Singapore Stock Market News

Since I did Ossia, I might as well do a little analysis on FJbenjamin too. This have a similar business to that of Ossia of retail. FJben sells watches, apparels and have a 30% stake in St.James power house too. Flipping their annual report for FY07, this is what I see:

Turnover increases at a CAGR of 25.0% from 2003 to 2007
Net earnings increases at a CAGR of 94.8% for the same period.

---------------------2003-------2004-------2005-------2006---------2007---
Operating margins---1%----------2%---------2%----------7%-----------8%----
ROE (%)-------------2%----------3%---------6%----------11%---------11%---
EPS (cents)----------0.52--------0.70--------1.50--------3.53----------5.07--

COGS as % to revenue-------------------------------------59.0%-------59.2%--
Gross margins---------------------------------------------41.0%-------40.8%-
Net margins (with exceptional items)----------------------5.4%----------8.3%--
Net margins (without excep. items)------------------------4.8%----------6.8%-

Wow, that's impressive isn't it? How did fjben manage to earn so much more profit from a proportionately lower increment in turnover? Earnings per share went up by 81.9% CAGR from 2003 to 2007 too. How did they do that when the turnover only grows at 25%? Very interesting!

Second thing I noticed but Fjben is that they have no non-current bank borrowings. Nil. Zero. They do have current borrowings (meaning have to repay within a year from June 07) but no long term borrowings. Is that too prudent? Why are they not leveraging on other people's money to boost their returns?

(Just saw that their shares had increased by 67.1%. Perhaps their plan is to use shareholder's money instead of bank's money to fund their growth. Not sure about the warrant stuff, though I know the warrants will expiry in 16 July 2007, with an exercise price of $0.45. Total amount is around $236 million, not at all a small sum. This deserves a closer look.)

They are sitting with a lot of cash in their piggy banks. Way too much in fixed deposits with an interest rate of 1.5 to 3% per annum. Maybe that's why they are giving a fat dividend last time round.

(Realised from their presentation slides that the fat dividend is due to capital reduction exercise, to return $74 million to shareholders)

A few things to worry about:

1. I noticed the advertising amount spent had dropped slightly, from 3.9% to revenue in 2006 to 3.6% in 2007. Branded goods have to keep on appearing in people's mind in order to create a perceived difference in the quality of the goods. Okay, I admit, I'm rather blind to advertisement and I don't watch TV. Not exactly in a position to comment on advertisment and its effectiveness :)

2. Rental of premises is increasing from 8.1% to revenues in 2006 to 9.3%.

3. Staff costs dropped from 14.5% in 2006 to 14.1% in 2007. Are they mistreating their employees as I heard from someone in it? Sales staff, if poorly motivated by rewards, will have poor services. I personally haven't tried the service of their brands, and I wonder if their services are okay?

Now I realised that branded goods isn't such a wonderful business. Yes, it's a cash cow business but the margins aren't that fantastic. To bring about brand awarenss, the shops have to be in high end places, not neighbourhood shopping malls (even though I see some brands carried by Fjben in Tampines mall). Such places are naturally going to be more expensive in rental. But I think FJben is doing well to keep costs rather constant, at least for FY06 and FY07.

How then to grow earnings?

1. Charge a higher price
2. Sell more
3. Sell another product or have a new revenue stream
4. Acquisition

I think fjben have the options of 1 to 3. It's not that 4 isn't an option, it's a rather funny option. (I saw in the presentations that their strong cash position allows them to do potential acquisitions. On who? Ossia? haha1) If they can do (1), it'll mean that they have a certain competitive advantage in the sense that they can control pricing. Retail at this branded goods level depends much on the brand, I guess. How about (3)? I think they're doing that currently by bringing in new brands (banana republic, is that right?)

I really wish they can show us the turnover figures for the respective brands they carry. As well as the margins. But i think that's too much to ask for as it's a sensitive information that can be used by their competitors against them. I'm especially interested in their house brand Raoul. Are there certain brands that aren't doing too well but is covered up by one or two brands that's doing very well. I guess we'll never know unless you're from the inside. Oh well, let's take a look at the segmented information:

---------------------2006-------2007-------
Turnover by region---------------------------
SEAsia--------------78.3%------83.8%------
North Asia----------19.8%------14.6%------
Others--------------0.11%------1.6%--------
----------------------------------------------
Turnover by segments-----------------------
Fashion--------------54%--------60%-------
Timepieces-----------42%--------36%------
Licensing-------------4%---------4%--------
----------------------------------------------

They mentioned in their presentations that their store growth had grown double digits. With fashion up 55%, timepieces up 15% and licensing up 44%. What much they make from each segment is not mentioned. If they give that, it'll be interesting.

The management seems very positive about the FY08. They citied a retail renaissance in SE asia with buoyant consumer spending. In singapore alone, there are 5 major orchard road malls being build or refurbished in 2008 and 2009, along with 2 IR (2010, 2011), resulting in more retail spaces and hopefully more revenues for the products. This in in addition to F1 Grand prix in 2008 and the much touted Tourism board to double tourist arrival by 2015 to 17 million from the current 10 million. M'sia have new landmark malls to open - Pavillion and Gardens (date to open is not mentioned). Indonsia there are 2 too - Grand indonesia and pacific place.

They expressed confidence in their 3 new brands - GAP, Banana Republic and Celine and they hope to strengthen their market share in those 3 brands. Guess brand must be their cash cow, as they plan to increase their no of stores in 2008 by 71 for guess alone. For GAP - increase by 19 stores. Banana republic by 7 stores, La Senza by 35 stores, Raoul by 30 stores and Celine by 9 stores. Just looking at their number of stores, I suppose we can guess which are the ones who're doing well (or at least expected to do well enough to justify the expense to open up new stores)

In order of highest stores opening in FY08:

1. Guess (71)
2. La Senza (35)
3. Raoul (30)
4. Gap (19)
5. Celine (9)

As a retail swaku who buys clothes maybe once every 9 months or so, I'm only interested in Guess products. La Senza is of course not my cup of tea ;)

Due to my incompetence in this retail industry, I'll gladly stay out of it. I'm not interested in branded goods, nor am I very confident of their earnings especially in bad times. My only brush with branded goods are those that went for sale (like the recent store wide sales at Springfield - yummy! my fav brand!). Not interested in Fjben :)

Today there's quite a number of companies posting results. A few are interesting, but let me just look a bit more in detail for Ossia international limited. They had just released their full year results for FY07, so there's more things to look at in comparison with FY06.

Gross profit went from 50.9% in FY06 to 52.1% in FY07
Sales went up by 9.8%
COGS went up by 7.2%

As sales went up, COGS went up by a proportionately lower amount, bringing gross profit up a little.

I saw a 38.3% jump in operating income, which looks interesting. I tried searching in the report, but not much clues from there. Maybe I didn't really search hard enough (though they should make a note beside the item too to make it easier for investors). There is also a one off gain on the disposal of investment property to the tune of S$3.4 million from the sale and leaseback of Ossia building near changi area. From hence on, there will be higher expenses from the rental of the building in which they sold and leased back. Distribution costs went up 23.2% which the management attributed to the expansion of distribution channels in China.

Ossia disposed off its entire equity interests in 2 subsidiaries from Hong Kong (I wonder why?), resulting in a gain of $85.23 million. Interesting...i wonder what's their game plan? Selling off HK subsidiaries, increased distribution channels in China, opened more than 20 stores in Singapore and M'sia. Is there a clear plan stated by the management? This is what I'll be looking for.

(Found that they had stated in point 10 that "the Group will continue to focus and expand its core business to be the regional distributor and retailer in lifestyle products apparel, bags, footwear, sports and golf in Asia Pacific". Isn't Hong Kong part of Asia pacific? Why the disposal then? Money losing subsidiaries? )

Net profit rose 26.1%.
Net margins for FY07 is 59.9% while FY06 is 2.9%.

Without the disposal of subsidiaries interest (85.23 million) and the one off gain from the disposal of investment property (3.4 million), net profit will be be such a stellar figure, improving from 2.9% to nearly 60% in FY07. So don't take the stated figures so literally. I remember the net margins for fjben is around 4 to 5%, so I'm wondering why Ossia isn't having a similar margins. Could it be the brand names that Ossia is selling compared to that of fjben? Highly possible.

I won't be calculating the inventories turnover for Ossia as I suspected that the disposal of subsidiaries will distort the figure a lot, so no point. It's satisfying to see that later on in the report, the management said as much that the decrease in inventories is due to the disposal of subsidiaries in HK. Inventories turnover remains an important metric to look at such companies though.

Cashflow for Ossia is mightily strong, waiting to receive a huge chunk of cash from their disposal of the subsidiaries. Gearing ratio went from 0.52 times in Dec 06 to 0.09 times in Dec 07, due to the repayment of the borrowings. Looks like Ossia have a strong balance sheet.

Point 13, Ossia had a segmented revenue and business results. The following is a summary:

--------------------2006-------------2007-------------
Sales---------------------------------------------------
S'pore/M'sia-------33.8%--------------36.2%----------
HongKong----------34.8%--------------27.7%---------
Australia/Taiwan---31.4%--------------36.0%---------
--------------------------------------------------------
Operating profit----------------------------------------
S'pore/M'sia-------38.1%-----------------NA----------
HongKong----------4.8%-----------------NA---------
Australia/Taiwan---57.1%-----------------NA---------

For the sales, the percentages are with reference to the continued operations sales. For operating profit, the percentages are with reference to continued operations operating profits. It's not possible to find the percentages of segmented operating profit in 2007 because the HK region is making a loss. Below is the actual figures for FY07:

In FY07
S'pore/M'sia ----$409,000
HK--------------(-$1,222,000)
Austrialia/TW---$3,043,000

I think this small exercise shows why Ossia decided to dispose of their interests in their HK subsidiaries. They completed the disposal exercise in January 2008, so the subsidiaries are still operating as of FY07.

It appears that while sales figure for HK is nearly 1/3 of total sales, the operating profit is only a paltry 4.8% of the total operating profit in FY06. FY07 is even worse. I wonder why? Perhaps a more careful and detailed look in the previous few years of data will shed some light on this abnormal situation. Could it be the same situation that plagued Popular - that of rising HKD that erodes their profits? It's a possible reason, given that in point 10, they mentioned that had a foreign exchange loss (HKD to SGD) when they dispose of the two HK subsidiaries.

Did some sleuthing and found these are the brands that Ossia is marketing:

Elle Paris, Elle Sports, Elle Active, Elle Petite, Bodymaster, And 1, Prince, Mizuno sports, Spank, Keds, Sperry Top Sider, Bridgestone Golf, Kasco Golf, Bally Golf, PRGR Golf, Sword Golf, Hedgren, Tumi, Columbia, Acegene, Progres, Playboy, Diesel, Levi's, Kangol, Hush Puppies, Scholl, BCBG, Nina, Vago and Millie's

(There could be more...I didn't really search their website, if there is one)

Okay, maybe I swaku, because I only heard of Elle, Bodymaster, Bridgestone golf, Columbia, Playboy, Diesel, Levi's, Hush puppies, Scholl and Vago.

Based on Wallstreet's general piece on Ossia, ROE of Ossia isn't exactly fantastic. Going from 17.3% (FY04), 14.6% (FY05) then to 5.7% (FY06). I'm not sure how they count it, but I'm not going to calculate the ROE of Ossia in FY07 due to the disposal (if I just subtracted those one off, I'll get negative net earnings!).

I'm pretty convinced of its instable ROE though. Family owned business by the Goh family (60 % over), but not exactly my cup of tea :)

Today, I saw a cat sitting right in the middle of the pavilion near my home. It looked so carefree and serene, full of content. I thought how come a cat, with so little possessions, can have a life so carefree and possibly happy, at least at that particular moment in time. I wonder how come, humans having so much, can actually have so little.

I knew my blog post tonight will be about this topic, so I suddenly thought of the Mayfly - an insect that lives for 1-2 days with absolutely no mouth to feed. Its sole purpose in life is to mate and then die off. Is such a life worth living - to live in order that the species will propagate and carry on? I wonder what do the Mayfly think of its life...is it full of purpose or is it meaningless as I thought it is? What could it be thinking of as it lies in the last few minutes of its life?

It's eerily coincidental that there is this insect that had been resting motionlessly in my bathroom. I thought it was dead because I really never see it moving for 1-2 days already. I told myself that it must have attained nirvana and must have died a happy death - possibly a painless one. C'mon, at least it's not eaten and smashed alive by humans. I left it alone.

It's eerie because when I did some research on Mayfly (to type this blog), I found that a mayfly looks like this:

It's characterised by 2 long hind legs, with an 'arched' body. So guess what? When I went back to the bathroom and looked closely at it, it's exactly the same! I went to nudge it a little and am surprised to see it inch a little away from my fingers. I guess it's still alive...though weak enough not to fly away.

Things around us work in strange and mysterious way. Perhaps it's time for me to look inward and ponder upon the meaning of life. Do we need so much to be happy?

Think about it.

Preliminary studies on the dividend that singpost gives and the current dividend yield looks good, hovering around 5% to 6% (based on average prices) since 2003. Take a good look at the ROE and EPS, classic signs of deep (earn a lot) and wide (hard to penetrate) economic moat, most likely due to its monopolistic status of its postal license, which ends in 2007. Looking at their annual report for 2003, I'm glad to see that Singpost had already prepared for this eventuality. I'm probably going to take a good look at their plans for 2003 to prepare the company for deregulation of the postal services, and then see if what had been said had been done now.


More metrics:

Average yield (based on average yield) for the past 5 years (2003 to 2007) = 5.37%
Averaged dividend growth for the past 4 years (2003 to 2007) = 10.67%
CAGR for dividend growth = 10.45%

Average EPS over past 5 years = 6.15 cts per share
Average EPS growth rate for past 4 years = 6.50%
CAGR for EPS growth = 6.29%

Net margin approximately 30% since 2003
Average payout ratio = 0.81

To really understand the finer points of the model, I suppose you have to read the book. After messing around with the variables, I settled on three main things: first is that the EPS is 0.615, which is the average EPS over the past 5 years, second is the core growth rate which I tried between 5% to 7% (I based it roughly on the earnings growth rate), and thirdly a ROE of 50% to 80%. Here's the matrix of possible projected total return by fixing EPS at 0.615 and changing ROE and core growth.


Payout ratio of 0.81 or 81% is about right. Singpost's dividend policy is 5 cts per share or 80-90% of net profits, whichever is higher. Messing around with the variables give me a projected total returns (meaning capital + income) of around 10% to 12%, which is pretty close to the rougher "current dividend + future dividend growth" model of 15.82% (5.37% + 10.45%). Difference probably lies in the fact that I'm using historical average EPS of 0.615, whereas I should be using a forecasted future EPS. Doing so will add in less than 1% to my projected total returns, bringing it to a range of 11% to 13%.

Is it safe?

Looking at the current dividend yield of 5.63%, it forms nearly half of the total projected returns, which makes this dividend play rather safe (because the other half of the potential returns are not guaranteed, whereas this 5.63% is guaranteed as long as they give out the dividend). So far, this is one of the few companies that I see that had a strict dividend policy stated explicitly in its investor relations page. I've got more reason to believe that such a dividend can be maintained. I didn't want to go in depth to talk about the economic moat and the ROE...another time another day.

Singpost is a very stable business. Net margins is almost constant at 30% since 2003, though they are doing things better and better with ROE increasing from 23% to 84% in 2007. With EPS growing steadily, I think based on history, this should be a safe counter.

Will it grow?

So far, the company did not give any indications that their dividend policy is going to change. There could be a possibility that after selling their flagship HQ in paya lebar, they are going to give out one big fat dividend, and thereafter change their dividend policy due to higher cost (from rental of the sold premises) . But that is just pure speculation. Since the company had already planned for the eventual deregulation of the postal services, they had been going full gear into expansionary plans. Btw, Singpost is appointed as the Public postal licensee (whatever that means). A good thing to analyse here will be how their other revenue streams are growing.

Amid a possible global slowdown, even if the growth rate drops to 4%, it will still give a lowest potential total return of 9.1%. Pretty pessimistic viewpoint, but still reasonable returns. To me, anything more than 8% is pretty solid. More than 10% is great.

What's the return?

To summarise, a pretty pessimistic viewpoint will give a total return of 9%. But I think a more possible outcome is between 11% to 13%. Messing around with various combination, I found that:

1. $0.95 is an extremely good bargain for singpost, based on 5 cts per share dividend, 2006 earnings, ROE 50% and a core growth rate of 4% (which is lower than singapore's economic forecast) - this combination gives a total potential returns of 10% which I'm satisfied with.

2. I did a quick Free cash flow discounted model, based on a perpetuity rate of 4% (btw, that's pathetic and ultra conservative, meaning that singpost is growing slightly faster than inflation only) and a discounted rate of 6% (which I based it on EPS growth rate...feeling is that it's around there).


Intrinsic value turns out to be 1.284.

Given the steady and consistent showing by Singpost, I reckon a 20% margin is sufficient...$1.03.
If you're feeling pessimistic, try 30% margin...$0.900.

So there we have it: $0.90 to $0.95 is a very good buy based on both dividend and discounted FCF. While it is all very sketchy, upon reflection, I feel that I've understood the numbers more clearly. Going by feelings alone, I feel $1.00 itself presents a very good buying oppportunity because if it's really based on on 90 to 95 cts buy, it's a very pessimistic outlook. The point is this, the lower the price, the safer it is and the greater the potential returns.

Price in which you enter is everything!

Here are my thoughts for the book that I finished reading, titled "The Ultimate Dividend Playbook - Income, Insight and Independence for Today's investor" by Josh Peters. This is another excellent series from Morningstar group. I really really love their clarity and ample use of examples to illustrate the point. This is one of those books that I would love to keep. Probably will buy it, together with another of Morningstar's series, "The five rules for successful stock investing" by Pat Dorsey.

Perhaps it's because I don't have much background in accountings and finance, hence the simplicity of the books drives the points straight home :)

This author is a believer of Graham's teaching, so ample use of margin of safety can be seen in a number of chapters. Like other morningstar series, they place equal emphasis on intrinsic factors like management and economic moat to determine the valuations of dividend counters.

These are the succinct points which I think the author is trying to drive at:

1. Buy and hold for dividend counters. The compounding will work wonders for the patient investor. The author believes firmly in income rather than capital gains because dividend paid out is yours to keep and isn't subjected to the vicissitudes of the market.

2. Prospective returns of a dividend yielding stock = Current dividend yield + Future Dividend growth

For example, if a company has a current dividend yield of 3% and the dividend had been growing in the past for 10%, and we can estimate that in the future the dividend growth is say 7%, then the total returns (prospective returns) = 3% + 7% = 10% for the long term

If one truly understands this, then having a low current yield need not be bad, especially if the dividend growth is higher to give a high total returns. If the current yield is high, perhaps the dividend growth is low, so it brings down the total returns. If the stock price falls, current yield will be pushed up, bring the total prospective returns to be high. It's good to buy when the price is depressed, to put in simply.

Current yield is a function of profits and dividend payout ratio.
Future dividend growth is a function of reinvestment of retained earnings into existing business opportunities, acquisitions and share buybacks.

This, I think, is the gist of the whole book. Truly opened my eyes.

3. Payout ratio = Dividend per share/Earnings per share

High payout ratios leaves little margin for errors since a slight drop in profits might leave the firm with insufficient earnings to cover the dividend. Too low a payout ratio might make the current yield too low to be attractive.

While payout ratio is the amount out of earnings that is paid to shareholders as dividend, what happens to those earnings that aren't paid out (after subtracting costs and such, of course)? It will be plunged back to the firm as growth.

In other words, earnings is either given out to shareholders (rise in current yield) or if not, it'll be plunged back to the firm to grow it (rise in future dividend growth).

4. Sustainable growth rate = (1 - payout rate) x ROE

Sustainable growth rate suggests how much earnings growth can be expected to grow, given constant ROE and payout ratio. Since how much the earnings can grow for a company will in turn affect future dividend growth, sustainable growth rate probable shows us the upper limit of how much dividends can grow. ROE and payout ratio will affect this potential earnings growth.

Given that all else is equal, a firm with high ROE is going to do a better job of increasing its dividend rate than one with lower ROE. And in the long term, ROE is a function of the firm's economic moat.

5. A good check on a firms dividend records can shed a lot of light. These are the points to look out for:

a. Are there dividend cuts? Plenty of cuts means that dividend is not sacred in the company, they shows less commitment by the company to carry on giving the same or more dividends in the future.

b. Is there meaningful payment? Talking about dividend rate here. Check for at least 5 year, 10 years or more if possible.

c. Is there meaningful increment? There must be consistency in increasing dividends. Look for those companies are proud of their dividend increment records - they are less likely to sacrifice these record on a whim. Look for average growth rate too, at least growing faster than the rate of inflation.

6. 3 questions to ask:

a. Is the dividend safe?

b. Will this dividend grow?

c. What is the return?

Each is a separate and wordy chapter on its own, so there is no way for me to summarize it all.

The book ends after teaching the reader how to evaluate the few great dividend plays - banks, utilities, REITS and energy partnership (don't think this is present in Singapore). As I said, an excellent book to start on one's journey into dividend play.