Wednesday, 6 December 2017

Case Study - Frasers Ctrpt Trust Investment Returns

Changi City Point

My experience with Frasers Centrepoint Trust (FCT) since 2013 has been a fruitful one. It may be timely now to review what is the actual return.

For an investment with cash dividends at different dates, plus my several purchases, IRR is a suitable measurement  as it takes into account actual out and inflow of cash.

FCT Share Price Performance since May 2013


In this period, FCT's highest price was around $2.35 in May 2013. It dropped 30% to around $1.65 in early 2014, due to initial news on Fed's tapering of QE. Subsequently, it had major drop in 4Q 2015 (around 17%) and 4Q 2016 (around 14%).

Actual IRR Based on Actual Lump Sum Investments
I bought 3 batches of FCT in Sept 2013, Oct 2013, and Oct 2014, and have been holding them till now with no sales.

Here is a screenshot of the IRR table. Note that I use the 2 Dec closing price of $2.21 and $50 brokerage fees to calculate the final value.


My IRR over 4 years 4 mths (Sept 13 to Nov 17) for FCT is 11.11%.
  • Total capital invested - $12,966.35
  • Total dividends received - $3,132.82 (24.1% of capital invested)
  • Final value of holdings is $15,420 (capital gain of 19%)
Contrary to popular belief that retail Reits would be severely impacted by online shopping and consumers gradually veering away from mall visits, I decided FCT was investment-worthy due to its consistency in dividend payments, strong fundamentals with a nice blend of growth prospect in Woodlands and Yishun. I believed its resilient sub-urban malls catering to residents' non-discretionary shopping needs will remain attractive.

The IRR over 4 years at 11.11% is rather good and this has vindicated my beliefs.

IRR Simulation - Quarterly Regular Investment
What if, instead of 3 sporadic lump sum investments, I did a Dollar Cost Averaging (DCA) by buying into FCT every quarter? Could I have done better?

In this simulation I build and maintain the discipline to save up $1k per mth, and buy $3k worth of shares every quarter, ignoring the share price.

Some key info:
  • Purchase based on closing price of last trading day of that quarter
  • Costs fixed at $29 per transaction; cost of sell transaction on 2 Dec is $120
  • First and last purchase in Dec 2013 and Sept 2017. A total of 16 tranches and 23,600 shares acquired
For this regular investment planIRR is 11.43%. This is a better returns over the lump sum investment earlier.

Here are other key info:
  • Total capital invested - $46,934
  • Total dividends received - $6,018.33
  • Final value of holdings - $52,036

IRR Simulation - Bought at May 2013 Peak Followed by Regular Investment
Looking back, it was lucky that FCT had a major drop to $1.7 in Sept 13. It allowed me to enter at a relatively good price. Should the plunge did not happen, or I was not disciplined enough, it is highly possible that I would have bought at a much higher price.

Lets assume the worst case scenario in which I bought an equal amount of 4,000 shares (as per what I actually did in the first simulation) at May 2013 market peak of $2.32.

Naturally I would be horrified by the steep 30% drop later. Panicked and not knowing what to do, I decided to start a  quarterly DCA of $3k. I started buying in Sept 13 up till Sept 17. 

For this mode , my IRR would be 9.17%.
  • Total capital invested - $59,225
  • Total dividends received - $8,923.03
  • Final value of holdings (29,200 shares) - $64,372
Despite buying at the highest price in the past 10 years, I still managed to earn a good annual return of 9.17%.

There are a few take-aways here.

Be clear in your objective in investing in a Reit
I bought FCT with the goal of earning regular and steadily increasing dividends. It has a clear positioning in my portfolio - a dividend play. I didnt sell through the years, as it was still able to fulfill what its set out to do.

This echoes my earlier thoughts on giving your stocks time to serve its purpose.

Importance of Reit quality - assets and management
2 intertwined factors convinced me of the Reit's quality - a strong management bringing about high footfall to the malls, and the unique locations of malls making management's job easier. My confidence were reinforced by numbers and track record - increasing dividends and lease renewal, plus track record in  acquisition and asset enhancements.

FCT's past performance shows what benefits a strong management plus good assets can bring to its investors. 

Merit of regular investment
Despite my relatively low cost price of $1.85, and its share price range-bound between $1.7 to $2.3 past 4 years, quarterly regular investment managed to improve my returns from 11.1% to 11.4%. 

In the third simulation, despite buying at a ten-year market peak, I would still earn a respectable returns of 9.17%, through regular investment.

In both scenario, regular investment helped improve my returns.

Essentially regular investment removes the guesswork of timing your purchase (which is tough for most investors) and allows one to buy more at cheap price. Over time, this tends to lower the average cost price. And if the share price shows larger fluctuation amidst a stronger upward trend, regular investment would have done even better.

So, if your research shows that the company is fundamentally sound, and you have set aside monthly investment funds from your salary, you really should not be too concerned about the current expensive price because regularly investing into strong companies would ensure that you earn decent returns.

And it also reduces speculative flavour in your investment - attempt to catch market low or high, take profit and lose sight of big picture.

Conclusion
I elaborated that by investing in quality Reits with strong fundamentals over long term, one would not do too shabby. Regular investment taking advantage of DCA tend to lower cost price and improve returns as well, even when one first bought at market high.

This study in also limited in a sense that it is just one Reit. And the period of study was also a time when most Reits prospered.

However, I think the most important lesson here, is investor has to learn basic investing knowledge, understand market psychology, and build mental discipline to stay the course. These are life skills that enable investors to be self reliant, and earn real investment returns regardless of industry, market condition and companies.


*Email me at chunsiangchong@gmail.com or fill up the contact form at top right corner if you want to improve your investment returns or for a quick chat on stock investing. 

*Opinion expressed is for education and illustration purpose only. It does not constitute a buy or sell call. 

Sunday, 19 November 2017

M1 or Starhub??


M1 and Starhub are household names with close to 50% of Singaporeans being their customers.

They are also popular stocks among investors. But we know that the telco sector has seen a bit of shake-up recently, with new players emerging - Circles.Life and TPG.

Are M1 and Starhub still good investments? I studied their latest 3Q earnings to find out more. 

3Q Earnings Snapshot
Figures obtained from M1 and Starhub Q3 FY17 Earnings Results 

M1 managed to eke out a small increase in revenue and EBITDA in 3Q over 2016, with both numbers rising by 1% and 1.3% each. However, Starhub saw a small drop in both: -0.8% and -1.7%.

Both have similar EBITDA margin. 

And based on their closing price on 17 Nov (M1 $1.77, Starhub $2.83), M1 is valued lower at TTM PE of 12.3. M1 also enjoys a higher dividend yield of 6.3% (TTM dividends $0.111), compared to Starhub's 6% (TTM dividend $0.17). 

Both companies continue to face margin erosion due to stiff competition. The 9-mth EBITDA margin for both shows clearly: 
  • M1 9-mth 2017 EBITDA margin: 29.8%; 2016 is 32.1%
  • Starhub 9-mth 2017 EBITDA margin: 29.5%; 2016 is 31.5%
Extent of Mobile Segment Deterioration, and Growth of Enterprise Services
One narrative for future growth of telcos is the Info Communication Technology arising from an increasingly digitalised economy, more online communications and activities among consumers, and a rising demand for cyber security services. 

Besides, I would also like to find out which of their consumer mobile segment, the bread-and-butter business, have fared worse. 

Comparison of Both Companies
Figures obtained from M1 and Starhub Q3 FY17 Earnings Results 

From this table, it is clear that M1's mobile segment has been faring worse in the past 9 mths, with its mobile revenue and mobile ARPU deteriorating. Despite innovative product offerings and better value mobile plans (eg. here, here and here), M1 does not seem to be able to retain customers and defend its mobile revenue. The significant 4.2% drop in mobile ARPU is particularly concerning. 

While its Fixed Services showed a 21% growth, it is still a small portion of the overall revenue. With its small base, Fixed Services has to grow much more to stem off the overall business decline. 

Starhub has a milder drop in mobile segment revenue and ARPU, with its Enterprise Services grew 5% in past 9 months. With less dependence on mobile segment, Starhub should be less impacted by the mobile industry headwinds. 

Dividends Trend
Many investors bought into either companies enticed by the high dividends. As dividends are cash outflow, it is important to find out if the company's earnings and cash generated from its daily operations are sufficient to pay out dividends.

Ideally, dividends paid should be lower than Earnings per Share (EPS) and Free Cash Flow (FCF), as anything above, over a sustained period, means company would need to borrow, or dip into their cash reserves, to sustain dividend payment. 

FCF is defined as Net Operating Cash Flow minus purchase of fixed assets/spectrum rights/plant property and equipment). 


Figures obtained from past Annual Reports

M1's dividend was above its FCF, but below its EPS, until 2016 where it dipped below both FCF and EPS.

Starhub's dividend is higher than both EPS and FCF per share in 2016. Its FCF has also shown a down trend past 3 years.

Do note that both companies have actually reduced their dividends. Starhub has announced intention to pay out $0.04 per quarter instead of the usual $0.05, decreasing its div per share to $0.16. M1 has also been reducing its dividends for the past 3 years: 

Source: M1 corporate website Investor FAQ

Conclusion
Analysis presented here are by no means a thorough and complete assessment, and there are many other areas that could warrant discussion depending on each investors level of confidence and familiarity with the companies. However, as far as investment decisions are concerned, these points are sufficient for me. 

It is a tough choice to make. Business fundamentals wise, both companies are facing a difficult operating environment, caused by new players entering an already matured and competitive industry. Opportunity areas such as ICT and corporate/enterprise services are not seeing sufficient growth to offset the drop in mobile services.

My hunch is to veer towards Starhub. It should have a better chance of surviving the competition, due to its larger size, more diversified operations with less reliance on mobile segment, and a bigger presence in ICT/enterprise services. 

However, for an even safer value proposition to investors, one could always wait for price drop before buying. Based on 16c dividends, its valued at 5.6% currently. One would recall that back in the good days before fourth telco announcement, Starhub was a favourite among investors with its regularly paid out 6% dividends. 

To have a 6% yield to compensate investors for the additional risks, Starhub would need to fall to $2.66, which is around the low price just few months ago. 

I will look at it again if it goes to $2.6, vis-a-vis its earnings then, to decide whether to start buying its shares. 


*See my profile here. Feel free to contact me if you wish to start share investment, or interested to start personal wealth management to make your money work harder!

Sunday, 5 November 2017

3 Steps to Start Wealth Management

A financial month of a working adult would typically look something like this:
  • receive salary in bank account
  • go around daily necessary expenses eg. food, transport, loan payments
  • have discretionary spending eg movies, shopping, travelling etc. 
  • keep the remaining amount in a bank saving/deposits product
  • wait for next salary
While such approach is a logical one and easiest to embark on, it is not ideal for someone striving towards a secure financial future and comfortable retirement. One needs to take a holistic look at his entire wealth plan and start taking suitable actions.

It is essentially allocating our money to specific wealth management goals, maximising their usage over our working life. 

Here, I offer 3 sequential steps to start managing one's finances better.

Manage Personal Cash Flow
We should all have separate bank accounts for daily expenditure, savings, and investments. Set up automatic funds transfer from the salary-receiving account into savings and investment buckets right after one's pay day. Don't leave it till the middle of the month. Chances are we would compromise on the savings or investment amount given our propensity to spend. 

As I always say, people hate money. Somehow when we see numbers in our bank account, we must quickly get rid of them by exchanging them with things or services. 

However, we can respond to such an innate hatred of money better - by getting them out of sight via transfer to different account and leaving a just-enough-balance for necessary spending and some entertainment in the main account. With our funds in their rightful compartments - for savings and investment, they can be put to good use when time calls for it. 

Get Essential Insurance Coverage
Insurance transfer, or reduce partially, the impact of risks arising from life's catastrophic event. It is done by entering into contracts with insurance companies to grant an agreed amount upon certain unfortunate events taking place. 

This is critical due to the deadly effects of life catastrophic events such as passing on, critically ill or total disability: 
  • potential to deplete one's accumulated assets to deal with the aftermath, and rendering his future earnings capacity zero
  • jeopardising family members' and dependents' livelihood through loss of income and a sudden need to take over debt payment
Insurance should gear towards restoring one's life back to the state before the strike of unfortunate events, as much as possible. Life insurance ensures your dependents have money to fall back on; hospitalisation plan pay for expensive medical and treatment costs, disability insurance payout replaces your last drawn salary. 

With proper insurance in place, the downside risks of life major mishaps are significantly reduced and our base assets protected. We can start investing for wealth growth. 

Invest for Higher Returns
There are many investment products in the market such as shares, exchange traded fund, unit trusts etc., with one common goal - to earn returns.

While each product offer the potential of returns, they always come with differing level of risk of losing money. This is because investment attempts to give you back a larger sum in future even when future is never certain. Herein lies the most fundamental concept of investment risk. And the higher the potential returns, the higher the possibility of losing money (risk).

Another factor to consider is the costs of investment, which is also inversely correlated with returns. Do our investment products have too high a cost that it affects the returns? Could we put in some efforts to learn the ropes of investing, and turn to other less costly instruments?

One should try to have a good mixture of investment products, considering the returns, risks and costs. Start taking a personal financial review to uncover what products are suitable for you, taking into account your risks tolerance and other factors such as age and time horizon. 

Conclusion
While we work hard for a better future, we should also be smart about managing our wealth. Its our hard-earned money, and no one else care about it as much as we do.

There will be time when human beings stop earning, but money can work every single seconds with no down time. Hence, not letting our funds earn a reasonable returns would be a huge disservice and we should start taking actions today.  

*Feel free to contact me at chunsiangchong@gmail.com, or fill in the contact form at top right, if you like to start a proper personal wealth plan today. 

Case Study - Frasers Ctrpt Trust Investment Returns

Changi City Point My experience with Frasers Centrepoint Trust (FCT) since 2013 has been a fruitful one. It may be timely now to review...