Monday, 23 October 2017

The IQ, EQ and AQ in Investing

To be successful in investing, it takes more than just having a high Intelligence Quotient (IQ). As Warren Buffett said, "Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." Besides IQ, Emotional Quotient (EQ) and Adversity Quotient (AQ) also play important roles in determining the outcome of our investments.

Intelligence Quotient (IQ)

IQ is about the ability to rationalise our investments. It involves setting up a framework to determine asset allocation, risk management, stock selection, stock valuation, buying and selling rules, etc. If you are an active investor who picks stocks or unit trusts, IQ is at work most frequently in the last 3 activities. Nevertheless, being able to spot a good investment is important, but not sufficient, as we shall see in the section on EQ later. 

It is also not necessary for an investor to have high IQ to be successful. If an investor recognises his limitations in picking stocks, he could become a passive investor and buy a basket of market indices and still be able to reap good results. See All I Want Is To Invest Wisely for more info.

Emotional Quotient (EQ)

EQ is about the ability to control our emotions from running wild and interfering with our investment rationale. Examples are: not being influenced by peers or market rumours, not getting too excited when we spot a good investment and buy beyond our means or position limits, not chasing the stock as it goes above our target buy price for fear of missing out, not losing our nerves as the stock keeps on rising or falling, etc. Essentially, it is about making sure that we do not do something stupid that we might later regret had we thought through more comprehensively. If we have the IQ to spot a good investment but do not have the EQ to hold on to it until its full potential is realised, our competency as investors will be diminished. 

Personally, EQ is my weakest link. There have been countless examples where I get too excited, chase a stock or sell too early. I also have loss aversion bias, which means that I sell my winning stocks too early and hold on to my losing stocks. In addition, I have phobia about financial crises, having gone through both the Asian Financial Crisis and the Global Financial Crisis. EQ is the area I have to work on if I wish to improve my investment results.

Having said the above, the good news is that EQ can be managed to some extent using IQ. For example, by setting rules on stock valuation, position limits, target prices, etc. and following them strictly, emotions of fear and greed can be managed to some extent. See Have a Plan for more info.

Adversity Quotient (AQ)

AQ is about the ability to survive difficult times, such as at the depth of a market crash. Do you give up and sell out, or do you rationally look at the situation and identify potential silver linings among the dark clouds and act accordingly? In a way, AQ is related to EQ, but there are some differences with EQ. The emotions that I associate with EQ are greed and fear, while the emotion that I associate with AQ is despair. They are different emotions and some people can handle one emotion better than another. For me, I can handle actual losses (both realised and unrealised) much better than the fear of losses. A case in point is my Oil & Gas (O&G) portfolio. Although the unrealised losses are heavy, they have not seriously dented my confidence in managing them. I am still taking steps to turn them around.


To be a really good investor, you not only must have high IQ, but also high EQ and AQ. I am still trying to improve in these 3 areas.

Sunday, 15 October 2017

The First Class of Minions

3 years ago, I embarked on a new strategy of placing small, speculative bets into loss-making companies with the potential to make a turnaround. That strategy is now affectionately known as the "minion" strategy. The first class of minions is from the semiconductor sector, which has risen strongly this year. Most of the minions have been sold in the last 1 year, and they have graduated with flying colours.

The triggering point for initiating this strategy is that I realised that although there were many semiconductor stocks listed on SGX, only 2 made good profits and gave out good dividends. The vast majority were not. See the table below, which is based on the financial results for FY2013, which were the latest available results at the time when I initiated the strategy in Mar 2014. Please note that the figures are not adjusted for consolidations and other corporate actions.

Company EPS Div D/E NTA Price P/NTA NTA/EPS Max EPS
AEM -0.92 0.00 2.5% $0.150 $0.079 0.53 16.3 1.53
ASTI -2.32 0.00 14.9% $0.120 $0.057 0.48 5.2 2.58
Ellipsiz 0.86 0.20 4.5% $0.190 $0.085 0.45 N.A. 3.85
MicroMech 3.69 3.00 0.0% $0.270 $0.570 2.11 N.A. 4.92
MIT -2.98 0.00 35.7% $0.130 $0.072 0.55 4.4 1.74
STATS -2.50 0.00 93.4% $0.560 $0.310 0.55 22.4 6.50
Sunright -1.40 0.00 7.3% $0.610 $0.125 0.20 43.6 5.00
UMS 8.40 6.50 0.0% $0.560 $0.655 1.17 N.A. 8.40

The intriguing question I had was why both Micro-Mech and UMS could make money but the rest could not. Some even had fairly large losses. The divergence in performance raised an interesting question, which was that would Micro-Mech and UMS follow the rest into losses, or the rest would follow Micro-Mech and UMS into gains. Thus, I decided to explore placing speculative bets into the loss-making companies, with the hope of them turning around and becoming multi-baggers. These bets were mentally written off the moment they were invested (see Meet The Minions for more info).

Having said that, it is not just anyhow throwing money away. Nobody likes to really lose money. Thus, there are 2 guiding principles in the minion strategy. Firstly, the companies must demonstrate they have the ability to survive at least for the next few years, so that there is sufficient time for a potential turnaround to happen. They should also not have to call a rights issue, else it would be throwing good money after bad ones. Secondly, there must be reasonable probability of a turnaround happening. If either of these 2 conditions are not present, the minions would likely lead to losses.

On the ability to survival, the companies should not have high Debt/Equity ratios and the Net Asset Value should be sufficient to absorb the loss per share for the next few years. Surprisingly, all the semiconductor companies evaluated above had low Debt/Equity ratios, with the exception of STATS ChipPAC. The NTA/EPS ratio for loss-making companies show how many years they could last, assuming they continue to make the same losses every year. Again, in this aspect, all the companies could survive for the next 4 years at least.

On the probability of a turnaround, I really had no insights into this industry (and why Micro-Mech and UMS made money but the rest did not) and was relying heavily on the guess that convergence among the companies (in either direction) was probable. Exactly how long the turnaround would happen was unknown. Based on the earlier discussion, if the turnaround were to happen within the next 4 years, then all the stocks evaluated would rise.

Besides checking whether the companies could survive, I also considered if a turnaround were to happen, how much money could the companies make. This is where the highest EPS in the past 5 years came in. It is not much use if the companies only made small profits at the peak of an industry cycle.

Next, the stocks must be selling at a cheap price relative to valuation. If they are not cheap enough, the profit potential is reduced. This is why even though Micro-Mech and UMS are profitable companies, they do not make good candidates as minions. The Price/NTA ratio shows that most of the companies have low P/NTA ratios of around 0.50, except for the 2 darlings which are Micro-Mech and UMS. In particular, Sunright only had P/NTA ratio of only 0.20.

Finally, diversification is extremely important. Despite all the checks, I cannot tell for sure which stocks would tank or call a rights issue. To manage this risk, I buy more than 1 stock.

Based on the considerations above, I selected ASTI, Ellipsiz, MIT (Manufacturing Integration Technology), STATS and Sunright for my speculative bets in Mar 2014. Each position was a small one, and I had 5 stocks to spread out the risks. Most of these stocks were sold in the last 1 year. The results are as shown below.

Company Bought Sold % Profit Remarks
ASTI $0.055 $0.056 2% Sold in Apr 17
Ellipsiz $0.283 $0.380 34% Sold in Sep 16
MIT $0.066 $0.220 233% Partially sold in Jul 15
STATS $0.335 $0.625 87% Sold in Sep 14
Sunright $0.125 $0.305 144% Sold in Mar 17


Among the 5 minions, 1 is a dud, 1 is a 2-bagger and 1 potentially could be a 3-bagger (assuming fully sold at the current price). The average gain is 100%. Many of them rose further after I sold.

So, the above are my first class of minions. They have graduated with flying colours and gave me enough confidence to continue my minion strategy.

Just a final note, in case you go away thinking minions are very profitable, they are actually high risk, high gain positions. Not all will make money. Some will show unrealised losses for long periods of time. Some will be completely wiped out. One of them, Ezion warrants, got suspended the day I bought into it. Do not attempt this unless you fully understand and are prepared to take all the risks.

See related blog posts:

Monday, 9 October 2017

The Accounting for Hyflux's Water Treatment Plants

Hyflux develops and operates various types of water treatment plants for municipals and industrial companies in concessions of 20 to 30 years. It has a strong order book of $3,187M as at Dec 2016, of which $1,916M is related to future revenue from the operations & maintenance (O&M) of the water treatment plants over the concession periods. Fig. 1 below shows Hyflux's order book.

Fig. 1: Hyflux's order book

Yet, despite the strong O&M order book, Hyflux lost money in recent quarters from the operations of the Tuaspring Integrated Water and Power Project. In 1H2017, Hyflux lost $25.4M, of which $47.9M was due to Tuaspring. The reason given for Tuaspring's loss is the continuing weak power market for Singapore and losses are expected for the next 2 quarters. Accounting-wise, why did Tuaspring lose money, despite it having a 25-year concession from the Public Utilities Board (PUB) to sell water and excess power from the plant?

Firstly, some background on Tuaspring. Tuaspring is a Design-Build-Own-Operate-Transfer (generically called BOT) project with a 25-year concession from PUB. The plant generates desalinated water and power, some of which is used for the operation of the plant. The excess power can be sold to the National Electricity Market. During the concession period, Hyflux will receive guaranteed minimum payments from PUB. It will also receive additional revenue from the sale of water and excess power. At the end of the concession period, the plant will be transferred to PUB's ownership.

Traditionally, when companies build plants, there is no revenue and there is investment in the Property, Plant and Equipment (PPE) account in the balance sheet during the construction phase. When the plant is operational, the company generates revenue from the sale of goods/ services produced by the plant and depreciates the PPE until the plant reaches the end of its economic life. 

Due to the nature of the BOT arrangement and concession payments from its water treatment plants, Hyflux adopts Financial Reporting Standard (FRS) 112. Under FRS 112, there is no investment in the PPE account during the construction phase. Instead, all the projected payments during the concession period are discounted to the present value and considered as financial receivables (for guaranteed payments) and intangible assets (for non-guaranteed payments). During the construction phase, these 2 accounts are progressively increased in the balance sheet instead of the PPE account.

Correspondingly, in Hyflux's cashflow statements, negative cashflows show up in "changes in financial receivables/ intangible assets arising from service concession arrangements (SCA)", which we do not usually find in other companies' cashflow statements. Traditionally, it is the PPE line under the Cashflow from Investing that is negative during plant construction. In the case of Hyflux, it is these 2 numbers in Cashflow from Operations that are negative.

Fig. 2: Hyflux's Cashflow Statement

There is another major difference between Hyflux and other companies. Traditionally, when a company builds the plant, it is recorded on the balance sheet at cost, i.e. the cost that the company pays for the plant. However, Hyflux does not pay other companies to construct its plants; it builds them itself. Hence, it is able to recognise a construction revenue for the plants during the construction phase. Since concession grantors like PUB do not pay for the construction of the plant, the construction revenue is the financial receivables and the intangible assets arising from SCA described above. Note from the earlier discussion that the financial receivables and SCA intangible assets are computed as the present value of the projected payments over the concession period. Thus, by the time the plant is completed, all the projected payments over the 20- to 30-year concession period would have been largely accounted for.

When the plant is completed and operational, Hyflux generates revenue from the guaranteed payments from PUB and the sale of water and excess power. On the other hand, it has to amortise the financial receivables and SCA intangible assets over the concession period. Thus, if the actual payments match the projected payments, what Hyflux earns during the operational phase is the interest from the financial receivables and SCA intangible assets, based on the discount rate used to compute the present value. If the actual payments exceed the projected payments, Hyflux earns more profit. Conversely, if the actual payments fall below the projected payments, Hyflux earns less profit or loses money. In the case of Tuaspring, due to the weak power market, actual payments came in below projected payments and Hyflux lost money on it.

Thus, contrary to conventional wisdom, the 20- to 30-year operational phase of a water treatment plant may not be the most profitable phase for Hyflux. A lot will depend on whether the actual payments exceed the projected payments. In contrast, the construction phase of the water treatment plant can be quite profitable.

In FY2016 financial results, Hyflux reported a net profit of $4.8M. It also mentioned that profits from Engineering, Procurement and Construction (EPC) were substantially wiped out by losses from Tuaspring, which amounted to $113.2M. This shows that the EPC profits can be quite substantial.

Fig. 3: Earnings Review for FY2016

Thus, based on current understanding, Hyflux might not generate the most profits from operating the water treatment plants during the 20- to 30-year concession periods. It probably generates more profits from constructing them.

Just a disclaimer, this post is not a recommendation for anyone to buy or sell Hyflux's shares or perps. Please read the accounting policies in Hyflux's annual report and do your own due diligence.

See related blog posts:

Monday, 2 October 2017

Know Your Customers Well!

Ouch! I just lost $33K on Triyards after it got suspended last month. Triyards is a shipbuilder and a subsidiary of Ezra, which is now under Chapter 11 bankruptcy protection. By right, if you read my post on My Upstream Oil & Gas Rescue Operations, ship and rig builders have not seen the worst of the Oil & Gas (O&G) long and harsh winter and I should not have invested in Triyards in Mar this year. However, Triyards has successfully diversified away from the O&G sector. Among its new orders for the financial year ending in Aug 2016 are chemical tankers, research vessel, passenger ferries, river cruise vessel, wind farm support vessels, etc. New contract wins in such non-O&G vessels totalled USD226.2M in FY2016. Including O&G vessels, total contract wins represent 84% of the revenue in FY2016. The orders-to-revenue ratio is an important metric for me when investing in O&G stocks, as described in Oil & Gas, Show Me the Orders!

Given its success in diversifying away from the O&G sector, Triyards is similar to another ship builder, Vard, which has also diversified away successfully and was the subject of a voluntary cash offer by its parent company in Nov 2016. However, unlike Vard, Triyards' parent company, Ezra, is not in any financial position to offer a cash offer. Nevertheless, Ezra had pledged all its 60.9% shareholding in Triyards equally to both DBS and OCBC in Jul 2016. Any sale of the shares to recover the loans by any one bank would have triggered a mandatory cash offer. When I first bought into Triyards at $0.288 in Mar, its net asset value was USD0.673 as at end Feb 2017. Its debts were USD187.9M, translating to a debt-to-equity ratio of 0.86, which was very high. However, most of the debts were used to finance working capital and trade receivables were USD238.6M. When the bills are collected, there will be cash to pay down the debts.

On 19 Mar, Ezra announced Chapter 11 protection under US laws, instead of the usual judicial management under Singapore laws, which means that creditors cannot foreclose and sell the assets pledged to them. In other words, both DBS and OCBC cannot sell Ezra's Triyards shares to a third party except with the approval of the US courts or consent by Ezra. Since the banks could not sell off the shares, there would be no cash offer, at least not in the near term.

Upon Ezra's bankruptcy protection, Triyards disclosed on 21 Mar that it had approximately USD41.5M exposure to Ezra, mostly in the form of joint corporate guarantees. This represents 19% of Triyards' equity, reducing the net asset value to USD0.545. In Triyards' 3Q2017 financial results announcement, it announced another USD45.1M in impairment losses. As at end May 2017, the net asset value was reduced to USD0.478. Including the exposure due to joint corporate guarantees of USD38.5M mentioned above, the net asset value would be USD0.359. Ezra was a huge body blow to Triyards, but not fatal. Triyards itself was not under Chapter 11 bankruptcy protection and continued trading on SGX despite Ezra's troubles and trading suspension, until 4 Sep.

The company that has a bigger impact to Triyards has a name that also starts with "Ez", but it is not Ezra, it is Ezion. On hindsight, Ezion is a major customer of Triyards, much more so than Ezra. Ezion subscribed to 29.5M warrants in Triyards at an exercise price of USD0.563 in Jul 2015. One of the conditions for the issue of warrants to Ezion is that Ezion enters into shipbuilding contracts with Triyards worth at least USD150M. Based on outstanding order book of USD422M as at Oct 2016, this represents 36% of Triyards' order book. On 23 Feb 2017, Ezion announced that it had indefinitely deferred delivery of 4 service rigs worth USD270M to reduce capital expenditure. A cross-check between Ezion's and Triyards' announcements of contract wins in 2014 suggests that 3 of these orders worth a total of USD162.5M are Triyards'. That means USD162.5M of the outstanding trade receivables of USD230.0M could not be collected, dealing a serious blow to Triyards' cashflow. Triyards' 3Q2017 financial results also suggest that banks, despite "owning" 60.9% of Triyards, have grown cautious about providing further loans to it. On 6 Sep, Triyards suspended trading of its shares.

Triyard's problem is similar to Keppel Corp's and SembMar's problem with Sete Brasil, which had deferred offers and stopped payments. Keppel Corp and SembMar survived, because of strong backing of their parents, Temasek, and continued support of their banks. Triyards have neither, and its chance of surviving is a lot lower. For Triyards to survive unscathed, either its banks continue to provide financing to complete the ships ordered by other customers, or Ezion takes delivery of some of its ships, so that Triyards can convert the receivables into cash and pay off the debts.

Actually, I also did not expect Ezion to go into restructuring. Ezion's market capitalisation was one of the highest among the mid-cap O&G stocks before it was suspended on 14 Aug. In fact, I had just bought into Ezion warrants just before it was suspended.

Triyards is the biggest loss on a single stock. The lessons I learnt from this episode is to know your customers really well!

Sunday, 24 September 2017

If You Invest In Fixed Income, Read the Fine Print

After the exertion to read the Offer Information Statement (OIS) of Hyflux's preference shares and perpetual capital securities (perps) in the past few weekends, this week's post will be a lighter one. 

In my post last week, I extracted the relevant portions of the OIS of Hyflux's preference shares and perps to discuss the conditions upon which Hyflux could omit the preference dividend and perps distribution respectively. For me, the most surprising discovery is that the preference shares are ranked pari passu (or have the same seniority) with the perps! See the figure below, which is extracted from the perps' OIS.

Fig. 1: Relative Ranking of Hyflux's Preference Shares and Perps

All along, I had thought that the preference shares would rank lower than the perps, mainly because the preference shares are a type of shares and perps have characteristics of a bond. Conventional wisdom suggests that a bond must rank higher in seniority than a share. It was only until I read the above from the perps' OIS that I realised that I was wrong!

The relative ranking of the preference shares and perps have important implications for their respective holders. If the preference shares were ranked below the perps, the preference shares would serve as a cushion for the perps. Any losses would be absorbed first by the ordinary shareholders, followed by the preference shareholders before the perp holders suffer a loss. As at Jun 2017, the total debt of Hyflux is $1,308.7M. The equity attributable to ordinary shareholders is about $226.9M (corresponding to net asset value per share of $0.289 for 785.3M shares, which is down from $0.451 in Dec 2016). The debt-to-ordinary-equity ratio works out to be 5.77, which is very high. If the preference shares were ranked below the perps, there is another $392.6M of preference equity between the ordinary equity and the perps. The debt-to-(ordinary + preference)-equity would be 2.11, which is a lot less than the original ratio of 5.77.

Unfortunately, that is not the case. Both preference shares and perps are ranked pari passu with each other. This means that both preference shareholders and perp holders share in the loss together if losses exceed the $226.9M equity attributable to ordinary shareholders. 

The key takeaway for me from reading the Hyflux's OIS is never to assume the relative ranking of different instruments based on their names. And if you invest in fixed income instruments, better read the fine print too.

See related blog posts:

Sunday, 17 September 2017

Watch Out for Hyflux's Omission of Ordinary Dividends

Hyflux announced its half year financial results last month. For holders of Hyflux preference shares and perpetual capital securities (perps), perhaps the most noteworthy point is that it did not declare an interim dividend on its ordinary shares. Why is this important? It is because the payment of a preference dividend or perps distribution is discretionary. If certain conditions are met, the company can choose not to pay or only pay partially any preference dividend or perps distribution. One of these conditions is that a dividend on the ordinary shares is not paid out. The conditions for preference shares and perps are different, so let's discuss these separately.

Preference Shares

There are 2 conditions upon which Hyflux can choose not to pay or only pay partially its preference dividends. The 2 conditions are:
  1. If it does not have sufficient Distributable Reserves; or
  2. If it does not pay its next dividend on its ordinary shares.
See Figs. 1 and 2 below for extracts of the Offer Information Statement (OIS) for the preference shares.

Fig. 1: Conditions for No/Partial Preference Dividend (Extract)

Fig. 2: Definition of Distributable Reserves

For Condition 1, if Hyflux does not have sufficient Distributable Reserves, it will not be able to pay its preference dividends in full. The definition of Distributable Reserves is shown in Fig. 2 above. I interpret it to mean that Hyflux must have sufficient retained earnings to pay dividends, regardless of whether they are ordinary dividends or preference dividends. As at Jun 2017, the retained earnings are $146.9M. The retained earnings have been dropping recently. In Dec 2015 and Dec 2016, the corresponding figures are $284.2M and $210.3M. See Did Hyflux Make Money for its Ordinary Shareholders? for more information.

For Condition 2, if Hyflux does not pay its next dividend on ordinary shares, then it can choose not to pay or only pay partially the preference dividend. Nevertheless, this does not mean that Hyflux will definitely not pay its next preference dividend in full. It only means that Hyflux can choose not to if it wishes.

In addition, the preference dividends are cumulative. If a preference dividend is skipped, it will continue to accumulate until it is fully paid out or the preference shares are redeemed.

Perpetual Capital Securities

For perps, the condition upon which Hyflux can choose not to pay or only pay partially its perps distribution is if it does not pay a dividend on, redeem or buy back any of its Junior Obligations in the preceding 6 months. The ordinary shares are considered as Junior Obligations. In addition, Hyflux can defer part of the perps distribution if it pays a dividend on, redeem or buy back its Parity Obligations on a pro-rata basis with the perps in the preceding 6 months. The preference shares are considered as Parity Obligations. See Figs. 3 and 4 below for extracts of the OIS for the perps.

Fig. 3: Conditions for No/Partial Payment of Perps Distribution (Extracts)

Fig. 4: Ranking of Hyflux Preference Shares and Perps

The last ordinary dividend was paid on 25 May 2017 and the last preference dividend was paid on 25 Apr 2017. As Hyflux did not declare an interim dividend on its ordinary shares in its latest financial results, if Hyflux chooses not to pay the next preference dividend scheduled on 25 Oct 2017 in full, Hyflux can defer part of the next perps distribution scheduled on 27 Nov 2017.

And like the preference dividends, the perps distributions are cumulative. If a distribution is skipped, it will continue to accumulate until it is fully paid out or the perps are redeemed.

Just a disclaimer, this post is not a recommendation for anyone to buy or sell Hyflux's preference shares or perps. It is also based on my interpretation of the terms in the OIS. You can find a copy of the OIS/ prospectus in Bondsupermart. Please read the OIS and do your own due diligence.

See related blog posts:

Sunday, 10 September 2017

The Small Cushion That Warrants Provide

I have a small, speculative strategy affectionately called the "minion strategy", which involves throwing a small amount of money into certain depressed stocks that have the potential for a turnaround. The money is mentally written off the moment it is invested. The strategy is described in more details in Meet The Minions. Since the money will be written off anyway, if the stock has a warrant, I would choose the warrant over the mother share, as warrants are cheaper and rise (or fall) proportionally more than the mother shares. 

One of the recently added minions is Ezion warrant. As luck would have it, on the day I bought the warrant, Ezion called for a trading halt (later changed to a suspension). I literally had to write off the amount the moment it was invested. Later announcements by the company mentioned that it was in discussion with lenders to secure additional funds for working capital. On some investor forums, there were comments that Ezion might need to call a rights issue again to raise funds.  

When a company calls a rights issue, shareholders either have to cough up more money to subscribe to additional shares, or sell the rights (if the rights are renounceable) to collect some money back. Because a rights issue dilutes the amount of shares a warrant can be converted into, there are adjustments made to the conversion terms of the warrants. For example, each Ezion warrant is currently convertible into 1 Ezion share at an exercise price of $0.45. If Ezion were to call a rights issue and increase the no. of shares outstanding, the shares that warrant holders get would be worth less if the conversion ratio and the exercise price stay the same. Hence, there is an adjustment to the conversion ratio and/or exercise price. 

The Ezion warrants were issued in Apr 2016 as bonus warrants to all shareholders. Each warrant was then convertible to 1 share at an exercise price of $0.50. In Jun 2016, Ezion called a 3-for-10 rights issue at an issue price of $0.29. Adjustments were made to the warrants such that holders got 0.113 free warrants for every existing warrant (in lieu of changing the conversion ratio of 1 share for every 1 warrant). In addition, the exercise price was adjusted from $0.50 to $0.45.

Ezion is not the only company that adjusted the conversion terms of its warrants after a rights issue. Viking did the same after its rights-cum-warrant issue in May this year. Innopac also issued free warrants (but did not adjust the exercise price) after its rights issue in Jun this year.

Perhaps the most generous adjustments are made by Olam, which adjusts the conversion terms of its warrants even for ordinary dividends. For example, in Aug this year, Olam declared an interim dividend of SGD0.035. The exercise price was adjusted from USD1.12 to USD1.09 and the no. of warrants was increased by 1.8%.

Thus, there is a small cushion that warrants provide in the event of a rights issue.

Monday, 4 September 2017

It Is Possible to Survive a Currency Depreciation

Since that fateful day when Britons voted for Brexit a year ago, the British Pound (GBP) has fallen by 11.8% against US Dollars. Worries about Singaporean companies' investments in UK were raised in the aftermath of the vote. However, the fall in GBP was small fry to one Singaporean company which faced much larger currency depreciation in the countries it invested in. The company is Food Empire, which derived 58% of its revenue from Russia and 13% from Ukraine in 2013. 

In Mar 2014, Russia annexed Crimea from Ukraine. International sanctions on Russia followed suit. Both the Russian Ruble (RUB) and Ukraine Hryvnia (UAH) fell against major currencies. Fig. 1 below shows the fall in RUB (blue line), UAH (red line) and GBP (orange line) against USD since Mar 2014. At the lowest point in Feb 2016, RUB fell by 60% while UAH fell by 70% against USD. In comparison, GBP's fall of 24% against USD over the same period appears mild. 

Fig. 1: Fall of RUB and UAH against USD

Food Empire, which derives the majority of its revenue from Russia and Ukraine, saw its earnings fell from a gain of USD11.3M in FY2013 to a loss of USD13.6M in FY2014. However, despite the continued depreciation of RUB and UAH, earnings began to recover for Food Empire. In FY2015, it narrowed the loss from USD13.6M to USD0.1M. By FY2016, it had recovered to a gain of USD13.8M, which was even more than in FY2013, even though neither RUB nor UAH had recovered to their previous values against USD.

Likewise, Food Empire's share price also followed its earnings. The share price fell from $0.535 in Dec 2013 to a low of $0.205 in Jan 2016 before staging a spectacular recovery to a high of $0.765 in May 2017. 

Fig. 2: Food Empire's Share Price Performance

When a currency depreciates in value relative to other currencies, there are usually 2 impacts -- accounting and economic. The accounting impact means that all assets, liabilities and cashflows denominated in that currency are worth less. However, such impact on assets and liabilities are usually one-off, unless the currency continues to depreciate.

The economic impact means that the real purchasing power of consumers in that country reduces and consumers are not able to afford as many as before the products that companies sell. However, such effects will also readjust themselves over time. When a currency depreciates, imports become more expensive and the real purchasing power of its consumers reduces. However, at the same time, exports also become cheaper and exporters can sell more products overseas and increase their earnings. The net effect of a currency depreciation is that imports will decrease while exports will increase, thus increasing the current account surplus of the country. Over time, a part of these surplus will be spent within the country, leading to a recovery of the real purchasing power of its consumers. Hence, eventually, the profits of companies selling products in the country will also recover.

Having said the above, not all companies will survive a currency depreciation. Those companies with large debts denominated in foreign currencies would have difficulties repaying the debts which have become much more expensive in local currencies. To avoid such situations, companies need to hedge their foreign currency exposure, either by entering into a currency swap, or by holding foreign assets denominated in the same currency. For example, if you take a GBP-denominated loan to buy a property in UK, the effect of the currency depreciation on the property and the loan will offset each other if the loan quantum matches the property price.

Thus, although a currency depreciation will lead to immediate losses for companies invested in a particular country, eventually, prices within the country will readjust and the companies could make normal profits again.

See related blog posts:

Sunday, 27 August 2017

Did Hyflux Make Money for its Ordinary Shareholders?

Hyflux is an interesting case. In FY2016, it reported a net profit attributable to owners of $4.8M but a loss per ordinary share of 7.51 cents. Its net asset value correspondingly dropped from $0.56 in Dec 2015 to $0.45 in Dec 2016. The main reason? There are a few different types of owners of the company. Besides the ordinary shareholders, there are preference shareholders and perpetual capital securities (perps) holders. The net profit attributable to owners of $4.8M has to be shared among these different types of owners. Both preference shareholders and perps holders have prior claims over ordinary shareholders. In total, they were paid $63.8M in preference dividends and distributions in FY2016. Thus, ordinary shareholders ended up with a loss of $59.0M after accounting for the preference dividends and distributions instead of the reported $4.8M. Divided over 785.3M ordinary shares, the loss per ordinary share was 7.51 cents.

In order to make money for its ordinary shareholders, it has to make a net profit attributable to owners that is more than sufficient to cover the preference dividends and distributions payable to preference shareholders and perps holders. In FY2016, this amount was $63.8M. In the last 12 months, Hyflux has begun to redeem some of its perps. In July 2016, Hyflux redeemed $175M perps bearing interest of 4.80%. In Jan 2017, it also redeemed $295M worth of perps bearing interest of 5.75%. The remaining perps left are $500M bearing interest of 6.00%. In addition, there are outstanding preference shares of $400M bearing a dividend rate of 6.00%. These preference shares are callable on 25 Apr 2018, failing which the dividend rate will step up to 8.00%. Thus, Hyflux needs to make a net profit attributable to owners of between $54.0M and $62.0M every year, before ordinary shareholders get to enjoy the profits.

Since Hyflux made less money than is sufficient to cover the preference dividends and distributions of its preference shares and perps in FY2016, the money has to be drawn from its retained earnings. Its retained earnings thus dropped from $284.2M in Dec 2015 to $210.3M in Dec 2016. In 2H2017, the figure dropped further to $146.9M after reporting a loss attributable to owners of $24.3M. Preference shareholders and ordinary shareholders have to watch this figure very carefully. If the retained earnings drop to zero, there will be no more reserves to pay dividends, including the 6% preference share dividend.

Thus, at this point in time, Hyflux is not making any money for its ordinary shareholders.

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Sunday, 20 August 2017

Buying the Most Expensive Integrated Shield Plan When Young and Downgrading When Old

Integrated Shield Plans (IPs) are hospitalisation insurance plans offered by private insurance companies to cover hospital stays in public and private hospitals. They are integrated with the basic Medishield Life plan run by CPF. There are typically 3 types of IPs, namely those covering Class B1 wards, Class A wards and private hospitals. For ease of reference, they are named as Class B1, A and P plans respectively. Annual premiums increase with age and are most expensive for Class P plans. For this post, I will use the IPs offered by my insurer as the basis for discussion, since I signed up with them and have records dating back to 2006 when as-charged plans were first introduced. I believe the trends discussed below are applicable to all other insurance companies offering IPs.

Private hospitals offer the best care compared to public hospitals. However, Class P plans are the most expensive compared to other plans. One of the strategies used by some people to afford private hospital care is to sign up for Class P plans when they are young and premiums are affordable, and downgrade to Class A/B1 plans when they age and premiums become more expensive. As an example, for the Class P plan offered by my insurer, premiums for a person aged 25 is only $417. However, as he ages, premiums increase rapidly to $2,639 when he reaches 70. At this age, the corresponding premiums for Class A and B1 plans are $1,758 and $1,428 respectively, which are equivalent to 67% and 54% of the Class P plan premiums.

It is a good strategy to use, but do note that annual premiums do not stay static. The figures below show the annual premiums for Class B1/A/P plans since 2006, which have been increasing. To be fair, the increases in premiums are also accompanied by enhancement in insurance coverage.

Fig. 1: Class B Plan Annual Premiums Since 2006

Fig. 2: Class A Plan Annual Premiums Since 2006

Fig. 3: Class P Plan Annual Premiums Since 2006

Thus, when you buy an IP, please take note that annual premiums are not static and are expected to rise over time. And for those who plan to use the above-mentioned strategy of buying the most expensive Class P plan when young and downgrading to Class A/B1 plans when older, be prepared to downgrade earlier than expected.

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Sunday, 13 August 2017

No Need to Maximise Profits with Cash of Last Resort

CPF funds are my cash of last resort in investing. I have quite a good record of investing my CPF funds. However, that statement would be incomplete, because majority of the time, the funds are parked in bank preference shares and collecting regular dividends that pay higher than CPF Ordinary Account's interest rate of 2.5%. On equity investments, there were only 2 occasions when CPF funds were deployed. The first was during the market doldrums during 2000-2003, when I ran out of cash for investments and had to rely on my CPF funds. The second was to buy more of Global Logistic Properties (GLP) than what was allowed for in my cash portfolio (see What is My Target Price? for more info).

Since CPF funds are my cash of last resort, the overriding principle is safety rather than maximising profits. Hence, majority of the time, they were parked in bank preference shares rather than being invested in equities. Furthermore, on the 2 occasions when they were invested in equities, they were not held until profits were maximised. On the first occasion, CPF funds were invested in STI ETF when the STI was at 1,316 points in Feb 2003 and sold when the STI reached 2,169 points in Mar 2005 for a 66% gain. The STI went on to hit a high of 3,876 points in Oct 2007. The reason for selling STI ETF early was because by early 2004, the stock market had recovered from the doldrums and my cash portfolio had turned a profit. There was no longer any need to use CPF funds for equities investment. Hence, they were returned to CPF.

On the second occasion, I bought GLP at $1.985 in Nov 2016 on rumours that a Chinese consortium was interested to buy GLP. Last month, GLP announced that it had selected the Chinese consortium as the preferred bidder, which offered to privatise it at $3.38. I sold the GLP shares bought with CPF funds at $3.22, even though there is another $0.16 to gain if they were held until completion of the privatisation, which has to be completed by 14 Apr next year (unless extended). The gain is 62%. In my opinion, the job is done. There is no need to further expose the CPF funds to unnecessary risks to get the remaining gains. They can be returned to CPF until the situation calls for them again.

When you have a cash of last resort, the important thing is to keep them safe and have them ready when you need them. There is no need to expose them to unnecessary risks for longer than is required.

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Sunday, 6 August 2017

What Are Driving Those Numbers!

The quarterly earnings season has started and I have been busy reading the financial results. It is sometimes frustrating that the reports do not reveal much about why the business is doing well or poorly and whether the trend will continue. The reports contain a lot of numbers and some discussions, but most of the time, the discussions just regurgitate what the numbers already show. To illustrate what I mean, I will use M1's financial results as an example, but it is not the only company that has the issue.

The figure below from M1's financial results shows the numbers generated by the various business segments in 2Q2017. For instance, it shows that revenue for the mobile telco services segment dropped by 2.1% Year-on-Year (YOY) in 2Q2017, customer subscriptions rose by 4.5% YOY, etc. These are useful numbers to understand how well the business is doing. But they do not explain why revenue has fallen even though customer subscriptions have increased. By right, if customer subscriptions increase, revenue would also increase correspondingly, isn't it?

Fig. 1: Numbers

Following the numbers in the financial results is a discussion of those numbers. The figure below shows the level of sophistication of the discussion. 

Fig. 2: Discussion

The opening paragraph of the discussion says, "YOY, operating revenue at $251.6M for 2Q2017 and $512.3M for 1H2017 were 4.7% and 2.9% higher respectively due to higher fixed services revenue and handset sales. Compared to 1Q2017, it was 3.5% lower." Haven't all these information been reflected in the numbers already? What extra information do investors get after spending time to read the discussion?

What investors really want from the discussion is to understand the factors driving those numbers. Investors should not be left to guess why those numbers rise or fall and whether the trend would continue. An example of a good discussion is actually given by M1 in the second paragraph of Key Drivers, which explains why churn rate hit a high of 1.7% in 2Q2017 when the average historical churn rate is only 1.0%. It explains that "Churn rate was 1.7% for 2Q2017 and 1.4% for 1H2017 as a result of the migration of customers who were previously on 2G data to the M2M platform following the shutdown of the 2G network in April 2017." This gives investors assurance that customers did not desert M1 in droves in 2Q2017.

The discussion should not just be a repeat of what the numbers already show. If companies are serious about providing a discussion, I hope they would be more forthcoming and provide an intelligent discussion about the challenges the company faces and what plans does it have to overcome those challenges. Investors who are informed of these challenges and plans would be more willing to stick through thick and thin with the company when it is going through a difficult patch.

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Sunday, 30 July 2017

Properties and the Arrival of Robots and Automation

Recently, I went to view some houses and realised how expensive houses have become. A 2-bedroom condominium in Jurong could go for $1 million and a 4-room HDB flat in Clementi could sell for $700K to $800K. If you read my past blog posts on Properties, you would know that I am not a fan of properties in the long-term, mainly because of the ageing population in Singapore (see Properties, the Population White Paper and the Land Use Plan for more info). 

In the past 1 year, I have also begun to worry about robots and automation taking away jobs (see Early Retirement Maybe A Luxury That I Cannot Afford for more info). I believe that everyone would need to keep on learning and re-learning, and be prepared to change careers at least 1-2 times in their economic lifespans in order to adapt to changes brought on by technology. And in the worst case scenario, a lot of human jobs would be displaced by robots and automation.

For most people, housing is an expensive item and it can take 20 to 30 years to fully repay a housing loan. When you superimpose the trend of robots and automation displacing human jobs with the 20 to 30 years of steady employment required to service housing loans, it raises the question of whether most people can fully pay down their housing loans. And if they could not, what would happen to the housing market in, say, 20 years' time when the full effects of robots and automation happen?

Having said the above, at this point in time, it is not clear whether robots and automation would really displace human jobs on a wide scale as some writers fear, or whether they would allow governments to provide a basic income to every citizen so that everyone need not work and could pursue his/her own dreams. 

Personally, until the effects of robots and automation and governments' responses to them become clear, I would prefer to be more prudent in my housing decisions, i.e. to buy a HDB flat instead of a private condominium if possible, and/or to take a shorter loan tenure such that by the time I am displaced by technology, I would also have paid down the loan fully.

For investors buying properties with the hope of renting them out to foreign talents, robots and automation also raises another issue. If robots and automation really were to displace human jobs, the no. of foreign talents will also decline. Will properties still provide good rental yields in the future? I do not know.

I have raised more questions than answers in this blog post. This is because I also do not have the answers. We can only monitor and act accordingly.

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Monday, 24 July 2017

Oil & Gas, Show Me the Orders!

When I sold out of Keppel Corp in Jan at $6.16, my colleague laughed that I had sold too early. Nevertheless, I was pleased to get out of Keppel Corp before it announced results for 4Q2016. I was concerned that orders were not coming in fast enough to replace those orders that had been completed and that Keppel Offshore & Marine (O&M) would show a loss for 4Q2016. True enough, Keppel O&M reported a net loss of $138M for 4Q2016 after asset impairment. I was concerned that Keppel O&M would continue to report losses from that point onwards.

Nowadays, when I consider buying or selling Oil & Gas (O&G) stocks, I look at 2 key information. The first is where is the company positioned along the industry value chain (see My Upstream Oil & Gas Rescue Operations and My Downstream Oil & Gas Recovery Operations for more information). I do not mind the Exploration & Production companies that are at the start of the value chain and the Engineering, Procurement and Construction companies that are at the downstream side of the value chain, but not those in the middle, i.e. Offshore Support Vessel, oil services and ship/ rig building companies.

The other metric that I look at is orders-to-revenue ratio. This is similar to the book-to-bill ratio for the semiconductor industry. If the book-to-bill ratio is higher than 1, it means that the industry is expanding. Conversely, if the book-to-bill ratio is lower than 1, it means that the industry is contracting. Likewise, the orders-to-revenue ratio is able to show whether the companies are getting enough orders to sustain the business through the long and harsh O&G winter. The other way of looking at this metric is that orders will eventually translate to revenue down the road. If the order is $1, you cannot report a revenue of $2 later (nevertheless, you can do 2 years' worth of work in 1 year and report revenue of $2, but the maths dictate that total revenue cannot exceed total orders over time). Thus, the orders-to-revenue ratio is an useful metric in analysing O&G companies.

Based on the above explanation, you will now understand why I sold Keppel Corp in Jan. In FY2016, Keppel O&M's revenue was $2,854M. Its new orders secured over the same period was only about $500M. The orders-to-revenue ratio was only 0.18. A couple of years down the road, would Keppel O&M still be able to report profits based on annual revenue of $500M (or $1,000M if you combine 2 years' worth of work into 1 year)? I thought it was unlikely. Thus, I was pleased to exit Keppel Corp at a price higher than my average cost of $6.08.

Nevertheless, I have to admit that Keppel O&M has continued to surprise me. For 1H2017, it still managed to report a net profit of $1M when I was expecting it to report a loss. And my assessment of Keppel Corp's ability to navigate the rough waters remains unchanged (see Keppel Corp – A Good Captain Sailing Through Rough Waters).

This year, I have considered buying/ bought 3 O&G stocks. In all 3 cases, orders-to-revenue played a key role. The first was Dyna-Mac. Compared to the other O&G stocks, its level of debts is low and therefore has a higher chance of surviving the O&G winter. However, its orders-to-revenue ratio as at end Dec 2016 was only 0.06 (net book order of $12.8M versus FY2016 revenue of $204.0M). In other words, it only had enough work for 1 month and would be idling for 11 months if new orders could not be found quickly. I gave up the idea of buying it.

The second was Triyards. In FY2016, it obtained new orders of US$273.9M, versus revenue of US$324.9M, translating to an orders-to-revenue ratio of 0.84. Compared to Keppel O&M's ratio of 0.18, this is considered very good. The other reason why I bought Triyards even though it is in the shipbuilding sector is because it is a distressed asset play. It is 60.9% owned by Ezra, which went into Chapter 11 bankruptcy protection in Mar. The shares had been pledged to the banks as collaterals for a secured loan. If the banks were to sell the shares, it would trigger a general offer for the remaining shares. As at end Feb 2017, Triyards' net asset value was US$0.673. Unfortunately, in the latest results for 3Q2017, it reported a loss per share of US$0.208 due to asset impairment and cost overruns and the net asset value dropped to US$0.478.

The third stock was Rotary. My average cost was $0.62 and I wanted to average down for a long time. Last year, there was an opportunity to buy at $0.29, but I decided to give it a pass. In May this year, I bought at $0.37. The reason? Again, it is because of orders-to-revenue ratio. When it was trading at $0.29 last year, it only had outstanding orders of about $150M, versus FY2016 revenue of $233.9M. When it reported 1Q2017 results in May this year, the outstanding orders had increased to $435.9M. To me, it was not safe enough to buy at $0.29 last year, but safe enough to buy at $0.37 this year because of the increase in orders. 

As things turned out, I sold Keppel Corp and it went higher. I bought Triyards and it went lower. Nevertheless, the orders-to-revenue metric is sound and I will continue to use it to guide my investments in O&G stocks.

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Sunday, 16 July 2017

Interest Rate Hedging Smoke Screen

After US Federal Reserve increased interest rates in Dec, Mar and Jun, and after Yellen's congressional speech last Wed, interest rates are confirmed on the way up. This will impact companies with large debts, especially REITs, as higher interest expense would mean lower distribution for shareholders. The usual response that companies give to questions of rising interest rates is that they have hedged the majority of their loans by swapping floating loan rates for fixed loan rates. However, are such measures adequate to mitigate the impact of rising interest rates?

If you ask any person who took up a fixed-rate mortgage loan to finance his housing purchase, he will tell you that even though it is a fixed-rate loan, the interest rate is only fixed for 2-3 years. After that, the interest rate will revert to a floating rate. Although he can refinance to a new fixed-rate loan after 2-3 years, the new fixed interest rate will be based on the prevailing interest rates then, not the interest rates now. Currently, a 2-year fixed-rate loan is available at 1.6%. But if interest rates were to rise to say, 2.6%, 2 years later, the new fixed-rate loan after refinancing would be at 2.6%. So, fixing the loan interest rate does not eliminate the effect of rising interest rates. It only postpones the impact to 2-3 years later when the loan or interest rate swap expires.

Moreover, unlike mortgage loans in which you pay down the loan principal over time, company loans are usually bullet loans, in which repayment of the loan principal is only required when the loan matures. Furthermore, these bullet loans are usually refinanced and rolled over to a new bullet loan. In other words, the loan principal is not paid down over time. When you fix the interest rate and pay down the loan over the period of the fixed interest rate, you reduce the increase in interest expense when the rate is reset after refinancing. But when companies do not pay down the loan when the interest rate is fixed, the increase in interest expense 2-3 years down the road is the same as if the interest rate fix does not exist! The only benefit is that companies save some interest expense during the 2-3 years when interest rate is fixed. But it does not eliminate the impact of rising interest rates altogether.

So, when companies say they hedge interest rates, please be aware that it only postpones the impact to 2-3 years down the road.

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Monday, 10 July 2017

Which KrisEnergy Should I Buy?

If you read my earlier post on My Oil & Gas Fightback, you would know that one of the stocks I am interested in is KrisEnergy. The main reason for my interest in this stock is because it can potentially turn around quickly when oil price recovers and become a multi-bagger. However, there are 3 KrisEnergy counters listed on SGX, namely, 
  • the KrisEnergy stock itself;
  • a warrant named KrisEnergy W240131, which is convertible to the stock and will expire on 31 Jan 2024; and 
  • a zero-coupon bond named KrisEnergy z240131, which will also mature on 31 Jan 2024.
Which KrisEnergy should I buy for maximum capital gain?

KrisEnergy the stock is the simplest. If oil price goes up, it will make money. Conversely, if oil price stays down, it will lose money. There is no expiry date to the stock, unless the company goes bankrupt.

KrisEnergy the warrant is also easy to understand. It can be converted into the stock at an exercise price of $0.11. Because of the exercise price, it trades at a much lower price compared to the stock. Thus, the potential for a price increase is many folds that of the stock. However, it has an expiry date of 31 Jan 2024, after which it will become worthless. Thus, for  speculators who believe oil price will go up at least once in the 6.5 years before it expire can consider the warrant.

For me, there is another consideration in choosing between the stock and the warrant. I treat KrisEnergy as a minion, meaning it is a small speculative position which is mentally written off the moment it is purchased (see Meet The Minions for more info). Since the money will be written off,  it does not matter whether I buy the stock or the warrant. The stock and warrant currently trade at $0.12 and $0.038 respectively. For the same amount of money, I could buy 3.16 warrants for every 1 share of the stock. Coupled with the fact that if oil price were to recover, the rise in the warrant is many folds that of the stock. Thus, between the 2, the minion strategy always prefer the warrant.

KrisEnergy the bond is an interesting one. It is a bond, which means that it will be redeemed at face value when it matures. Furthermore, in the event of bankruptcy, the bond ranks higher than the stock and warrant and might be able to recover some money back for its holders. Thus, it has less risks compared to the stock and the warrant.

Moreover, it is not a plain vanilla bond that pays regular coupons (i.e. interest) to bondholders at regular intervals and does not move much in price. It is a zero-coupon bond. Zero-coupon bonds are bonds that do not pay any coupons. Instead, zero-coupon bonds are sold at a discount but redeemed at face value when they mature. Thus, investors who buy the bonds make money by gaining capital appreciation instead of regular coupons. For KrisEnergy's zero-coupon bonds, the last traded price is $0.44. When the bond matures on 31 Jan 2024, it will be redeemed in full at $1 (assuming KrisEnergy does not default). Hence, bondholders would gain $0.56 over a period of 6.5 years. This is equivalent to a coupon rate of 13.5%. Of course, the caveat here is that KrisEnergy does not default or restructure the bonds. 

Not only that, it is also a junk bond. Junk bonds are bonds whose issuer's ability and willingness to meet the bond obligations are uncertain. Their prospects are closely linked to the issuer's ability to pay dividends on the stock. Thus, both junk bonds and stock will rise and fall along with economic developments affecting the company. In other words, junk bonds can be as volatile as equities.

Thus, to gain capital appreciation, either the stock, warrant or bond are feasible options. The best instrument to speculate in will depend on your outlook for oil price. If you are bullish about oil price in the next 6.5 years, warrant will give the best capital appreciation. If you are neutral about oil price, bond will provide the best capital gain. If you are bearish about oil price, all instruments will be bad, with bond being less worse off. An estimation of each instrument's performance under the various scenarios on oil price is as follows.

Outlook Bond Stock Warrant
Bullish Good Good Best
Neutral Good Neutral Bad
Bearish Bad Worse Worst

P.S. I am vested in KrisEnergy stock but planning to switch to KrisEnergy warrant.

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Monday, 3 July 2017

Wills, Trusts, AMDs and LPAs

I just attended a 2-day estate planning talks on wills, trusts, Advanced Medical Directives (AMDs) and Lasting Powers of Attorney (LPAs) organised by RockWills Corp Pte Ltd. There are some interesting facts about them that I share below.


Most people know what is a will, so I will skip the basic facts and mention what I learnt from the talk. As you may be aware, you need to identify who are the executor and trustee of the will. The executor is the person who will carry out all necessary actions to distribute the estate according to the wishes of the will, while the trustee is the person who will hold on to the estate until it is completely distributed to the beneficiaries of the will. Although you can nominate an executor and trustee to carry out the wishes of the will, they can actually renounce these roles! The beneficiaries will then have to appoint another executor and trustee to execute the will.

The other point highlighted is that while you can write a well-planned will, if the will cannot be found or is destroyed, it is useless as well. This may sound like common sense, but the safekeeping of the will is sometimes taken for granted. For example, I made my will approximately 10 years ago. It is sealed inside an envelope and placed in an easily accessible location as nobody knows the existence of this will. However, for these past 10 years, I never open up the envelope and check the content. Who knows, maybe the ink might have faded or the paper on which the will was written might have turned yellow such that the will is no longer legible? 

The other concern for leaving my will so easily accessible is if someone were to read it after I am gone and dislike its content, he could simply destroy it and there would not be a will left behind.

The reason for my complacency is because I believed a copy of the will is kept by the law firm who wrote my will and by the Wills Registry under the Ministry of Law. I was reminded at the talks that the Wills Registry does not keep a copy of my will; it only has a record of when and who drew up my will. Will the law firm still keep a copy of my will 10 years after making it? I believe so, but I better not count on it since it did not charge me any custody fee. I will have to seriously think through how should I keep my will securely while still keeping it accessible when needed. 


This is the most interesting topic that I learnt from the talks. If you have read my blog post on There is Really a Regular-Payout Term Insurance, you would know that I have a preference for insurance policies that pay out regular sums of money over a period of time instead of a lump sum. This is because my dependents might not be financially savvy enough to handle a large sum of money suddenly and might unwittingly invest the money in some risky investment products. A regular payout provides greater certainty on the financial sustainability of my dependents.

Similarly, a will pays out the inheritance as a lump sum, which has the same disadvantages mentioned above. However, if you write a will to pay out the inheritance into a trust, you can provide instructions on how regularly a trust disburse the funds to the beneficiaries. You could also set certain milestones for your beneficiaries to achieve before they get further payouts, such as getting a degree, etc.

Advanced Medical Directives (AMDs) 

AMDs are instructions that you set in advance to inform doctors whether you wish to be kept on life-support in the event of a terminal illness and when death is imminent without life-support. You can refer to Ministry of Health's website on AMDs for more information.

The key thing to note is that the witnesses to the AMDs should not be beneficiaries of your will.

Lasting Powers of Attorney (LPAs)

LPAs are legal documents authorising a trusted person (known as a donee) to make decisions related to your personal welfare and financial matters in the event of mental incapacity such as dementia or stroke. This is a very powerful document as the donee(s) can make many decisions on your behalf. Thus, whom you appoint as donee(s) is very important. For the simple LPA, you can appoint 1 or 2 donees and specify whether the 2 donees need to act jointly or can act alone. You can also appoint a replacement donee should one of the originally appointed donees becomes unsuitable. You can refer to Office of the Public Guardian's website on LPAs for more information.

Some other practical considerations that the speaker mentioned at the talk are the donee should preferably not be of the same age, because both the donor and the donee might suffer from dementia when the LPA needs to take effect. Also, the donee should not be someone living overseas as he would have difficulties overseeing daily matters related to personal welfare and/or financial matters. 

That's all for the lessons I gathered from the talks. It is useful to attending such talks from time to time to clear up any misconceptions and understand the options available for estate planning.

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