SIA Engineering

[kennynah]

say i bought a house in 2005 at $100K and rented it out for $1K/month, that means it yields 12% annually....

in 2010, that house is now valued at $300K and even if my rental income was adjusted to $2K/month, that actually yields 8% annually...

it's just a feel good effect to imagine that you are yielding 24% of annual rental yield... should not think of it as $100K asset anymore...

be smart .... history is the past.... how much return current asset can generate shd be the focus....

[cif5000]

Assuming I am a value investor, here would be my reply.

From your perspective, I would say it would make good sense to divest if you are sitting on >250% profits, since the yield from holding it may not come close to the capital gains.

Actually, value investing says that the selling should be independent of the purchase price.

I was wondering why you did not buy more of SIAEC at the time? Was it due to the fact that you wanted to diversify rather than concentrate your monies on just one company?

You have probably looked at my transaction history. No one in his right mind would put everything into one stock, and a portfolio definitely needs a certain level of diversification. A year and a half later, we might look back and see if we had made the right choice but at the point of purchase we have to weigh our options. Every stock (at a particular price) is in competition for capital with other stocks. Who talks about weighing and voting in a stock market? And how many actually did? Luckily for me, the alternatives didn't turn out too badly compared to SIAEC. Plus minus one month, the money injected then into ARA, FJB, Lion Apac, EYS, etc provided a more stable portfolio which luckily didn't compromise on performance (with hindsight).

Do note, however, that high P/B ratios often accompany companies which are generating consistently high ROE with little or no debt, and hence there is a premium placed on the value of the business franchise which far exceeds the book value of its assets (which no doubt are accounted for using historical cost).

Value Investing 101?

I was actually a little surprised when you mentioned charts as I had assumed you were purely a fundamental investor; then again I am not so astute in such matters and this may have been a mistake of mine for which I apologize in advance (if I had got it wrong).

"Price is what you pay, value is what you get" Simply, if you spent 1 hour to pore over 10 years of annual reports (to understand value), why not spend another minute to look at the 10-year chart (to understand price). At the very least, it gives an indication of what pessimism and optimism look like.

I would think that since your dividend yield should be 10% or even greater (based on your cost), why not just hold this for superior yield?

It doesn't make sense to compute that way. I am sure you will figure out why.

[Musicwhiz]

Hi cif5000,

I took about half a day to think about your replies. Thanks for taking the time to reply to specific sections of my posting, really appreciate that you can share your thoughts and insights.

You mentioned that selling should be independent of purchase price, which is correct. However, note that I had mentioned this in response to your previous posting where you said this - "Today closed at 4.38. Dunno how high it can go but the price now is almost at its historical high. I am thinking to sell mine." The statement made me think that you were commenting on price, rather than value and so led me to the conclusion that it was a price-centric decision, rather than a value-oriented one. As I said, if I was wrong I am sorry, but this was just the sentiment I got at the time (no offense intended).

I've never advocated putting all one's money into ONE single company or stock either. I concur with your view that capital allocation should be rational and based on factors at that point in time which make the most sense, in the absence of information about the future and also accounting for uncertainties during that period (i.e. March 2009 during the middle of the Great Recession). However, that said, the angle I was talking about was to do a studious evaluation of each company's merits and then allocate capital in the most rational manner to the one with the highest probability of achieving a good return on investment. I do not know the businesses of the other companies you mentioned (i.e. ARA, FJB, Lion Asiapac to name a few) well, but I was thinking more from the point of view of concentrating your monies on the best bets instead of spreading it out? Of course, I am more coming from a focused investor perspective while yours is more of a diversified, stable portfolio perspective; so it is possible we view the same issue differently. If so, please treat this discussion as being purely "academic".

It would not be fair to just quote "value investing 101" to summarize such a statement I made. I can give two examples:-

1) Warren Buffett purchased See's Candy at about 3x book value, because it was a business which required little capex and had high ROE and good favourable long-term prospects. Of course, one also had to note that people in general wil not stop eating candy anytime soon!

2) I also would like to refer you to an article written by Teh Hooi Ling of Business Times published August 15, 2010 titled "In Search of Super Returns For Stocks". In it she mentioned the following:-

"On the other hand, if the company is able to generate earnings above its cost of capital, then investors should be willing to pay more than the book value of its assets. Conversely, if a company's net earnings cannot even cover its cost of capital, then investors will only invest in the company if it is trading below its book value. A PTB ratio of two times (she was quoting an example) implies that investors are confident that the company can earn significantly above its cost of capital for a sustained period of time."

The above two points demonstrate that I am not alone in thinking that one is justified in paying a premiun over book value for an investment which can consistently generate superior returns on invested capital (above the cost of capital).

To be very frank, I did pause to take 1 minute to look at the charts of the prices for SIAEC, and noted that near its peak it was trading at an all-time high of S$5.00++, while at its low it was about S$1.00++. I guess you may say this indicates "optimism and pessimism", but I see it more as a valuation issue amid uncertainty, certainty and economic conditions. At a time of uncertainty, investors are willing to pay less of a premium both above book value and for price-earnings ratio (PER). This, however, does not mean that the business is impaired in a way significant enough to justify low valuations in the long-term; and SIAEC, like all the other stocks in the universe at the nadir of the stock market, may just have been unjustifiably "punished" by having to trade at such low P/B and PER when the business is still coughing up so much cash and earnings. So what I am saying is that price charts may not tell you much about the QUALITY of the business, or whether one should make a rational, objective decision to invest in it. Valuations will not return to crisis levels (back in March 2009) anytime soon, nor should an investor wait for such a time so that he can comfortably inject in all his funds. The 52-week high does not mean much when viewed from the perpsective of a recovering economy (from the worst recession in 70 years, no doubt).

On your last point, I've thought about it and it still makes sense to me to compute my dividend yield based on my cost, and not on the current market price. I fail to see why it should not make sense to compute it that way. I can give you my personal example:-

I purchase some shares in Boustead back in Sep 2008 for 40 cents, which translates into a dividend yield of 10% based on last year's declared dividends (1.5 cents interim, 2.5 cents final). If we take market price now of 89.5 cents, the dividend yield based on current price is "just" 4.47%. So if I retain my investment in Boustead at 40 cents and the company continues to pay HIGHER dividends, this means my cash is yielding 10% and more; while an investor who purchased at today's market price is just getting a yield of 4.47% as mentioned above. Dividend yield remains a function of purchase price and I fail to see how you can dissociate the two. It would be enlightening if you could explain your logic.

Thank you.

[cif5000]

I think academic discussion is healthy and fun. However, I would like to put it straight that my initial post on the price of $4.38 and 3.5PB was actually responding to Chinaman's post. Nothing related to you or your purchase. In fact, I had (and have) nothing to comment about your purchase of SIAEC. I am just another forumer who is thinking of selling my shares of SIAEC at this current price and writing it openly.

Since you asked about my diversification/concentration approach, I told you about the alternatives that I had at that time. If you compared SIAEC with the three companies that you have not looked at (i.e. ARA, FJB, LAP), you will find that SIAEC, as I said with the benefit of hindsight, was not the best bet. Moving forward, one can only assess the probability of any investment but will never know the outcome until much later. A high probability does not always result in a good outcome. Diversification smoothen the result.

Value Investing 101 has a question mark behind. Again, nothing against buying stocks above book value. I was wondering if you were giving a lesson in value investing. And if you were, thank you. That's quite well written, twice over. It should benefit aspiring value investors. My arrogance insisted that I have read enough of those.

Your question on yield is very valid. If one were to account his portfolio according to current market value, then the yield should also be a function of that. Like I explained earlier about the competitive nature of stocks for capital, money that is sitting on a stock with lower current yield (or earnings equivalents for all subsequent uses of yield) can be and should be allocated to one that offers higher current yield, all compensated for risk. That is, of course, when one is an active investor. If today a stock can offer a 6% yield with similar or lower risk and similar or better probability than Boustead, using your example, then the logical thing to do would be to switch to the higher yielding one. For a passive investor, current yield has no bearing. He just sits there and watches the TV with his potato chips and beer, and is not bothered by better investment opportunities out there.

A final note on being a focused investor, and I am not directing at you. There are 2 strong reasons why an investor should be a "focused investor".
1. Limited funds
2. Highly competent and confident

[kennynah]

[cif5000]

Thanks Kennynah, I am finishing my 6-pack (if my wife didn't notice)...

[Musicwhiz]

say i bought a house in 2005 at $100K and rented it out for $1K/month, that means it yields 12% annually....

in 2010, that house is now valued at $300K and even if my rental income was adjusted to $2K/month, that actually yields 8% annually...

it's just a feel good effect to imagine that you are yielding 24% of annual rental yield... should not think of it as $100K asset anymore...

be smart .... history is the past.... how much return current asset can generate shd be the focus....

Hi Kenny,

Good example you gave, but let me give my take.

In your example you'd be sitting on a capital gain of 200% in just 5 years, which is about 40% per annum non-compounded. Your new rental income of S$24K per annum would imply a 24% yield on your original cost of $100K.

Basically when you say that one "should not think of it as $100K asset anymore", you are coming from the angle that the market value should take precedence over the rental yield; and that realizing 40% per annum is more important than gaining a historical rental yield of 24%. In such a case, you are treating the property more as inventory (to be bought and then re-sold), rather than as an asset generating consistent cash flows. It's the perspective which is different as your property has now appreciated by 200% in 5 years.

Assuming one simply ignores the market price and focuses on the income generating ability of the asset, one can enjoy many more years of yield at 24% or equivalent, which may eventually exceed the 40% per annum capital gain on the property (which will fluctuate over time).

And btw, what does the image with the beer glass mean?

cif5000 bro, give me some time to digest your reply, haha. It's pretty late and I am finishing up a cool glass of milk, so can't think such issues at this hour....

[kennynah]

hi mw....

it's ok....

[aifun]

Nice discussion on SIA Engg here.
SIA Engg is one of my favourites. Fantastic dividend payout and very healthy financials! Vested!

[cif5000]

sitting on >250% profits

I didn't check when you first mentioned. From the recent bottom to top, the capital gain should be less than 200%.