What a Start to the Stock Market in 2016!

Portfolio Results for 2015

I think readers of this blog would probably have guessed that I did OK in 2015. AP Oil

gained >46%, Avi-Tech gained >38% but Sembcorp Industries crashed a hefty -34% (all returns before dividends) since my write-up in this blog. What a crazy ride in 2015: On a portfolio basis and taking into account dividends received, my Singapore portfolio went as high as +18.7% (August) but ended off the year with a +12.8% gain while my Hong Kong portfolio went from +48.5% (May) and ended 2015 with +25.7%.

Will 2016 be a good year for stock markets?

Despite a 15% decline in 2015, our STI index continues to register losses in the first few days of 2016. From its peak of about 3550, the index had sunk about 23%. Will 2016 be a down year again? Honestly, your guess is as good as mine.

Opportunities Abound

For me, rather than trying to predict at the macro level, I feel it is more fruitful to focus on valuations of individual companies. Despite the uncertainty surrounding the market, make no mistake about it: there are more opportunities to take advantage of than it was just a few months back. Uncertainty is the friend of the buyer of long term values. Always be extra cautious in your dealings with the Mr Market but never be afraid of taking strategic advantage over him.

What I am going to do in 2016?

The wider the fluctuations of the market, and the longer they persist in one direction, the more difficult it is to preserve the investment viewpoint in dealing with common stocks. I think it is of utmost importance for an investor to have a logical process for investment and have the mental & emotional fortitude to stick to it despite daily market gyrations & noises. Different investors have different philosophies and the following is what I found quite useful (at least for me) thus far:

1. Try to get a general sense how the business operate
2. Ask yourself honestly if you can reasonably see the company still in existence and operating well >10 years later
3. Limit your risk - ensure the company is in sound financial condition
4. Limit your risk yet again - make sure the price you pay is significantly below your estimate of the business' value
5. Diversify your risk adequately
6. Have patience and conviction for value to be realized - the market for short term returns is very competitive but the market for longer term returns is much less competitive

These pointers are quite similar to my post on Our Investment Philosophy and I intend to adhere to it in 2016 and beyond.

Final Note

I’ve been slowly accumulating a few SG and HK stocks in the past few months and one of them appears to be a rare find – having reasonable defensive characteristics with potential for growth and selling at extremely attractive prices. I intend to concentrate more on that particular stock, probably towards 15-20% of my portfolio. If I have the time, I’ll probably discuss more about them.

A few friendly readers actually emailed and asked if I’ve stopped writing. I very much like to continue but will likely do so with shorter posts and at a very leisurely pace. Meanwhile, I’ll be more than happy to discuss investment related questions via the comments section of this blog or email at secretinvestors@gmail.com. Happy stockpicking!

My SG Porfolio 2014 (Top Realized Gains & Losses) and Some Recent Picks

My portfolio experienced quite a few changes in 2014 and I thought its good to highlight a few for my own tracking purposes. I consider this year a lucky year for me as I've sold my 2 main losers before it went down even further. I'm glad to realize a few winners too although most of them went even higher after my sales. Also, my event-type portfolio did not register any losses for 2014. Currently I have 15 Singapore companies in my portfolio and throughout the year it fluctuated between 14 to 18 stocks. Percent wise, my largest total unrealized loss currently in my SG portfolio is -4.4% while the largest total unrealized gain is about +61.3%, both inclusive of dividends.

I classify my portfolio to 2 main types. The first is the normal ones where we just make the purchase based on its quantitiative & qualitative strength and hold on to them until value is realized. The second type consists of event-driven stocks wherein their results depend a lot on certain external or internal corporate action(s) which I feel will close the price-value gap in a reasonably short period of time. Unlike in the USA, these situations are few and far between in Singapore. Consequently, I define them quite loosely and am pretty flexible with the type of event that occurred. For this group, I ensure that there is at least some degree of undervaluation before I make my purchases just to be safe.

Below is a list of my top realized winners (I define this by a more than 30% gain on an annualized basis) and my worst realized losers (Since annualized loss shows less meaning here, I define it by a total loss of more than 10%). Typically I'll buy up or sell down my shares on a scale over a period of time. To make things simple, my annualized returns are based on a maximum holding period which means the actual returns should be slightly higher.

Top Realized Winners

SMRT Corporation Ltd

Average Cost (Incl. Fees): S$1.02

Average Sold: S$1.49

Max Holding Period: 211 days

Returns (net of costs, include div) based on avg price: +47.6%

Annualized: +96.0%
Comment: Quite lucky here as a short while from my initial purchase, the price spiked up due to government's announcement about the new model. Nevertheless, the price at S$1.02 was clearly undervalued. The non-fare segment of the company was rather attractive too. Considering the nature and moat of the business, I probably run the risk that I've sold too low at S$1.49. Price now is S$1.58.

PNE Industries

Average Cost (Incl. Fees): S$0.1044

Average Sold: S$0.167

Max Holding Period: 480 days

Returns (net of costs, include div) based on avg price: +82.25%

Annualized: +57.8%
Comment: Price now at S$0.151.

UE E&C Ltd

Average Cost (Incl. Fees): S$0.737

Average Sold: S$1.20

Max Holding Period: 694 days

Returns (net of costs, include div) based on avg price: +77.4%

Annualized: +35.2%
Comment: Price now at S$1.26.

Koyo International

Average Cost (Incl. Fees): S$0.0528

Average Sold: 0.0864

Max Holding Period: 688 days

Returns (net of costs, include div) based on avg price: +66.4%

Annualized: +31.0%
Comment: Unfortunately the price thereafter went up as high as S$0.194. If I'm a bit more patient, it could have been a 250+% gain... Price now at S$0.154.

Worst Realized Losers

Vard Holdings  

Average Cost (Incl. Fees): S$1.097

Average Sold: S$0.958

Max Holding Period: 468 days

Returns (net of costs, include div) based on avg price: -12.7%

Annualized: -10.0%
Comment: This is probably my most foolish purchase in 2013. Fortunately, I sold months before the steep fall in oil prices. Counter is at S$0.595 now.

Fujian Zhenyun Plastics

Average Cost (Incl. Fees): S$0.168

Average Sold: S$0.155

Max Holding Period: 934 days

Returns (net of costs, include div) based on avg price: -1.8%

Annualized: -0.71%
Comment: Lucky here as I heard it is recently suspended due to some issues with its accounts. Price now at S$0.149.

Top Event-Type Winners

Fuji Offset Plates Manufacturing Ltd

Average Cost (Incl. Fees): S$0.35

Average Sold: S$0.45

Max Holding Period: 2 days

Returns (net of costs, include div) based on avg price: +27.9%

Annualized (Simple Average): >5000%

Captii Ltd

Average Cost (Incl. Fees): S$0.0351

Average Sold: S$0.041

Max Holding Period: 123 days

Returns (net of costs, include div) based on avg price: +17.5%

Annualized: +61.3%

From both the realized and unrealized results, I'm glad that my endeavor to ensure the risk of permanent capital loss is kept to the minimum has been working well. More details about my investment philosophy can be found in my post here. As always, I find that the timing of sales is always the hardest part of the entire investment process. Should we wait for the momentum to fizzle before selling even though it is already above my estimated value? But then again, how do we know that momentum has fizzled and what if the price falls below intrinsic value and never goes back up again? Because of this problem, I tend to start selling in phases when it is near my estimate of intrinsic value range. I guess the trick here is really to make purchases at a price so low that even if the sale is mediocre, the eventual results will still turn out good.

Some Recent Picks

I shall end off this post with 3 recent picks for my portfolio. For the normal portfolio, they are Sembcorp Industries and AP Oil International. You may want to check out my analysis for Sembcorp Industries here and AP Oil here. The event-type pick would be Avi-Tech Electronics Limited (company website) which I have accumulated at an average price including costs of S$0.699. Let's see how things goes from here. What about you guys? Care to share what are some of your picks? Have a fantastic 2015 ahead!

Related Articles:
Sembcorp Industries: Is It Worth The Buy Now?
AP Oil - A Neglected but Cheap Stock in Singapore
Avi-Tech Electronics - Is Quick Profit Possible?

Disclosure:
Long AP Oil, Sembcorp Industries & Avi-Tech.

AP OIL (5AU.SI) - A Neglected but Cheap Stock in Singapore

AP Oil (Company Website) is listed on the SGX and its main activities consist of 3 segments:

1. Manufacturing of a range of lubricating and specialty chemicals for industrial, automotive and marine applications under the group's own brand names.
2. Trading of base oils, additives, chemicals and some related 3rd party products.
3. Franchising which includes trading in raw material for products under the company's brand name. 

Their products are marketed to some 20 countries including Singapore, Bangladesh, Myanmar, Vietnam and others. What attracted me to this company is its relatively strong asset backing as well as ability to generate solid operating earnings and free cash flow. Also, throughout the company's more than 30 years of operations, it only suffered one year of loss which is due to one-off losses in a new business venture. Some key metrics are as follows:

Price = S$0.191
Shares Outstanding = 164,531,172
Market Cap = S$31.43M
P/E (ttm) = 7.0x
P/NTA (mrq)= 0.74x
EV/EBIT (ttm) = 4.3x
ROE (ttm) = 10.9%

AP Oil Financials

Having a P/NTA of 0.74x may not be spectacular but I would like to highlight a few things. The first is that the balance sheet is pretty clean and liquid, with net cash of S$20M (1H2014 Results) or S$0.12 per share. This compares quite favourably with the current market price. Secondly, a close look at the statements shows Associates contributing about $650K to the bottom line while it is booked at $2.9M. If a knowledgeable businessman were to buy this part of the company, I believe they would probably pay at least 7-8 times of its earnings (i.e. about $5M). Lastly, management is able to grow its book value consistently at a compounded rate of >10%/year since 2002 when the statements are available.

Statistically, we see that the earnings and free cash flows are on average, relatively stable and consistent. As alluded above, the trailing ROE is 10.9% and has decreased significantly from 22% in ’09. However, if we adjust for the low returns due to the huge excess cash horde, it should be higher (we estimate it to be in excess of 14%).

The company pays out 10-20% of its earnings, giving a relatively mediocre yield of about 2.5%. The only consolation is that the company has been paying dividends since 2010.

AP Oil Business

Now, we're no genius in the petroleum lubricating or specialty chemicals industry. Much of the qualitative aspects of the company should be reflected into the financials. Since there’s no easy way to ‘quantify’ its quality, our main concern is whether or not we can count upon the company to remain in business like it has before in the foreseeable future.

Other than the usual risks like fluctuation of raw material prices etc (which AP Oil has proven to manage quite well overall and our guess is that the current low oil price bodes well for its bottom line), the key business risk is the concentration of its major customers. The top 2 customers contributes about 40% sales in 2013 and the top 3 about 59% sales respectively in 2012. This got to be a big minus. As a sort of counterbalance, the company has plans to grow market share in existing markets and foray into untapped new territories. Hopefully, this will introduce both customer and geographic diversification. With its strong financial position and experience, AP Oil is well poised to take advantage of further expansion opportunities.

AP Oil is likely to enjoy regular recurring sales from repeat clients. Firstly, the lubricants and blended chemical are expendable products and secondly, it is hardly ‘postponable’ (i.e. once it’s being used up or expended, they need to replenish it pretty soon). Also, our guess is that for some applications and clients, these products form a small part of their budget and it is quite unlikely for them to actively source for another supplier.

Lastly, some products are non-standard and require certain R&D and technical know-how. When a customer orders a product to meet specific requirements, R&D is required to develop a new formula to meet these requirements. Note that AP Oil will retain ownership of the formulation which builds on its existing knowledge and database. In some cases, customers provide sensitive formulation owned by them (which may be sometimes a positive too in terms of customer retention).

AP Oil - Valuation

It seems that AP Oil is a pretty solid business with decent assets backing. Is the company undervalued relative to the market price now? 

As mentioned, AP oil consists of 3 segments. The financial reports separated their individual revenue and gross profit contributions (all 3 segments are still positive here) but lumped all the expenses together. Thus the best way to value the company is by considering the whole.

With its predictable & stable results, it is not hard to have a conservative earnings power estimate for the company of about $4M, which is lower than the past 5 years as well as the TTM results of $4.5M. Despite having a relatively simple business model, nice track record, potential for growth and strong financial setup, I hesitate to give a high multiplier due to some key risks I’ve discussed earlier (I'll probably touch more on that in my future post). A 9-11x multiple should be good enough. Adding to our $12M estimate of net excess cash, the valuation becomes $52M or $0.315 per share. Comparing market price of 0.191, we have an upside of 65%.

Of course, this is just a very simple but in our opinion, quite reasonable valuation process. Although we did test this with other valuation models (which coincidentally gives an intrinsic value range of between $0.25 - $0.35 which reinforces this estimate of $0.315) I think this is good enough. As long as the estimate is sensible and conservative, coupled with a huge margin of safety, there’s no need for an accurate figure. It’s better to be approximately right than precisely wrong.

Insider Ownership

Insider ownership is pretty high at about 50% and the management should care enough for the business to do well. The question here is do they own too much to ignore outside minority shareholders?

Conclusion

With a long operating track record, potential for growth, coupled with a price that offers sufficient margin of safety, we decided to take a position in the company. Sure, the business isn’t the best of the best but a purchase at this low price should be well justified. It's not easy nowadays to find a relatively good ROE company with low valuations. If one can find 10 companies like this, the diversified result should turn out quite satisfactory.

Disclosure:

Long AP Oil (5AU.SI)