Year of the 🐶 Portfolio

I am a long time subscriber to the Edge Singapore and every lunar Chinese New Year, they will put up a portfolio of 10 stocks which they believe will outperform the market index over the next 12 months.

I myself manage a live portfolio and I can understand how difficult it is to "predict" the market.

Of course, in this case, there is no real money involved but to get the stars aligned is no easy feat as the portfolio is measured only on two pricing points - @ the last Friday before the CNY and the last Friday of the next CNY. You can't "rebalance" or "sell at anytime" during the period.

The Edge Singapore's 2017 portfolio above outperformed the STI benchmark by 2.1%. I would say the performance is pretty good.

The Edge Singapore stock picks for 2018 is presented below. Let's see if it can beat the benchmark again next year!

Passive Income Update - February 

SRS Portfolio - addition 

Since the last update, I added another 20,000 shares of Starhill Global REIT @ 73.5 cents. The addition adds another $946 each year to my passive income. 

I bought it for the following reasons:

• NAV is $0.91 vis-a-vis the current price of $0.73 

• Projected yield of 6.4%

• To round up my existing position to 50,000 shares. The total dividend expected from Starhill is now $2,365 each year. 

Non-SRS Portfolio - addition

I convinced Mrs. IPO to part with her "private savings" to buy 25,000 shares of Capitamall Trust at $1.98 each. I have been "convincing" Mrs. IPO to invest gradually. Starting from Aspial Bonds to Netlink and now Capitamall. 

The price has corrected from its recent high of $2.16 in early Jan and is now trading close to its NAV of $1.92. 

The projected yield of 5.62% will mean that it is adding $2,790 each year to her passive income. 

The current criteria I used to select stocks for Mrs IPO is:

• Large cap Company, REITs or Bonds

• Predictability of distribution 

• Quarterly payout or half yearly distributions 

While I would have preferred to buy at below NAV, it's usually quite difficult to do that for a "blue-chip" stock like Capitamall Trust unless it's the GFC. 

With the addition of the above positions, the portfolio I have curated is well positioned to meet my 2018 goal of generating $60,000 per year. 

Hyflux Perps  - My thoughts 

Some readers asked for my views on the Hyflux Perps, so let me share some of my thoughts as a perp holder (not shareholder of Hyflux):

How I view the Management and Board of Hyflux. 

One word - disgusted. 

Why disgusted ? Let me explain. 

On 28 Dec 2017, Hyflux announced that it will distribute 70% of its stake in Hyfluxshop to equity holders and retain a 30% stake. 

The distribution in specie is recently completed where Hyflux investors received one Hyfluxshop share for every 10 Hyflux shares held. Note that Hyfluxshop is an unlisted company with the ELO brand and wellness business. 

The intent is to list Hyfluxshop in future and investors can have direct shareholding in two distinct companies. 

Company usually don't do a dividend-in-specie unless the underlying "specie" is a listed security where shareholders can benefit from either holding the stock or selling them directly in the market place. 

Even the private equity fund managers globally don't distribute shares in private companies to their investors until the underlying investment is listed and even then, they hardy do so. 

In other words, the balance sheet of Hyflux just "lost" 70% in its value of Hyfluxshop. 

Questions I have for Hyflux Board:

Why distribute an unlisted company to existing investor in the first place if the company is not listed? 

If the intent is to list Hyfluxshop, why do they have to do it now? Can't Hyflux do it a later stage when Hyfluxshop is listed and instead incur all these unnecessary expenses?

Who is the biggest loser in this distribution in specie ? 

I probably wouldn't have been so upset if Hyflux is doing well but the fact is the business performance of Hyflux is horrible with declining profitability and widening losses and Hyflux is highly levered. In addition, they have not indicated whether they will redeem the RPS this coming April. 

The big loser in this entire episode is probably the Hyflux CPS and Perp holders. Why? That is because 70% of the value in Hyfluxshop shop has been "leaked out" via the distribution. If Hyfluxshop turn out to be something valuable, then that value is lost and no longer "protects" the Perps holders. Or push it to the other extreme, if Hyflux is to go belly up, the value of Hyfluxshop is no longer in the hands of the creditors (including the Perps holders) of Hyflux. 

Is Hyfluxshop worth something? 

Well, if you ask Olivia, it is definitely worth something. After all, she is willing to pay $0.1783 for each Hyfluxshop share that she doesn't already own. Of course, if you take the half full view, she is "helping" to provide an exit option for investors who don't know what to do with the unlisted shares. She is helping to pay "dividend" to Hyflux shareholders out of her own pocket even when SIC ruled that there is no need for her to do so. 

Why did the Board permit the distribution in specie? Did the Board ask any questions on whether such action is detrimental to Hyflux Perps holders. 

I have no idea. You may want to write to them and ask. 

According to MAS Corporate Governance guidelines clause 3.1, it is not recommended to have the same person acting as both CEO and Chairman of the Board. Usually this role is kept separate but based on the Annual Report 2016, Olivia is holding the dual role. This means she is the boss deciding. 

When I look at the 2016 Annual Report (note I based my writing below on the 2016 report), Teo Kiang Kok is the lead independent director and he was first appointed since 19 Dec 2000! A whopping 17 years and counting. After 17 years can still be independent? 🤣 

Let's see who are the rest of the so-called independent directors:

Gay Chee Cheong is there since Aug 2001. 

Lee Joo Hai since Dec 2000. 

Christopher Murugasu since Feb 2005. 

Gary Kee since May 2011. 

Simon Tay since May 2011. 

Lau Wing Tat since Jul 2014. 

While there is no restriction on the tenure, perhaps the board needs to be refreshed in view of what's happening to Hyflux? 

Who benefits most from the distribution in specie ? 

Why not you tell me which shareholder will benefit the most... 🙄

Will Hyflux redeem the CPS that is maturing in April 2018. 

The market is telling you quite clearly that Hyflux is not going to redeem. Which is why the share price of both the CPS and perps crashed in February. In fact, there is a recent article suggesting that it is even cheaper for Hyflux to pay 8% after the step up in interest as it will not be able to raise new funds at that interest rate. 

Will Hyflux go belly up ? 

Your guess is as good as mine. Probably not in the near term or the Board wouldn't dare to approve the distribution in specie. However, if the fundamentals does not improve and continue to worsen, then there is a chance of this happening. 

If Hyflux goes belly up in the next 12 months, I would be quite worried if I am an independent board member. 

I guess one telling sign will be when the board members start to resign for no good reasons. So use that as your E2C (not ELO, punt intended) early warning system. 

Is Mr. IPO still vested and whether he will cut loss? 

Yes I am still holding. As I wrote before, I regretted not taking a more active stance on this position. I probably won't do it now but may consider later when sentiments improve. I am keeping my fingers crossed and see what's next. I am sure I will get at least get my April 2018 payment. 

Hope the above thoughts are useful for you.