MAS and SGX Propose Changes to Singapore’s Stock Market
By Sudhan P - February 9, 2014
Last year in October, shares of Asiasons Capital Limited (SGX: 5ET), Blumont Group (SGX: A33) and LionGold Corp (SGX: A78) were the talk of the town when they crashed, wiping off around S$5.2 billion collectively from their market capitalisation.
Quite a number of traders were buying those shares on “contra”. This means that traders can purchase shares without any cash payment upfront and sell them within three days, pocketing the difference if there is a profit or paying the difference if there is a loss.
Such speculation could be curbed in the future if the latest proposal by the Monetary Authority of Singapore (MAS) and stock exchange operator Singapore Exchange (SGX: S68) comes to fruition. In a joint consultation paper released on Friday, the MAS and SGX have proposed some changes to curb speculation and beef up the securities market.
The proposed changes are as follows:
1.Introducing a minimum trading price
2.Having collateral requirements for securities trading
3.Changing the short position reporting requirements
4.Having more transparency of trading restrictions imposed by securities intermediaries
5.Reinforcing the SGX listings framework
6.Strengthening powers to enforce regulatory actions against breaches of listing rules
SGX may also implement a minimum trading price of around S$0.10 to S$0.20 per share for shares listed on the Mainboard exchange. Back in August 2012, there was already a change in the rules by SGX to only allow new listings on the Mainboard exchange to have a share price of at least S$0.50.
In any case, 130 to 230 firms may be potentially affected by the possibility of the change of having a minimum trading price take place. If a share consolidation has to occur for those affected-shares to align with the proposed rule, SGX is prepared to waive all corporate action fees payable by firms for two years.
Another change proposed is that brokerages may require clients to put up collateral of at least 5% on any unsettled purchases. For example, if an investor wants to purchase 1,000 shares of Keppel Corporation (SGX: BN4) at its current price of $10.37 per share, he/she has to put up $518.50 (0.05 x 1000 x $10.37) as collateral.
Furthermore, the settlement period is to be cut from transaction plus three days (T+3) to T+2 days by 2016. This means that investors have a day lesser to pay for the shares that they do not want to purchase via “contra”.
To know more, interested readers can take a look at SGX’s website. A direct link to the consultation paper can be found here where detailed information of the proposed changes can be obtained.
SMRT Corporation (SGX: S53) released its results for the third quarter of 2014 (3Q 2014) last week. Revenue for the quarter was up 4% year-on-year to S$293 million. However, the company’s net profit had plunged 44% to S$14 million.
SMRT derives revenue from ridership of its trains, LRTs (light rail transit) and buses – collectively known as “fare sources” – and also from non-fare sources such as taxis, rental, advertising and engineering and other services. 74%, or S$216 million, of its 3Q 2014 revenue came from fare sources while non-fare sources contributed to the rest.
Revenue from trains and buses rose 2.4% and 3.3% year-on-year respectively but the revenue from LRTs dipped 2.2% year-on-year. As for the non-fare segment, rental, advertising and engineering and other services all saw year-on-year revenue increases of 11%, 27%, and 47% respectively. The taxi service on the other hand, saw a revenue decline of 4%.
As for SMRT’s operating profits, the fares segment saw a loss of S$9 million compared to a profit of S$7 million in the corresponding period a year ago. The non-fares segment had an operating profit of $27 million, a 6% year-on-year increase. The loss for the fare segment was mainly due to a rise in operating expenses, which went up 10.6% to $284 million on the back of higher staff costs and depreciation expenses.
The company’s net profit margin for the quarter was at 4.9%, which was quite a fall from the margins of 9% that were achieved in the previous year. At its current profit margin, SMRT is only able to generate around five cents of profit for every dollar of revenue.
Let’s turn our attention to the balance sheet. As of 31 December 2013, the firm had total borrowings of S$629 million while its cash balance stood at $99 million. SMRT’s balance sheet had deteriorated quite a fair bit since the end of the first quarter of its current financial year (31 March 2013) where it carried S$333 million in cash while having only S$609 million in total debt.
To give further colour on how the company’s balance sheet had weakened, net gearing for the quarter stood at 0.64 while the metric was only at 0.08 on 31 March 2013. SMRT’s net gearing had went up predominantly due to the payment for 17 trains and operating assets that were taken over from the Land Transport Authority.
During the reported quarter, SMRT generated S$50 million of cash from its operations, a 16% drop from the previous year. Capital expenditures, on the other hand, was at S$90 million which meant that the company did not generate any free cash flow for the quarter.
SMRT’s President and Chief Executive Officer, Mr Desmond Kuek, said: “Our fare business continues to face cost pressures arising from ongoing efforts to meet heightened demands on service, reliability and capacity. The impact of rising costs will be mitigated partially next year by the recently approved fare adjustments, and our continuing efforts to drive higher productivity and cost efficiency. We are engaging the authorities on a timely transition to a viable and sustainable model for the Trains and Bus businesses. We will continue to leverage on SMRT’s core engineering competency and commercial expertise to support business expansion in both fare and non-fare businesses. Sportshub is expected to commence operations within the next few months and we will continue to explore rail business opportunities overseas.”
SMRT will be operating the commercial retail space at Sportshub when it opens to the public.
Shares of SMRT closed at S$1.06 on Friday, representing a 34% decline over the last 12 months. In contrast, the general market, as represented by the Straits Times Index (SGX: ^STI), only dipped by 8%.
Another publicly-listed land transport operator, ComfortDelGro Corporation (SGX: C52) will be releasing its quarterly earnings on 13th February 2014. Investors of SMRT might also want to check that out to have a better picture on the competitive landscape that land transport operators are seeing.
To say that Genting Singapore (SGX: G13) is a casino operator would be doing the company a great disservice. It is an integrated resort operator, which means that it has its finger in many pies, of which providing games of chance is just one.
That is the first thing to like about Genting Singapore – its diversified business model. Apart from being a casino operator, it also owns a convention centre, museum, spa, lots of restaurants and hotels, the world’s largest oceanarium, and it even has time to run a theme park. Not just any old theme park but Universal Studios.
Genting Singapore’s unique selling proposition is the second thing to like about the company. It is a go-to destination for many overseas visitors to our Garden City. As a destination of choice, it has that special quality that many investors look for in a company – pricing power. That is exemplified by its above-average Net Income Margin.
While the average margin for the 30 Singapore blue chips that comprise the Straits Times Index (SGX: ^STI) is 18%, Genting Singapore’s margin is around 23%.
Genting Singapore is also a growth company in its early stages of expansion. That is the third thing to like about the company. Lest we forget, the company only won the bid to develop one of two integrated resorts with casinos in Singapore in 2006. What’s more it only opened its doors to Resort World Sentosa four years ago. Over those seven years, revenue has jumped from S$290m to $2,940m – a ten-fold increase.
Growth investing can be more risky than other types of stock market investing strategies. But it can also be more rewarding. In the case of Genting Singapore, it has rewarded early investors with an annual total return of around 18% since 2006. Most of that has come from capital gains. So don’t expect the company to dish out much in the way of dividends. It can’t because it is still growing.
Otto Marine Limited (SGX: G4F) is an offshore marine group that specializes in the subsea and deep sea segments. It operates in three distinct business divisions: Shipbuilding, repair, fabrication and conversion; specialized services; and, ship chartering and leasing.
The company owns and operates one of the largest shipyards in Batam, Indonesia. Its customers are primarily major players in the oil and gas industry and fleet operators who provide logistics support to offshore service companies. Two of its competitors which also own shipyards in Batam include Marco Polo Marine Limited (SGX: 5LY) and ASL Marine Holdings Limited (SGX: A04).
Otto Marine had just released its full-year results for 2013 yesterday.
Some basic numbers
For the 12 months ended 2013, revenue soared 36.8% year-on-year from US$374.4 million to S$512 million, propelled by buoyant sales and delivery of vessels (from its shipbuilding activities) coupled with increased ship repairs and fabrication work. The revenue increase was partially mitigated by the decrease in sales from the other segments.
As a result of the boost in sales figures, gross profit also surged 450.1% on a year-on-year basis to US$46.5 million. In addition, other income jumped 307% from US$22.8 million to US$92.7 million mainly due to the gains from the deconsolidation of a subsidiary.
To top it off, the company’s “other expenses” were significantly reduced by 85% in 2013 to US$5 million. In 2012, Otto had seen impairment losses on its assets on a number of fronts that affected its available-for-sale investments, plants, properties, equipment, and goodwill, among others. These losses were a lot lower in 2013, leading to the lower “other expenses”.
All told, Otto rebounded from a US$113.7 million loss it suffered in 2012 to hit a profit of US$15.9 million for 2013. Nevertheless, its net profit margin stands at a meager 3.1%, way below the 12% margins it had achieved at its peak in 2008 and 2009.
Financial Statement
Otto Marine ended 2013 with an improved balance sheet compared to a year ago as borrowings fell from US$403 million to US$330 million and total equity increased from US$223 million to US$304 million. As a result, its net gearing ratio fell from 2.31 to 1.63 times, a drop of 29.43%.
On the cash flow side, Otto Marine’s operating cash flow for 2013 had increased significantly from US$62 million in 2012 to US$157 million. However, the growth in operating cash flow was largely offset by two factors: Otto Marine’s use of cash for investing activities had swelled from US$24 million a year ago to US$85 million; the out flow of cash from the company’s coffers due to financing activities (comprising mostly of loan repayments of various sorts) had gone up as well from US$61 million to US$71 million.
The net effect of all that manifested itself in the company’s cash hoard on its balance sheet barely increasing from US$47 million a year ago to S$48 million.
Valuation
At Otto Marine’s share price of S$0.087 on Friday, its shares are valued at an estimated 0.9 times book value and 12 times trailing earnings. The company’s Board of Directors is proposing an ordinary dividend of 0.1 cents per share for 2013 (there were no dividends for 2012) which will result in a dividend yield of 1.15% at Otto Marine’s current price.
The stock market has a terrible habit of making you doubt your own capabilities. Time and time again, your resolve for investing can be tested to the limit when share prices take a bath. But time and time again, markets also recover.
How you react to market turmoil is a bit like the water in a fish tank. Here’s why.
Many years ago, I was helping a friend move a fish tank from one side of his living room to the other. He assured me that it was not necessary to empty the tank, given that two able blokes could shift the aquarium without too much problem. I nevertheless insisted that we, at least, relocate the fish to somewhere safer. Thank goodness I did.
As we moved the tank – taking one careful step at a time – the water within would crash from one side of the aquarium to the other. By the time we had successfully relocated the tank, there was almost as much water on the floor as there was in the tank.
The episode with the fish tank reminds me of the way that people invest in shares. As investors we will probably be aware that from time to time the market has an awful habit of swinging from one extreme to the other. One moment it’s bullish. The next moment it’s bearish.
Currently, the popular chatter on the market is whether China can successfully rebalance its economy. Tomorrow, the market may find something completely different to worry about. If you are ever short of ideas for things to fret over, just drop me a line. I have a list as long as my arm of things that you can get anxious about.
Meanwhile, the winding down of America’s money-printing activities can fill many fun-filled hours on financial news channels, as analysts pore over each and every sinew of economic data. They think they can second-guess what the Federal Reserve might do next. Good luck to them.
If that wasn’t enough to put worry-lines on your face, you can always sift through the numerous economic reports about our South East Asian neighbours to see how emerging markets in the region might cope with America’s decision to taper.
As analysts continually pass judgement on whether tapering will be good or bad, or whether China’s rebalancing could be bad or good, stock markets will inevitably respond. First one way, then the other – much like the water sloshing from one side of the fish tank to the other.
As investors, you have three possible options. You could, like the fish, sit on the sidelines and wait for the craziness to end. That way you won’t be exposed to any risk at all. But it’s important to remember that returns from the stock market are made up of two separate components – capital gains and reinvested dividends.
Consider a company such as Singapore Technologies Engineering (SGX: S63). Over the last ten years, shares in the defence contractor have risen from a dividend-adjusted price of $1.29 to $3.77. That equates to an annual total return of 11% over the last decade. Just over half the returns have come from capital gains and the rest by reinvesting the dividends. By staying out of the market, you could have missed out on both.
Another strategy would be to time the market. Yes, lots of people like to think that they can do that successfully. However, market timing requires some insight and lots of foresight as to when shares might have hit a peak and when they have reached a bottom.
Thing is, not many people can. Additionally, no one will ever ring a bell at the bottom and top of the market to let you know the right time to get in and out of shares. Consequently, by dipping in and out, you could, like the water in the fish tank, find yourself on the floor as an unnecessary casualty of the move.
The third way is to just stay invested. Only buy shares that are selling below their intrinsic values. That is a good way to help reduce your exposure to risk. The margin of safety that you build in will, unfortunately, not guarantee that things won’t work out badly. But it should give you a better chance for a profit than a loss.
Put another way, if you can buy a 2-dollar bill for a dollar coin, you have a much better chance of making money than if you did it the other way around.
