Thursday, May 29, 2014

Updates on the Greedy Dragon portfolio (a NUCLEAR addition)

Please read the disclaimer here: Enjoy the article, bitches!

Sup my value investing homeboys! Today I bring you a brief update on the Greedy Dragon Portfolio. I recently added 2 new stocks to my portfolio and sold an older position. I usually write articles analyzing the stocks I bought, but I just couldn't find time to do this. I probably will start writing more frequently in about 2 weeks as my schedule will free up then. Anyway here are the stocks I bought and sold:

National Bank of Greece: I bought this stock sometime last week as I think that the Greek economy will start improving very slowly and that National Bank of Greece is slowly getting stronger. Don't get me wrong, I still think that the stock is risky and I only took a very small position in the stock. I will likely publish my analysis of the bank in a few weeks time. 

Yes, the stock went up 15%-20% since I bought it. I don't have those fancy smartphones so I can't take a picture of the contract note for proof (I don't know why but gadgets just don't interest me, all I look for in a phone is the ability to text bitches and flirt with them which my Nokia 3310 does just fine). So, I guess the haters will just have to take my word for it. Anyway, this is a very small position and a 15% return on it isn't likely to have a significant impact on my portfolio's total return. Maybe I will upload the contract note if I finally cave in and buy a smartphone (either for work purposes or to play candy crush or something with some chick).

Uranium Participation Corp: I also took a position in Uranium Participation Corp which is listed on the Toronto Stock Exchange. The purpose of the company is basically to hold uranium and achieve appreciation on the commodity. This is not a uranium mining company so you don't have to worry about large capital expenditure and operating expenses. The company has virtually no debt (not that I can remember when I glanced through the financial statements) and pays very little management fees so there's minimal risk of the company selling its uranium holdings at current low prices to meet its obligations. I can't take credit for the decision to invest in uranium though. I got the idea from this article on the DailyWealth. According to the article, it costs about $70 a pound to produce uranium but it's selling for below $30 a pound now. I urge you to read the article as it's very good. I generally shy away from commodities, except for times when the market price is lower than the cost of production. In this type of situations, I think it's likely that either the market price have to rise over production costs or some producers have to shut down which will result in lower supply and eventually higher prices. As I like to say, economics 101 mofos!!! 

This stock will also act as a hedge in my portfolio. I have a few positions in U.S. banks as I'm betting that the Federal Reserve will eventually have to raise interest rates. This could push the profits of U.S. banks up as I think they will have higher net interest margins in a higher interest rate environment. But in the event that the Federal Reserve keep rates low for an extended period of time, then I think inflation will start to set in and commodity prices will start moving up. 

Bank Rakyat Indonesia: I sold this stock as it went up quite a lot since I bought it, and I needed to raise some cash to fund my new stock purchases and still maintain a comfortable cash balance.

As always, thank you for reading. Take care and stay rational.

Wednesday, May 21, 2014

Analyzing Quill Capita Trust's purchase of Platinum Sentral

Disclaimer: The information I got on this deal is from online articles which may or may not be up to date. I also make a lot of assumptions on this deal which could result in my analysis being off the mark. I’m also not an investment banker or corporate finance lawyer, so my understanding of the deal could be wrong. There may also be errors in my calculations. This is not a recommendation to buy or sell Quill Capita Trust. I’m analyzing this deal because I get high doing stuff like this.

Hey, how are you guys doing? It’s time for another article by the Greedy Dragon BITCHES!!! Today I will be talking about a recent property acquisition made by Quill Capita Trust, a Malaysian office REIT. Quill is to double its asset size with this property acquisition. I was meaning to discuss this deal for quite some time now as I get a buzz analyzing deals, but I guess I got side-tracked by Bar Refaeli’s photos on Facebook or something. According to this article in The Star, Quill entered into a deal to buy Platinum Sentral for Ringgit Malaysia (RM) 750 million from MRCB. The property consists five blocks of four to seven-storey commercial buildings located in Kuala Lumpur. Most of Platinum Sentral’s net lettable area (NLA) is used as office space, but some of the NLA is used for retail space as well.

Quill will pay for Platinum Sentral with a combination of stock and cash. Quill will issue 206.25 million units at RM1.28 per unit, so RM 264 million of the RM 750 million total purchase consideration will be in stock. The effective price paid for the property is actually lower than RM 750 million. This is the case as the current market price of Quill’s units (RM 1.14 per unit) is lower than the pricing of the units that will be issued to MRCB. According to my calculations, the effective purchase consideration for Platinum Sentral is RM 721.12 million.

According to this article on The Edge, Platinum Sentral’s office space is fully occupied while its retail space is 77% occupied. Considering that the retail space only makes up about 11.8% of the property’s NLA, I would say that the occupancy rate is satisfactory. Based on the average rental per square foot (psf) figures I got from this press release from Malaysian Rating Corporation, Platinum Sentral would have a rental yield of 6.64%. The press release was in August, 2013, so I guess the rental psf figures should still be more or less relevant. To get a rough idea of how much it costs to operate the property, I will use Tower REIT as a benchmark as all its properties are located in Kuala Lumpur. In 2013, Tower REIT had a net operating income margin of 69.17%. So, applying Tower REIT’s net operating income margin to Platinum Sentral’s gross rental yield, the property would have a net operating income yield of 4.59%. If you include other income such as income from the property’s car park, then the yield should be higher. Overall, I think that the rental yield is acceptable as the property is in a good location and the buildings are quite new.

Note: My calculation of net operating income may differ from how it’s conventionally calculated, please ask me for my formula if you’re interested.

Now, Quill plans to raise the balance RM 486 million cash for the deal by raising debt and issuing more units. Quill plans to place between 55 million and 85 million new units of Quill Capita Trust to institutional investors at a price that will be determined later. In this article we will assume that 70 million (the midpoint) new units will be issued at Today’s price. So, including the 206.25 million new units that will be issued to MRCB, 43.67% of Platinum Sentral’s effective cost will be funded by equity. I believe that Quill did not use too much leverage as according to Quill’s press release dated April, 2014, it only has a current gearing level of approximately 36%.  

If the assumptions I made about the equity raising exercise turns out to be true, then Quill will need to raise RM 406.195 million in debt. According to this press release from Quill dated April, 2014, its cost of debt was 4.3% per annum for quarter 1, 2014. I will assume that the debt raised will cost 4.3% per annum and be in the form of a balloon loan where principal is not amortized periodically but paid off in a lump sum at the end of the loan. So, after deducting the interest cost from Platinum Sentral’s net operating income yield discussed earlier, the property will have a return on equity (ROE) of 4.96%. I guess the ROE is alright for a property investment as I haven’t factored in other income such as income from the property’s car park. This definitely isn’t on the level of deals made by Warren Buffett. But for an income investor, it probably will turn out to be ok over the long-term. I personally won’t buy office properties now as the KL office market seems soft and there’s a chance that you can add properties to the portfolio at lower valuations if you wait a bit. But Quill’s management is much more experienced than me (I don’t even own my own house) and they have more and better information than me. So, of course they’re in a better position to make a decision.

On the surface the deal seems ok. However, I can’t come up with a conclusion as to whether or not I think the deal creates value without knowing stuff like:

1) provisions for rental increments in the agreements with tenants 2) the impact of increases in property assessment taxes if any 3) the cost of the new debt that will be raised for the deal and what percentage of the new debt will be fixed rate debt 4) the price of the new units will be issued to institutional investors 5) up to date info for net property income   

This is probably the longest article I wrote in a long while. I hope you guys liked it. Thank you for reading. Take care and stay rational.

Saturday, May 10, 2014

Cash management the Warren Buffett way

Hey guys, I know I haven’t updated my blog for quite some time. I had a lot on my plate lately. I also started watching the Big Bang Theory and got fucking hooked on it. So, yeah I couldn’t find the time to write articles. Anyway, enough of the small talk, let’s get down to business.  Have you ever thought about the percentage of your portfolio that should be allocated to cash? How about the part of your portfolio that should be allocated to cash-generating assets such as rental properties and dividend paying stocks?  I personally never followed any cash management guidelines. I just hold enough cash to not feel that I will have nothing but my dick in my hands if the market crashes. But it’s a fact that having good cash management skills which allow you to be greedy when everyone else is fearful can be the difference between superior investment returns and mediocre returns. And who better to learn cash management from than the O.G. of value investing, Warren Buffett.

We will try to get a picture of Buffett’s cash management principles by studying Berkshire Hathaway’s financial statements during the great financial crisis. At the end of 2007, just before shit started to get real, cash and cash equivalents made up 16.22% of Berkshire’s assets. Berkshire’s free cash flow as a percentage of average total assets was 1.89%, 3.86% and 3.56% for the year 2008, 2009 and 2010 respectively. You can think of free cash flow as similar to dividends, interest and rent generated by your portfolio.

It’s natural for cash-generating assets to throw off less cash during a recession. However, investors need to be reasonably sure that their portfolios can still spit out a decent amount of cash during tough times as that’s when their cash will work the hardest. For example, if I were to evaluate the income producing potential of a Blue Chip stock, I would look at how much earnings and dividends declined during the previous recession.

Some of you may be wondering if it’s too conservative to allocate 16% of your total portfolio to cash. Well, it depends on the situation. If Mr. Market is fucking giving away good quality business at 70 cents on the dollar, then it’s dumb to hold so much cash. But Buffett’s company had 16% of its assets in cash at a time when markets were overvalued. You can generally build up a significant amount of cash during a bull market when stocks are overvalued. Just don’t reinvest the income from your portfolio in overvalued shit. I truly believe that another key to superior returns is patience. You don’t see Buffett making investments just to keep busy. The man waits till the price is right before making big bets.

At the end of the day, you should only look to Buffett for guidelines on how to manage cash. How you manage your portfolio’s cash allocation and cash flows should be based upon your own independent judgment. Another little tip for newer investors out there: only invest money that you can afford to lose, never put yourself in a position to end up as a broke ass mofo. Thank you for reading. Take care and stay rational.