Archive for August, 2011

Really short post.

I have noticed that the share price of Starhub has been rising significantly in the recent weeks, and that quite a few people have been recommending Starhub based on its yield.

Although I think the company is fundamentally sound, I feel that investors are focusing too much on the yield and ignoring the valuations.

Currently SH trades at a PE ratio of 18.65. Owner Earnings (Reported Earnings + Depreciation, Amortization & Other Non Cash Items – Capital Expenditures), which is similar to Free Cash Flow was 250.3 Million in 2010.

With its market cap of roughly 5 billion, it gives it a Price/Owner Earnings Ratio of about 20.

What I find more disturbing is that Starhub paid out 343.1 Million in dividends in 2010. It earned 4 & 4.54 cents per share in the first and second quarter this year, yet paid out 5 cents per share in dividends.

Although the company is sound, their current commitment to their current payout puts them in a bind – seeing that they are bring far less cash than they can pay. I did a check for the large telecoms both in Singapore and in the US, and Starhub is the only company which I found which is doing so. The only way I see this is possible is that they are borrowing more money than they are bringing in to pay shareholders – something which I find quite puzzling.

My thesis is that Starhub will drop significantly in the event that they reduce their dividend payout for whatever reason. However, I don’t see this as something that will happen anytime soon, considering its relatively entrenched position as one of the leading telecoms in Singapore. However, raising its dividend yield anywhere in the near future looks impossible (not to mention irresponsible).

At this price, I believe Starhub is trading at a slight premium to its intrinsic value, offering in my opinion, little margin of safety to investors.

As Seth Klarman said – “Dont be a yield pig”.

[Not vested in Starhub]


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One of the questions I hear about investing in the US Market (as an international investor) is the recent devaluation of the US dollar. While I agree that its a valid concern, I would like to highlight something to my readers to put this in perspective.

First off, lets look at the graph:

* The Horizontal Scale Represents The Number of Weeks Since The First Week of January 1998

It’s interesting to note that anyone buying USD now with SGD will be buying it at a 10 year low. Bear in mind that this doesn’t mean that it has bottomed out. If the FED continues to pursue further quantitative easing with QE3, we  might see the USD devalue further.

However, these figures cannot be taken alone without looking at their historical context. Bear in mind that with interest rates at virtually 0%, the Fed was forced to resort to quantitative easing to provide and additional kicker to the economy.

What I believe is that at some point or another, the USD will inevitably strength against the SGD. Quantitative easing will come to end at some point or another, and the FED will be eventually be forced to move interest rates back up again, forcing the current trend to revert back to to the mean.

Of course, when this happens will be open to debate, which brings me to my next point.

If you’re a long term investor (3 – 5 year time horizon), than I believe that investing in US equities is far more attractive than investing in Singapore equities – simply because of the 1) More attractive valuations 2) Historically Low USD.

If the USD continues to weaken, it provides (in my view) an advantage for the long term investor as it will allow him to add onto his or her positions at a cheaper rate. I do not believe that this current trend will last forever, and sooner or later, the US economy will rebound and get its balance sheet back in order.

Of course, if you’re investing with money that you might need soon, or have a much shorter time horizon, than dabbling in US equities might not be the bets option available to you as you expose yourself to the short term trends in the forex market.

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For those in tune to the financial turmoil, you will need no introduction to the insane roller coaster ride that equities market have been put through the past month. Yet amid this madness, is there value to be found?

Now, for those who are true value investors, perhaps the most important lessons that we learn is that the mood of the market is akin to a pendulum. Market confidences invariably swings from wild optimism to irrational pessimism. For a quick assessment of the market “temperature”, here are some other reference points that you can look out for:

If you find more ticks on the left hand column, you might want to hold onto your checkbook.

There’s no denying that the markets are extremely fearful right now. The marketing is swinging widely – down 500 points one day, up 400 points the next. And yet in all this panic selling, I believe there lies a compelling and unmistakable opportunity in high quality large cap US equities.

The Compelling Case For US High Quality Companies

To set the record straight, when I refer to US High Quality, I am referring to companies with strong franchise values like McDonalds, Coke, Johnson & Johnson, Microsoft etc. They are typically characterized by:

1) Strong consistent free cash flow generation

2) Competitive advantage aka “economic moat” present

3) Needs little or no debt to run

As value investors, the source of our confidence and our ability to read through wild price swings invariably falls to our valuation of the company. If we have a reasonable estimation of the intrinsic value of a company with an appropriate margin of safety, it represents a worthwhile investment no matter what the world tells us.

In this aspect, the case for high quality US stocks have never been more compelling.

The valuations of these companies are startling. Many of these large cap high quality companies are trading at their historical lows if you were to judge them based on valuations. Furthermore, many of these companies have extremely healthy balance sheets, with enough cash to weather them through the potential storm. Even the US Banks which were hard hit by the sub prime crisis are in a much better state, having been recapitalized.

Whats more amazing is that many of these companies are earning as much, if not more than what they did before the crash in 2007 – 2008.

I don’t know about you, but I find it amazing that a company like Starhub is trading at a PE Ratio of 18~ whereas a company like Microsoft is trading at a PE ratio of 8.9. Don’t get me wrong – I like Starhub, but the valuations of these large cap high quality stocks are too compelling to ignore.

Concluding Thoughts:

One of the biggest arguments I hear against buying equities now it’s better to wait a while more for the markets to stabilize – as dark clouds loom over the horizon. After all, prices might continue to plunge. However, I must caution my readers of the naivety of such an argument. Firstly, seeing that a person could not predict the downward surge of prices a month ago, why would he or she suddenly be gifted now with the ability to see the future? Secondly, earning a good return on our investments does not equate to buying at the absolute bottom.

Sure, it would be nice if I could buy at the bottom and sell at the top. However, wishing ain’t going to make it happen.

In the end, our ultimate goals as value investors was never to pay the cheapest price possible for a good investment. Rather, it’s to pay a reasonable price for a good company. As such, I believe that large cap, high quality US equities presents such as investment that’s just too compelling to ignore.

Disclosure – Author is long MSFT, CSCO, WFC.


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