Poker Game Over CH Offshore & UE E&C

After the last poker game (i.e. privatisation offer) with Capitaland over CapitaMalls Asia in Jun last year, I was invited to another 2 poker games, this time over CH Offshore and UE E&C. How should I play these 2 poker games to extract maximum value from them?

CH Offshore

This game should end very soon, with the cash offer from Falcon Energy at $0.495 expiring on Mon at 5.30pm. The Independent Financial Advisor recommended that shareholders should reject the offer or sell the shares (if they so wish) in the open market if they could get a higher price. The largest shareholder, Chuan Hup Holdings, has also announced that they would not accept the offer. In fact, they have even increased their stake in the company. 

For me, a key consideration for not selling is the fact that the revalued Net Tangible Asset (NTA) of the company is $0.571. Moreover, if the company could recover a trade receivable of US$44 million, the NTA could go as high as $0.653. CH Offshore has also paid generous dividends in the past, averaging 3.58 cents in the past 3 years. Furthermore, CH Offshore had traded as high as the offer price, so if I had really wanted to sell, I would have done so long ago. Hence, the offer of $0.495 is not attractive. 

The only possible reason for selling is that I have quite a lot of oil-related stocks, as mentioned in My Oil Stock Adventures. This cash offer thus offers me an opportunity to reduce my exposure to oil prices, which is still trying to find a bottom. However, considering that Falcon Energy, which is also in the offshore marine industry, still chose to proceed with the cash offer despite oil prices having fallen by 40% from its peak in Jun by the time of the cash offer announcement suggests that they know there is value in CH Offshore. If an industry expert such as Falcon Energy thinks CH Offshore is valuable, minority shareholders like myself should take heed. So, after considering all the above factors, I'm not accepting the offer. 

UE E&C

UE E&C is the more exciting game as the outcome is more open. The offerer, Southern Capital Group, offered to privatise UE E&C at $1.25. The offer will expire on Wed at 5.30pm. But as at last Thu, it has only managed to acquire 79.05%, still 10.95% short of the level needed to exercise the rights to compulsorily acquire all the shares. It is unlikely to reach this level, as a shareholder has emerged to become a substantial shareholder and increased its stake to 9.20%. Unfortunately, there is no possibility of the offerer increasing the offer price, as it is declared as final. Shareholders either have to accept the offer, sell in the open market, or reject it and risk the shares being suspended and/or delisted. The combined shareholding of the 2 largest shareholders is now 88.25%, with only 11.75% left in the hands of the public. If the public shareholding falls below 10%, the shares will be suspended. To avoid being caught in the no-man's land where the shares may be delisted, I will use the same approach as I had with CapitaMalls Asia, i.e. to accept the offer only partially, such that the proceeds from accepting the offer is sufficient to cover the cost of all the shares that I own. See The Last Stand on CapitaMalls Asia for more info.

Conclusion

Generally speaking, all of us can have different views of the intrinsic value of a company. But when an expert comes along and offer to acquire a company that you own, you can be sure that you have a gem in your portfolio. This expert can be an industry expert, as in the case of Falcon Energy with its cash offer for CH Offshore, or a financial expert, as in the case of Southern Capital Group with its privatisation offer for UE E&C. Granted, they might be able to restructure the company to maximise its value in a way that the original management could not do, but the fact that they see value in the company at the offer price means that the company is more valuable than the offer price suggests. So, why the need to accept the offers?

Also, the conventional market wisdom suggests that the current share price is supported by the offer and if the offer were to expire, the share price would fall below the offer price. My opinion is it should not (assuming there is no change in the prospects of the company), because firstly, the offer already tells us that some expert thinks the company is worth more than the offer price, and secondly, those who want to sell would have accepted the offer, rather than wait until the offer expires and sell in the open market at a lower price. There is some proof of this, in the cash offers for Olam and Hotel Properties (HPL). After the close of the offer at $2.23 in May 2014, Olam's share price dipped below the offer price for a few days and then rebounded, closing as high as $2.69 in Sep 2014. Likewise, HPL's price dipped slightly below the offer price of $4.05 for a few days after the close of offer and rebounded, closing as high as $4.41 a month later. So, again, why the need to accept the offers?

Generally, I think we investors are short-changing ourselves in privatisation offers. We should stop doing so.


See related blog posts:

• The Last Stand on CapitaMalls Asia
• Are Investors Short-Changing Themselves Over Privatisation Deals?
• Case Studies of Unsuccessful Privatisations

My Investment Trends for 2015

Last week, I blogged about the Changes to My Investment Strategies in 2014. This week, I will share what are the likely changes in 2015. 

Dividend Stocks

Generally, I am not a big-time investor into dividend stocks. This is because I am predominantly a value investor. Value investors seek out undervalued stocks so as to make capital gains when the stocks recover to their intrinsic value. Whatever dividends paid out is a bonus and a side-product of the investment strategy. When I firsted started investing, the dividends collected were very small. However, as my capital grows over time, the amount of dividends also grows, so much that they now form a significant portion of the realised gains.

Although I have dividend stocks in the form of preference shares, REITs, some business trusts (and shipping trusts previously), dividends are not the primary consideration for their purchase. These non-equities primarily serve as reserves to be drawn upon in time of market crises, so the key considerations are capital preservation and liquidity. These non-equities must able to maintain their value and allow conversion into cash with minimal loss for reinvestment into stocks during market crises. Only when these 2 considerations are satisfied will I consider the amount of dividends they are paying. Although I have kept a few REITs and business trusts despite them failing the above considerations during the Global Financial Crisis in 2008, I remain wary of them. You may wish to read REITs Are Not Forever Attractive, Do REITs Overpay for Their Acquisitions? and The Hidden Risks of Buy-and-Leasebacks for Industrial REITs for more info.

So, generally, I do not invest for dividends. However, you can easily find investors who have a lot of success investing in dividend stocks. So, one investment strategy I plan to adopt this year is to invest in dividend stocks. I have actually screened through a list of high-yielding stocks. To my bemusement, there are some stocks on the list that I had sold previously, for reasons such as "they were too boring", "not part of my core holdings", "did not want to stick with them through a bear market", etc. Of course, when I first bought them, it was for their capital appreciation potential, so when they failed to meet those expectations, they were sold off. I wondered if I were to buy into these stocks again, this time for their dividends, would I end up selling them off for the same reasons mentioned above? Thus, for the dividend stock strategy to be succesful, some reconciliation needs to take place first, so that I do not end up selling the stocks when the market turns south. So far, 2 stocks have been bought based on the above strategy.

US Index

In Not All Market Indices Are Equal, I mentioned that some stock indices performed better than others and the US stock index has beaten my expectations since 1995. I mentioned that there could be something right going for the US stock market that I might not be aware of, and I would switch one underperforming unit trust into the LionGlobal Infinity US 500 Stock Index in my Supplementary Retirement Scheme (SRS) account. I would probably be starting a new portfolio comprises 70% in the US 500 Stock Index and 30% in global bonds for my cash account to be consistent with my belief. As usual, the key concern is whether now is a good time to invest given that the US stock market has yet again reached new highs and interest rates are going up. There is an inherent defence mechanism built in such a portfolio, as explained in Possibly The Worst Time to Invest. But still, it might be prudent to spread out the investment over 12 months instead of a lump sum. This way, I could also conserve cash for the dividend stock strategy mentioned above.

Overall Investment Strategies

If you put all the investment strategies mentioned in this post and the last, you would realise that they are very diverse. I am, all at the same time, active in passive investing and passionate about active investing; going after capital appreciation in undervalued stocks as well as dividends in fully-valued stocks; bought the highest-price stock (Keppel Corp) and the lowest-priced stock (turnaround stocks) in my investing history. How do you make sense of all these seemingly contradictory investment strategies? It arises out of a realisation that, after 28 years of investing experience (including the years I was monitoring stocks for my father), all investment strategies work to some extent, but none will work perfectly. See An Advice for Myself for more info. When you let go of a single tree, you will gain a forest.

Donation Policy

This part is not about investments but is more related personal finances. Truthfully speaking, I have not been very generous about giving donations. The main reason is that I am frugal in spending. Secondly, I believe I could grow the money and make a larger donation in later years. Assuming that I invest $1 at 7% for 25 years, it will turn to $5.43. It is better to donate $5.43 than $1.

However, progressively, there has been shifts in my thinking regarding donations. Part of the reasons is that there is some room to relax the purse string after working and investing for 16 years. Secondly, I am beginning to come around to the idea that donation is not about sympathy but a social obligation to help those lagging behind. You can find the shifts in thinking in The Economics of Income Inequality and Capitalism, Consumerism & The Distribution of Wealth.

There is another blog post that I have not written that will complete the picture why the review of my donation policy has taken more urgency. Generally, the idea goes like this: when we see people who are successful, we believe that they are successful because they have worked very hard and took more risks than others. The conventional wisdom is that those who are less successful should then work harder and/or take more risks rather than rely on others for help. However, does it mean that those who are less successful did not work as hard and/or took less risks? Or employees who did not get promoted put in less efforts than those who got promoted, or students who did not get As in their exams are lazier than those who got As? While it may be true that some people who are lagging behind did not work as hard, I believe we also know of instances where we or others have put in a lot more efforts, blood and sweat than those who were eventually successful and still did not get the desired results. Most of us have tasted both success and defeats before to know that efforts do not always commensurate with outcomes. When seen in this light, everyone, both ahead and behind, is really one big community. A member who is ahead should help those who are behind. It is not charity or sympathy, but an obligation because we are all part of the same community. Relatively, we are both ahead of some people and behind others, and we could all lend a helping hand to those who are behind us.

So far, the small steps taken are to increase my monthly contributions to Community Chest and in my expense tracking, to take the "Donations" expenses out of the "Others" category so that it has its own budget rather than share a budget with all other uncategorised expenses. I have also added a link to SG Gives in this blog for readers who might wish to make a donation. For 2015, a review will be carry out to determine how much money should be donated and how should it be donated.

See related blog posts:

• Changes to My Investment Strategies in 2014
• An Advice for Myself
• Charity

Changes to My Investment Strategies in 2014

With the start of the new year, it is good to take stock of the changes made to my investment strategies in 2014 and the likely changes coming in 2015. Looking at the list of changes below, it is amazing that I still have so much to learn despite being an investor for so many years. Here is the list of changes in 2014.

Turnarounds

I seldom invest in companies that are making losses. Most of the time, if they are loss-making, it is because the business conditions turned sour after I had invested in them. However, turnaround companies have been one of the sources of multi-baggers for me. You may wish to read How to Get a Multi-Bagger? for more info. Based on this knowledge, I started to purposely invest (or more correctly, speculate) in loss-making companies. The amount of money invested is relatively small and is mentally written off at the point of investment, so the expectations for them are rather low. So far, these speculations have performed up to expectations, with one of them already graduated (i.e. sold off) with a profit of 87%. Having said that, it is still too early to draw a conclusion and more time is required to review their performance.

Moving forward, due to the small amount of money involved, turnarounds are unlikely to form a big portion of my portfolio. Nevertheless, it is a good training ground to identify which companies are likely to start making a profit. Hence, small speculations in turnaround companies will continue to be made. You can expect to see maybe a few multi-baggers and a lot of salted fishes from this strategy.

High-Priced Stocks

Again, I seldom invest in high-priced stocks. The highest price I ever paid for a stock (excluding preference shares) in my 15 years of investing experience is $2.46 for Keppel Land. It is not that I am prejudiced against high-priced stocks. It is just that when you search for companies with high growth rates, these high-priced stocks usually do not appear high up on the list. So, what made me change my mind with the recent purchase of Keppel Corp at around $8? It is the realisation that while low-priced mid-cap stocks have better growth rates than high-priced large-cap stocks, these growth rates usually do not last. For more sustainable (but lower) growth rates, they can be found in high-priced large-cap stocks. Nevertheless, I am still very much into low-priced mid-cap stocks. The recent purchase of Keppel Corp is a small step towards discarding long-held traditions about high-priced large-cap stocks.

Freehold Stocks

This phrase "freehold stocks" comes from Uncle CreateWealth8888. It refers to stocks for which the intial capital has been recovered, either through dividends or partial sale of the stock at higher prices. Again, my usual practice is to sell all the shares of a particular stock instead of keeping part of them in the hope of higher prices. This practice is for ease of accounting, so that I do not need to adjust my investment cost. Moreover, even when I keep part of the shares, the share price usually goes down, so I usually sell the rest of the shares to protect the profits. However, inspired by Uncle CreateWealth8888's success, I decided to keep a portion of a 2-bagger (Valuetronics) to see what happens.

Frankly speaking, retaining freehold stocks is not as easy as it seems. I initially sold 50% of the stock at $0.485, intending to keep the remaining 50%. However, the price declined further to $0.41. Even though the cost had been recovered, the thought of the profits vanishing should the stock return to the price I bought was too much to bear. So, I sold a further 25%. Currently, the stock is trading at $0.345, but I am more at ease with the remaining 25% of the stock as freehold.

Generally, I do not expect to see a lot of freehold stocks, since I do not have many multi-baggers. A lot will depend on the experience with this freehold stock before deciding whether this should be a part of my investment strategies.

Dissenting Shareholder

Related to the idea of freehold stocks is the intention to become a dissenting shareholder in a privatised stock. This action was taken in response to Capitaland's privatisation of CapitaMalls Asia. To avoid locking up my money in a delisted stock, I accepted the privatisation offer only partially, such that the remaining shares became freehold. I wanted to experience what is it like as a shareholder in an unlisted but profitable company. Unfortunately, Capitaland acquired enough shares to allow it to compulsorily acquire all the shares. So, I had no chance to become a shareholder in an unlisted company. The reasons for taking this stance are further explained in The Last Stand on CapitaMalls Asia.

Nevertheless, I believe I have the chance to become a dissenting shareholder again since another 2 of my stocks have received privatisation/ cash offers, namely, UE E&C and CH Offshore. I will consider my response to the offers carefully.

Annual General Meetings (AGMs)

Prior to 2014, I have never attended an AGM. However, in search of blog ideas, I started to attend AGMs last year. So far, the experience has been mixed. The good side is that some directors are wiling to explain the nature of the business and the reasons for the company's performance as well as future prospects and challenges, while the ugly side includes arrogant directors, angry shareholders and hungry shareholders. Generally, you see more of the good side if the share price of the company is rising and more of the bad side if the share price is languishing. Moving forward, I believe I will still attend a few more AGMs, until the point where there is no longer any benefits in attending AGMs.

Conclusion

It is amazing that despite having 15 years of investing experience, there are still so much to learn. Investing is really a life-long learning journey.

See related blog posts:

• My Investment Trends for 2015
• How to Get a Multi-Bagger?
• The Last Stand on CapitaMalls Asia

The Dogs and Puppies of STI for 2015

This time last year, I blogged about the performance of the "Dogs of the Dow" and its sister "Puppies of the Dow" investment strategies as applied to the Straits Times Index (STI). I also identified the Dogs and Puppies of STI for 2014 as follows (you may wish to refer to The Dogs and Puppies of STI for more info).

Puppies of STI 2014

• CapitaMall Trust
• HPH Trust
• SingTel
• SPH
• ST Engineering

Other Dogs of STI 2014

• Jardine Cycle & Carriage
• OCBC
• SGX
• SIA Engineering
• Starhub

So how have these Dogs and Puppies of STI performed in 2014? The results are shown below.

	Price 31/12/13	Price 31/12/14	Div (cents)	Div Yield	Return (excl. Div)	Return (incl. Div)
Puppies
CapitaMall	$1.90	$2.04	10.70	5.6%	7.4%	13.0%
HPH Trust US$	$0.68	$0.69	5.25	7.7%	1.5%	9.2%
SingTel	$3.66	$3.90	16.80	4.6%	6.6%	11.1%
SPH	$4.12	$4.21	21.00	5.1%	2.2%	7.3%
ST Engg	$3.96	$3.40	16.00	4.0%	-14.1%	-10.1%
Non-Puppies
Jardine C&C	$35.95	$42.60	108.00	3.0%	18.5%	21.5%
OCBC	$9.90	$10.46	31.11	3.1%	5.7%	8.8%
SGX	$7.26	$7.81	28.00	3.9%	7.6%	11.4%
SIA Engg	$5.06	$4.22	24.00	4.7%	-16.6%	-11.9%
StarHub	$4.29	$4.15	20.00	4.7%	-3.3%	1.4%
Dogs				4.6%	1.5%	6.2%
Puppies				5.4%	0.7%	6.1%
STI	3167.43	3365.15	88.00	2.8%	6.2%	9.0%

As shown above, both the Dogs and Puppies have underperformed the STI for 2014, returning 6.2% and 6.1% respectively against STI's 9.0%. If we do not consider dividends, the results are even worse, with the Dogs and Puppies returning only 1.5% and 0.7% respectively against STI's 6.2%. The results are dragged down by the performance of ST Engg and SIA Engg, which returned a negative -10.1% and -11.9% respectively. So, for 2014, it is STI that beats both the Dogs and Puppies.

For 2015, which stocks will be the Dogs and Puppies of STI? The dividend yield and share price as at 31 Dec 2014 of the 30 STI component stocks are listed below, in descending order of the dividend yield.

Counter	Div (cents)	Price 31/12/14	Div Yield	Remarks
HPH Trust US$	5.25	$0.69	7.61%	Puppy
A-Reit	14.39	$2.38	6.05%	Puppy
SIA Engg	24.00	$4.22	5.69%	Dog
CapitaMall	10.70	$2.04	5.25%	Puppy
SPH	21.00	$4.21	4.99%	Dog
SembCorp	22.00	$4.45	4.94%	Dog
StarHub	20.00	$4.15	4.82%	Dog
Kep Corp	42.00	$8.85	4.75%	Dog
ST Engg	16.00	$3.40	4.71%	Puppy
SingTel	16.80	$3.90	4.31%	Puppy
Noble Grp	4.91	$1.14	4.31%	Substitute (P)
SembMar	13.00	$3.26	3.99%	Substitute (P)
Olam	7.50	$2.02	3.71%	Substitute (P)
SGX	28.00	$7.81	3.59%
SIA	41.00	$11.60	3.53%
UOB	75.00	$24.53	3.06%
ComfortDelGro	7.75	$2.60	2.98%
OCBC Bk	31.11	$10.46	2.97%
DBS	58.00	$20.60	2.82%
HKLand US$	18.00	$6.76	2.66%
ThaiBev	1.80	$0.69	2.61%
Jardine C&C	108.00	$42.60	2.54%
Capitaland	8.00	$3.31	2.42%
Wilmar	7.50	$3.24	2.31%
JMH US$	141.00	$60.95	2.31%
GoldenAgri	0.92	$0.46	2.01%
GLP	4.50	$2.48	1.81%
CityDev	12.00	$10.27	1.17%
Genting SP	1.00	$1.08	0.93%
JSH US$	26.00	$34.20	0.76%

Just to recap, the Dogs of STI are the 10 highest-yielding dividend stocks in the STI, while the Puppies of STI are the 5 lowest-priced stocks among the Dogs of STI. Thus, the Dogs and Puppies of STI for 2015 are as follows:

Puppies of STI 2015

• A-Reit
• CapitaMall Trust
• HPH Trust
• SingTel
• ST Engineering

Other Dogs of STI 2015

• Keppel Corp
• SembCorp
• SIA Engineering
• SPH
• Starhub

If you notice, among the Puppies are all the 3 Real Estate Investment Trusts (REITs) in the STI. This is to be expected, since by their very nature, REITs are high dividend-yielding stocks. Coupled with the fact that REITs are lower-priced compared to the STI component stocks, they would naturally dominate the Puppies of STI. The Dow Jones Industrial Average (DJIA) does not contain any REITs, so REITs do not form any of the Dogs and Puppies of the Dow. If you believe that REITs should not form part of the Dogs and Puppies of STI, their replacements would be the next 3 highest-yielding stocks, namely, Noble, SembMar and Olam, which are also lower-priced than the 5 newly identified Dogs.

As a matter of interest, assuming we remove the REITs of the 2014 edition of Dogs and Puppies of STI, would they have performed better than the original Dogs and Puppies of STI? The results are shown below.

	Price 31/12/13	Price 31/12/14	Div (cents)	Div Yield	Return (excl. Div)	Return (incl. Div)
Puppies
SIA Engg	$5.06	$4.22	24.00	4.7%	-16.6%	-11.9%
SingTel	$3.66	$3.90	16.80	4.6%	6.6%	11.1%
SPH	$4.12	$4.21	21.00	5.1%	2.2%	7.3%
ST Engg	$3.96	$3.40	16.00	4.0%	-14.1%	-10.1%
StarHub	$4.29	$4.15	20.00	4.7%	-3.3%	1.4%
Non-Puppies
Jardine C&C	$35.95	$42.60	108.00	3.0%	18.5%	21.5%
Kep Corp	$11.19	$8.85	42.00	3.8%	-20.9%	-17.2%
OCBC Bk	$9.90	$10.46	31.11	3.1%	5.7%	8.8%
SGX	$7.26	$7.81	28.00	3.9%	7.6%	11.4%
UOB	$21.24	$24.53	75.00	3.5%	15.5%	19.0%
Dogs				4.0%	0.1%	4.1%
Puppies				4.6%	-5.1%	-0.4%
STI	3167.43	3365.15	88.00	2.8%	6.2%	9.0%

There are 2 REITs in the 2014 edition, namely, CapitaMall and HPH Trust. They are replaced by Keppel Corp and UOB. Since they are also Puppies, their puppy status went to SIA Engg and Starhub. The results show that the non-REIT Dogs and Puppies performed worse that the original Dogs and Puppies. This is due to the inclusion of Keppel Corp as a Dog and SIA Engg as a Puppy, which returned -17.2% and -11.9% respectively, compared to CapitaMall's 13.0% and HPH Trust's 9.2%. Nevertheless, it might be premature to conclude whether REITs should form part of Dogs and Puppies of STI based on only 1 year's results. Readers will have to make their own assessment on this.

So, for 2015, will Dogs (and Puppies) be Man's best friends? We shall see this year :)

See related blog posts:

• The Dogs and Puppies of STI
• The Dogs and Puppies of STI for 2016
• Who Says You Can't Beat the Index?