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February has been a volatile month - Here's my game plan (MCT, SATS, DBS and more)

Please note that these articles are for discussion and informational purposes only and should not be relied upon as financial advice. Please read the full disclaimer available on the desktop version of my blog.

February has been an extremely volatile month with huge swings in the equity markets. Thousand point moves in the Dow Jones Index meant that volatility has shot up, and investors are worried and confused. Our Straits Times Index wasn’t spared either. With all the negative headlines dominating the news every day, you may be wondering – what’s next?

I would like to share with you the transactions I have made in the past month, as well as my game plan to navigate the volatile markets of today. I have made trades in four companies this month – I sold Eagle Hospitality Trust and Far East Orchard; while I bought SATS and Frasers Property. Companies on my watchlist – in the order of priority – include Mapletree Commercial Trust, DBS, ComfortDelgro and Hongkong Land.

Later in the article, I would also share my thoughts on Howard Marks’ latest memo, and how it ties in with my strategy in face of the volatility. Howard Marks is the co-founder and co-chairman of Oaktree Capital Management, which specialises in investing in distressed securities. He is also the author of ‘The Most Important Thing’, which I read early during my investing journey, and have applied the concepts discussed to my investing philosophy. I would highly recommend all investors to read this book.

February Transactions

Took profit on Eagle Hospitality Trust (EHT) at $0.52. Made a small gain from my entry price of $0.48. EHT was supposed to be a turnaround play for me back in November 2019, when it was sold off sharply due to uncertainties over its flagship asset, the Queen Mary. Subsequently, earlier in February, EHT missed its IPO forecasts for Net Operating Income and Distribution. Personally, missing IPO forecasts by a sizable margin would be a red flag for me, even though there were probably some valid reasons given by the management, including the hurricane which affected certain assets as well as the ongoing refurbishment works.

As a result, dividends declared for Q4 2019 of 1.179 cents missed the forecasted figure of 1.56 cents, a 24% variance. The recent resignation of the CFO also added to the uncertainty over the company, and I decided that it wasn’t ideal to hold on to a company with that much ambiguity involved. Additionally, I was also concerned of the coronavirus situation worsening. At the time of selling, the US wasn’t really affected by the virus yet, but subsequently, US hospitality assets have sold off sharply, as seen from ARA US Hospitality Trust’s decline as well. Thus, the recent decimation of the share price should not be entirely attributed to firm specific issues, as there has been a broader selloff in hospitality assets as well. If you’re keen to read about my reasons for buying EHT back in November, you may refer to this post: An in-depth look at Eagle Hospitality Trust's (EHT) Assets . Do note that the valuations would have changed slightly due to the lower NOI from the assets, as well as changes in cap rates.

Cut loss for Far East Orchard (FEO) at $1.14. This represents a 25% loss from my entry price of $1.52 back in late 2017, excluding the two years of dividends collected (6 cents annually). I felt that the share price has been on a constant decline since I bought in, and it this point of time, there are better opportunities to deploy my cash, and thus decided to cut my losses. Additionally, FEO is also exposed to managing and operating a number of hospitality assets in Singapore and abroad, hence I felt that while its share price has not sold off as steeply as other hospitality focused plays yet, I should exit while I can.

This investment gone wrong has also taught me the importance of not solely looking at the Net Asset Value of a real estate company when investing, and instead to consider the earnings visibility of a company as well. Evidently, investing while being overly fixated on the NAV of a company may mean that the earnings power of a company is overlooked, and this may result in declining earnings and dividends. I would candidly say that my level of analysis that I’ve did at that point of time in September 2017 was pretty superficial, when I was relatively still a newbie at analysing companies. Today, I am also focused on ensuring the sustainability of earnings from real estate assets, instead of solely focusing on the NAV of the company.

An additional thought that I had while divesting FEO was that ‘deep value’ companies trading at huge discounts to their NAV may take an extremely long time for their intrinsic value to be realised – or sometimes not at all. The problem with these small caps with low liquidity is that without many investors coming in to bid the price up, the company can stay undervalued for a long time. The low liquidity and small market capitalisation are also barriers for institutional investors to enter, and sometimes a privatisation may be the only hope for the value to be realised. An example would be Hanwell Holdings, which I have written about previously here: HANWELL HOLDINGS: NET CASH 70% OF MARKET CAP. Currently, its net cash position of c.20 cents per share is at the same level as its share price. However, due to high insider ownership and low liquidity, its value may take a long time to be unlocked. I am also thinking of the broader trends towards passive investing, indexing and ETFs, which means that index constituents continue to get more attention and trading volume, while small cap stocks continue to be neglected – even though from a fundamental point of view, these may be good investments.

Bought SATS at $4.49 in early February. This was intended to be a long term investment, and I felt the at that price it provided a good entry price. However, the subsequent worsening of the coronavirus situation and the further suspending of flights to South Korea and Northern Italy meant that SATS’ share price took a further beating. I still believe that my thesis holds – betting on the long term growth of air travel as a proxy for increasing affluence in the region -  a trend that I believe would play out over the next 5 to 10 years. As seen from previous epidemics, the rebound in demand for air travel and tourism is usually strong and quick once the epidemic blows over, hence I would expect passenger figures to rebound to normal levels within a year or two.

I guess the main concern now would be that the coronavirus situation would drag the global economy into a recession, which would mean a further drop in demand for air travel. A UK based airline, Flybe, as just went into administration as a result of the drop in demand for air travel. However, many airlines in the region are national flag carriers, and there major shareholders have vested interests in ensuring that they are able to stay in business. To account for the worsening situation, I have revised my assumptions on my discounted cash flow (DCF) calculations for SATS, with a revised expected fall in passenger numbers of 30% at Changi Airport this year, while also increasing the expected time taken for passenger numbers to rebound to last year’s figures. With my revised assumptions, I would be looking to average down at around $3.80. Do read my post on SATS here if you’re keen to understand more about its revenue drivers: A detailed look at how SATS earns its Revenue and Profits

Bought Frasers Property (FPL) at $1.66. Won’t elaborate much on this as I’ve recently wrote a post on FPL here: The Divergence of Performance between Frasers Property and its REITs. In short, I believe that FPL’s share price has significantly diverged from its underlying REITs – while its REITs have delivered strong performance, FPL as the holding company has languished. Additionally, FPL’s dividends are also well supported by recurring earnings from rental income. The lower interest rates going forward would also positively benefit REITs and developers.

Companies on my Watchlist

Mapletree Commercial Trust – the key thesis here would be that MCT stands to gain most from the proposed developments along the Greater Southern Waterfront. I would do a write up when time permits.

DBS – I am already holding DBS, but any further declines in share price presents an opportunity to me. DBS has the largest funding base and is the strongest in wealth management and digital banking among the three local banks, while having the highest ROE. Yet, it is trading at a c.100bps yield spread compared to the other local banks. That means the market is either pricing in a huge decline in DBS’ asset quality, a dividend cut, or both. Alternatively, one could simply make the conclusion that DBS is undervalued.

ComfortDelGro – In decline due to competition from private hire vehicles, while ridership for the public transport segment would definitely take a hit from the virus epidemic as more employees are having work from home arrangements. I have done a rough sum of the parts (SOTP) valuation for CDG, which seeks to value each business unit in isolation, providing greater clarity on the prospects and valuation of each segment. I would share more about my SOTP valuation in due time when I have consolidated the information available.

Hongkong Land – Landlord of prime commercial properties in HK and Singapore, which is facing headwinds due to the political situation and the epidemic in HK. HKL recently reported underlying earnings which increased marginally, while net profit declined 92% due to revaluation losses. To me, it seemed positive that rental rates in 2H2019 were able to hold up despite the protests which started in June. However, the market seems to take the results negatively, as HKL declined yesterday, post earnings release. One positive for me would be the privatisation of Wheelock & Company on the HKEX recently, which shows that the property magnates still have the appetite for buying. Perhaps the property magnates see an opportunity that the general market has overlooked?


After my transactions in February, my current cash level is at c.20% of my portfolio. I am looking to raise more cash by selling off some more positions. I also take this opportunity to review my portfolio, with the aim of consolidating my holdings to no more than 10 positions, so that I can dedicate more time to thoroughly research each of my portfolio companies. I am also looking to venture to the US market, with some big names including $MSFT and $MA catching my attention. I am still relatively unfamiliar with the US market, but I have friends who have a much better understanding of some of the companies there, and we would discuss before initiating positions.

At this point, I think that referencing Howard Marks’ memo on the coronavirus and markets today would be very apt. Marks’ view is that it is okay to do some buying now, because to be honest, no one knows what the future holds. Stocks may turn around, and you’ll be glad that you bought. Or stocks may continue down, and in that case, you’ll want to have money and the courage to buy more. “That’s life for people who accept that they don’t know what the future holds.

In practice, I can understand how retail investors may find it hard to apply this strategy. As a billionaire, it is relatively easy for Howard Marks to keep his conviction and stay with his strategy of averaging down when prices fall further. However, for retail investors like us, who have painstakingly scrimped and saved over the years to build up a warchest, seeing our positions tank right after we bought in may be very painful. Having sufficient funds is also another issue, as it is not like we have unlimited liquidity and are able to average down forever.

But another way to see this would be that if we have adequate rainy day funds set aside for any emergencies, and we only invest what we can afford to lose, then volatile stock prices should not have an effect on us. The long-term investor should not care about how wildly the price of a security swings throughout his holding period – what matters is that he has made a profit at the end of the period. This concept was shared by Howard Marks in his book “The Most Important Thing”, which I had read during my National Service days. I think the biggest takeaway for me was that volatility is not risk, and this greatest risk that investors should fear is permanent loss (think Hyflux, Noble, Swiber etc).

In fact, I am taking a class on investments this semester, and I think that the academic concept of using volatility to measure risk is completely ridiculous. Howard Marks purports that volatility is used by academics to measure risk as it is quantifiable and easily calculated. However, if you set yourself out to dive in depth into researching companies and select high quality, solid companies with the ability to ride out the storm, then you should not fear when prices decline in the short term – instead, it is an opportunity to buy.

In these volatile times, bear in mind that volatility and risk aren’t the same thing – do thorough due diligence, have a plan, and stick to it. Stay the course, and we will get through this together.

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