	Total Capital Invested (SGD)
1.	Cache Logistics Trust	24000	1.1472	27,533.97
2.	Keppel DC REIT	8800	1.0486	9,227.48
	Cash Reserves and Equivalents			14,000.00
	Total SGD			50,761.45

Total Invested Capital = $36,635.20

Total Expected Dividends/month = $218.59

Average Dividend Yield = 7.16%

For the month of June, I have bought up a fair bit of REITs to my portfolio. This includes the usual Cache Logistics Trust and a small addition of Keppel DC REIT.

The purchase of Cache Logistics Trust is a usual REIT which I have traded regularly over the past few quarters, with the exception of certain quarters where I felt the prices were too overvalued and ran the risk of a heavy profit taking. Other than that, prices which were fair and below was generally welcomed and I am happy to accumulate for a good risk to reward ratio. If my trading plan fails, I intend to hold the stock for its good yield of 7+% to cover for my risks taken. 

But why this stock but not others?

Well, it has to do with the charts. Cache Logistics Trust presents a good trading opportunity to buy on supports and sell on resistances. It produces clear support and resistance lines, which is pretty easy to spot even for a novice. The plus point of trading a REIT is that compared to trading other stocks which give little or no dividend, REITs provide high dividend yields which allows some protection if the trade goes bad, which should be acceptable because I had entered at a position where the price was either fair or undervalued in my opinion. So far I had been fairly successful, but I have been generally trading only in small quantities as it is still currently in a "testing" phase. This time I have increased to a fair bit of position, partly because of the breaking of supports at 1.15/1.145 which I had initiated the first and second positions, and towards the lower support at 1.13/1.135 where I averaged for my third position. Now, basically its a more of a hope and pray situation haha

For Keppel DC REIT, its more of an investment than a trading position, though if the price becomes attractive, I will not rule out selling my position. Keppel DC REIT is a defensive stock with its long WALE of 9.2 years. It has a healthy 8.1 interest coverage ratio and a low average interest rate of about 2%. This numbers are important particularly with the impending interest rate hike by the US Federal Reserve. I would like to see high coverage ratio, which shows how many times of earnings covering its interest expenses from taking on debt and low average interest rate to minimise interest costs. Gearing is a low 29.9% which allows for ample growth of DPU through acquisitions, which recently it has made its maiden acquisition of a data centre in Sydney which is likely to provide some boost to the DPU. The current yield is a decent 6%, but I am hoping for more acquisitions to provide a greater boost to its distributions, taking advantage of its low gearing. 

Let's see how this 2 investments go from here.

The Current Slump in the Oil & Gas Industry

When I joined my current oil company back just last year in August 2014, oil prices was trading slightly above $100 per barrel.* The oil and gas sector in Singapore back then was running at full steam, coming from a strong year in 2014 for the "black gold" related businesses. Analysts were expecting 2015 to be no different, some even predicting this year to be stronger for the oil sector.

*Refers to brent crude oil prices

What actually happened was a rude awakening to everyone's expectations. Oil prices plunged to less than half of its value back in mid 2014, to a low of $45 per barrel in early 2015. It has since recovered somewhat, stabilising at around the $60 per barrel region, leading to some analysts to believe that we have seen the worst in oil prices, and that the bottom has passed. Well, oil prices is one thing, but the current situation in the oil industry remains as bleak as when the oil prices plunged back then. I can say this for sure because I am working in the industry, and being at the frontline in this industry has allowed my to form my own views about the future of this industry against the more optimistic analysts.

Oil companies are still cutting back aggressively on costs and spending, particularly capex, short for capital expenditure on new investments in oil assets. The focus right now is on keeping and maintaining the existing assets for a long as they can function. This would affect many companies like Singapore-listed Keppel Corp and Sembcorp Marine, largely because this companies require new orders to maintain their income streams. They do not own oil assets or drill for oil, they service the oil majors with assets like rigs and ships. Primarily, we can view them as manufacturers of such assets, and this is currently a potentially a weakness because they rely on the spending by oil majors to acquire new rigs or ships. With them cutting back on spending aggressively, it doesn't take a genius to know what would happen next. The current supply glut of rigs are not helping, as well as intensified competition from smaller rig builders in Korea and China.

How about if when oil prices do recover strongly back to the $100 per barrel level? First of all, I want to point out that this may take a long time to happen, because the current low oil price situation is a supply-side driven phenomenon, unlike the previous crises of 2008-09 global financial crisis (GFC), or the 1998 asian financial crisis (AFC). Those crises were demand-side driven price plunges because of the plunging demand from consumers. The current situation is different because the issue comes from the heavily increased production of oil, not just from the US shale production which OPEC blames, but OPEC themselves not willing to cut back on production, preferring to produce more to protect their market share. This lead to price plunges not seen since the 1980s. 

Perhaps lets rewind ourselves back to what happened in the oil glut of the 1980s.

If we look at the chart above, oil prices plunged in 1985-86 due to a global glut in oil supplies partially due to slowed industrial activities in major countries. Because of the previously high oil prices in early 1980s ($30 per barrel then was $100 per barrel today), there was over production of oil from non-OPEC countries. The supply glut had actually happened in the early 1980s, with the Soviet Union becoming the largest producer of oil and the US relaxing its controls over its own oil production. This surge in production caused prices to slip, and OPEC responded by cutting production to maintain high prices. This did not work as the reduced production was simply taken over by non-OPEC and OPEC countries who cheated the Saudis. The Saudis were not a very happy group when they found out some of its OPEC members were cheating, so they punished them by producing at full capacity. Oil prices plunged when that happened to as low as $7 per barrel.

US Marines walk past a burning oil well in Kuwait

In terms of price recovery, it did happen, though temporarily during the Gulf War in the 1990s. A sharp spike in the chart temporarily jacked up the price of oil back to the pre-1980s glut era, but fell back down just as quickly when the war ended. Sustained price recovery only came a good 15 years after the plunge in prices.

So if you think this is going to be a simple V-shaped recovery for oil prices, think again. Though I believe that prices would most likely recover earlier than 15 years it took back in 1980s, because the still strong demand from India and China will likely absorb the higher supplies of oil. Once the oil industry finds its footing, and when the market realises that the demand is still very much intact and even growing, prices should recover, likely in a slow sustained manner. The lack of capex spending on new assets also would result in less oil producing assets, which in turn result in demand outstripping supply in future. This is what is going to happen eventually, but the question we should be asking is when, not what will happen.

So, what I am trying to say is that oil demand is here to stay, and while the oil glut may cause reduced prices, going long term on fundamentally strong oil companies is a sound strategy. Keppel Corp or Sembcorp Marine? Well the choice is yours to make, but I have an advice to those who are interested. Both are oil service companies, so basically they will feel the pain much earlier due to rapid capex cuts, and will only enjoy the benefits of the recovery much later than when prices recover when oil majors realise that the industry has recovered before kick starting the capex spending again. In addition, we buy shares as low as possible, so what we do not know is whether the market has priced Keppel Corp and Sembcorp at weakened earnings, as we have yet to see earnings weaken. The large order book created in the pre-glut years is keeping them busy with income streams in the meantime. 

So if you would ask me, I would prefer to wait it out first because the prices may face more downside if cancellations or postponements of the orders are made. Besides, I am already accumulating my own company's shares as part of the employee stock plan, so that should be enough of an exposure to the oil industry for now.

What do you guys think?

How much do you need to earn to be average in Singapore?

Well, we all might wonder, if we took all the recorded salaries of everyone in Singapore and took an average, what would it be? Of course, people in Singapore are "kiasu", which basically means hating to lose out to others, so would very much like to know this in order to know where they stand.

Hate to disappoint, but the average salary would be $5,493. If you are like me, you will most likely be really disappointed with your current salary. But emotions aside, lets see how this is calculated. We arrived at $5,493 from taking all the recorded incomes, basically GDP, and then dividing by the total number of the country's population.

Some of you might say, oh wait, how about the unemployed, the retirees, the school-going children and students? Now, we know where is this heading, taking more people out of the equation is going to make the average income even higher!

Well, the Comprehensive Labour Force Survey done by the Ministry of Manpower proves this by stating the average income to be... wait for it...... $9,207!!!

Oh crap, you might say. This is really way beyond us. In fact, Many people would not even be able to work till they get a salary of $10k or beyond. Actually, that is true, because the average income is skewed so high because the rich are really really rich and the poor are really really poor. The gap between the poor to the middle class is say 5cm, and the gap from the middle working class to the rich is really like 100cm. This is just an analogy to show how skewed this is, which propels the average wage to a whooping $9,207.

The median income is a better indicator. It shows the income earned by the majority of the population. And it is actually just $3,770. Phew!!! We can all breathe a sigh of relief, now that is more realistic some might say.

What we should take from this is actually much more important than simply benchmarking ourselves. We should note that the incomes declared include not just the monthly wages but other forms of incomes as well. So what does this mean?

Don't just stop at working hard to boost your wages. Complaining how low your wages isn't going to make things any better. Instead, look for other forms of income, particularly passive forms of income. The rich got really rich because of the very powerful boost from passive incomes, combined with the power of compounding as I have shown in a previous post. So really, we should stop procrastinating and start working towards our financial freedom today!

Index Funds, a great way to begin your investment journey

Many of my friends new to the scene of investing often ask what they should invest in, something that would have lower risk and a higher return than say, bonds or current inflation rates. Without hesitation, I would recommend index funds. Why, we might ask?

Well, we know statistics had proven that most fund managers of active funds failed to beat the index returns over a certain period. Managers of active funds as the name suggest, actively manages the fund portfolio by selecting stocks which he thinks will beat the market. Often, such funds have higher fees that passive funds which usually track the general market. Definitely then, we can say why not we invest in fund managers which had beaten the market? One thing is that, history may prove a useful tool to gauge a manager’s performance, but the future performance might not be similar in many ways. This could be due to the manager’s lucky streak of being in the right industry at the right time, and this may or may not be due to the well-timed anticipation of the manager.

So, we are pretty well off investing in funds which track the index itself (passive funds), producing market returns which would be enough to beat inflation eroding our wealth. So where do we start?

Well, in Singapore, we have the popular Straits Times Index (STI) ETFs. ETFs are exchange-traded funds. They track all kinds of popular assets; gold, oil, forex and indices etc. For Singapore index funds, there are the SPDR STI ETF and the Nikko AM STI ETF. They are both listed in the Singapore Exchange (SGX) are can be traded like stocks. Both ETFs are good in their own ways, but I would prefer SPDR STI ETFs now that the SGX have already reducing the minimum board lots since Jan 19. The initial advantage Nikko AM STI ETF had over the SPDR STI ETF was that Nikko could trade in lower board sizes of 100 shares, but since the board lots have been reduced across the board, it is now a much clearer choice. In addition, the SPDR STI ETF has a lower expense ratio, which measures the amount of fees the manager charges for managing the fund, aka adjusting the portfolio in order to track the market index as close as possible.

The minimum commission to trade STI ETFs apply though, which is usually $25 for most brokerages. This could be very hefty for small investors looking to only invest say a few hundred bucks into the ETF every month. In which case they can look to many products in the market which allows regular investments into ETFs, such as the POSB Invest-Saver, the OCBC BCIP and POEMS Share-Builder. For more in depth details on these plans, you could refer to the below link.

http://www.bigfatpurse.com/2013/11/sti-etf-monthly-investment-plans-comparison-why-poems-share-builder-plan-is-preferred/

However, the average total cost will be much higher than buying directly from SGX, but it would be very useful for retail investors looking to invest only a few hundred dollars regularly every month. For new investors, this would be a good way since it allows dollar-cost averaging, which eliminates the risks due to market timing.

But there could be an even better way to do dollar-cost averaging, contributing regularly while enjoying the lower costs of buying directly from SGX. Let me present you...

Yes, the no minimum commission works wonders here for the regular small time investor, and could prove to be a very useful tool, provided one has the discipline to continue to buy the ETF regularly, irrespective of the market sentiments at the time. I know there are many people out there who can be easily spooked by market events which deviates them from regularly contributing to the fund.

So which will you choose? The choice is up to you...