Sunday, May 31, 2020

What to do with an Annual Report before you dump it

When I was still a novice investor, I remembered feeling exuberant whenever the Annual Report of a company I own comes in through the post. Flipping the colourful, glossy pages of Duchenne smiles, well-posed directors and employees made me feel proud to be a co-owner of the enterprise. Never mind that the pictures only lasted through the first third of the publication and the rest is filled with ant-sized accounting gibberish.

Image by saralcassidy from Pixabay

Alas, nowadays in the name of caring for the environment, many companies opt to mail you a plastic CD instead, with a reply envelope stating if you DO want a physical book to be delivered (gasp!), write back to them.

It is hard to spark joy from a shiny circular thing, but I digress.

By the time you receive the Annual Report, it would have been several months since the preliminary annual results of the company had been announced. SGX has made it very convenient to retrieve the information, lest you forget whether it was 20 or 25 cents EPS last year.

So what grand purpose does the Annual Report still serve in the world of light-speed information at your fingertips today?

For a start, Annual Reports are a good way to get a handle on the qualitative aspects of a company - its directors and management. If you have five minutes to spare, I would suggest to spend it on checking out the Performance Review.

Why? You might ask.

A quick read through the segment should allow you to grasp how candid management is, in talking about the company's performance. Typically, you would get to know the achievements. What we ought to be paying attention to, are the problems:

- Has management been honest about why the foreign subsidiary is still bleeding cash?
- Did management simply attribute current year's losses to an economic downturn?
- Did management write matter-of-factly about the lawsuit a division was involved in?

You don't have to hear it from me. Hear it from legendary investor Warren Buffett. In Berkshire Hathaway's 1998 AGM, Buffett answered a shareholder's question on what he looks for when reading Annual Reports. (You can watch the video [here]. Fast forward to 1:30:00.)

Buffett said,

"We see from that report whether the management is telling us about the things that we want to know about if we owned a hundred percent of the company. And when we find a management that does tell us about those things, and that is candid in the same way that a manager of a subsidiary would be candid with us, and talks in language that we can understand, it definitely improves our feeling about investing in such a business."

And as if to emphasize the importance of this point, Buffett added,

"And the reverse turns us off, to some extent. So if we read a bunch of public relations gobbledygook, you know, and we see lots of pictures and no facts, it has some effect on our attitude toward a business. We want to understand the business better when we get through with the annual report than when we picked it up. And that is not difficult for a management to do if they want to do it. [emphasis mine]"

Even Buffett's right-hand man, Charlie Munger agrees with the observation:

"If you've got a standardized bunch of popular jargon that looks like it came out of the same consulting firm, I do think it's a big turnoff. That's not to say that some of the consulting mantras aren't right. But I think there's a lot...that for a sort of candid, simple coherent prose...a lot to be said for it."

The material may be as dry as your old school textbook. But if you ever find management honest enough with its missteps, capable enough to draft concrete plans to mitigate the failures, and steadfast enough to walk the talk, then the company will likely be in good hands.

And that five minutes before you dump the Annual Report would have given you the peace of mind.

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Saturday, May 30, 2020

Singtel - Five takeaways from 4Q20 analyst conference call

Broker analysts are similar to financial bloggers, in that both have a vested interest in making accurate investment calls. The difference comes when analysts do not have 'skin' in the game, as they are restricted from acting on their own conviction due to conflict of interest.

By listening to analyst conference calls, we can get some insights on what is keeping the analysts up at night, and the important bits of information they want to know about the company's performance down the road.

I recently listened in on Singtel's 4Q20 analyst conference call. Below are my five takeaways:

1. The first volley fired was about EBITDA margin and capital expenditures (capex) for Singtel in Singapore and Optus in Australia. However, Singtel's CEO Ms. Chua Sock Koong refused to provide any guidance at this point, but she hopes to be able to provide some numbers during mid-year. As for Australia, Optus' CEO Ms. Kelly Bayer Rosmarin highlighted the structural transition from operating a proprietary network to being a service provider on the NBN (national broadband network). As NBN works off regulated pricing, they will monitor the margins carefully. Ms Bayer Rosmarin also noted the pressure from years of discounting and heavy subsidies on the mobile side is coming off, and market repair is underway.

SS comment: I take it as a good sign that Optus and competitors are no longer engaged in a price war.

2. Another key question was about the medium to long-term outlook for Singtel's dividend. Of which, Ms. Chua replied the level of the dividend this year would be no reflection of what the dividend would be going forward [emphasis mine]. At this point however, she wouldn't comment on Singtel's future dividend policy.

SS comment: In short, the 50% dividend cut this year is not symbolic of a new trend to conserve cash.

3. In winning the 5G license, Singtel had to make a commitment to provide 50% of the population coverage in two years and 95% in five years. It was explained that the rollout of 5G is not going to be overnight (within a one to two year period), but progressively while improving the existing 4G coverage.

SS comment: I take that as a hint that the 5G capex is likely to be spread over more than two fiscal years.

4. Singtel's Consumer Singapore CEO, Mr. Yuen Kuan Moon takes it as a positive sign that the fourth telco operator in Singapore (read: TPG) has finally launched commercial service. The reason being consumers are now able to do effective comparison between price and quality of each operator's 4G network.

SS comment: From recent news (here), analysts were doubtful that TPG Telecom will be able to sustain the low price point and network quality.

5. HOOQ was Singtel's organically grown video on service provider, which the management finally decided to call it quits. An analyst quizzed whether Singtel will be looking to make bolt-on accquisitions to bolster Singtel's advertising platform Amobee. Of which, Singtel's Group Digital Life CEO, Mr. Samba Natrajan commented they would prefer to invest internally on research instead.


Singtel management is cautious, and will not commit to forecasts that will come back and bite them. 5G capex is going to be a mid- to long-term cash outflow, so I would not expect any urgent requirement for Singtel to raise cash in the markets. Lastly (and gladly), the much reduced 5.45 cents final dividend is not indicative of a new trend; rather it is a conservative response to the present situation. Investors will get more visibility six months down the road.

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Friday, May 29, 2020

Portfolio Summary for May 2020

As of 29 May 2020


Security# sharesPrice S$%
OCBC Bank1,5008.5511.10
ST Engineering4,1003.1911.32
Powermatic Data2,8002.405.82
Genting Singapore11,7000.7857.95
Old Chang Kee5,0000.6953.01
HC Surgical19,1000.3055.04
Nam Lee Metal28,2000.3057.44
Portfolio Value = $115,533

Trade Actions
- Added 600 shares of OCBC Bank.
- Added 1,600 shares of ST Engineering.
- Added 1,900 shares of SATS.
- Added 2,000 shares of Singtel.
- Added 3,300 shares of ComfortDelGro.


Security# sharesPrice S$%
OCBC Bank9008.5512.20
ST Engineering1,7003.198.60
CapitaCommercial Trust5,0001.7513.87
Sheng Siong8,7001.5721.66
HC Surgical19,5000.3059.43
Portfolio Value = $63,071

Trade Actions
- None


SGX - Company was dealt a critical blow when MSCI decided to shift its equity index business to Hong Kong, to the benefit of HKSE. I can understand MSCI's rationale for wanting to tap a larger potential customer base in Hong Kong (due to its proximity to mainland China). It remains to be seen whether SGX management has been humbled by this episode, and how hungry and determined they are in securing SGX's lead in APAC derivative trading over the next year.

Singtel - Full year net profit declined 65% y/y to S$1.08b. Excluding Airtel, net profit declined 21% y/y to S$2.42b. Winning the 5G spectrum means high capex ahead. Board cut final dividend by half to conserve cash. Management is also looking to sell off Optus' tower assets to raise cash. At current price, we're looking at 4.8% yield - still attractive in my opinion, unless there is unexpected COVID-19 pain ahead.

SATS - Poor company got bumped out of MSCI Singapore Index. Tracking funds will likely have to sell off their holdings. Took a chance to load. Still, I'm prepping for extremely lousy Q2 results.

ComfortDelGro - Another company that got dropped from MSCI Singapore Index. Taxi division is bleeding cash, but I'm heartened management is making an effort to secure side income for the cab drivers. Downside should be limited from this price point.

ST Engineering - Company with a comfortable order backlog. Customers may opt to delay contract delivery, but so far no news of clients backing out. MRO business will take a big hit, but that is water under the bridge.

OCBC Bank - Stock got sold down, probably due to its Wing Hang bank/HK protest exposure. Dividend may shrink a bit, but I don't foresee it being skipped like Stan Chart and HSBC.

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Wednesday, May 27, 2020

SGX - Loss of MSCI equity index business

SGX lost a sizable portion of MSCI equity index business today (except MSCI Singapore index futures and options). 

HKSE won the deal.  

At time of writing, SGX stock price had dropped by more than a dollar after lifting suspension.  

Will be interesting to see how much blood loss SGX will suffer from this 'gunshot wound'.

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