Singapore Property Cooling Measures - Buy on Dip?

Current Market Theme:

Mass market residential property to be worst hit given the additional measures aimed to further curb speculation in this category by hot money flowing through the financial system. Measures seem most drastic in the 7th round of property cooling but as with all past measures, it has shown that the government's steps have been well balanced and aimed to prevent a sudden collapse in prices in the near future should monetary easing start to reduce worldwide.

Going by history, as long as hot money is kept circulating in the global financial system (highly likely given the tepid growth experienced in US and Europe), property counters will still enjoy upside albeit less pronounced in the near future. Effects of measures present a buying opportunity to accumulate property counters.

[Previous post: Weekly Update - NOL, Yangzijiang, Swiber]

1. Capitaland

• Gap down on Monday, first day of the week, declining to a day low of  $3.61 before returning to $3.73.
• MACD - positive divergence declining and MACD turned downwards for the first time in 6 months.
• RSI (25w) - hit 70% to face resistance.
• Would be buyers at ~$3.45 after testing $3.42 key support to catch the property momentum.

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2. Keppeland

• Faced key resistance at $4.38 last week. Gaped down opening today at $3.97 to close at same price.
• MACD - MACD turning downwards after peaking at highest levels in 2 years.
• RSI (25w) - hit 70% to face resistance.
• Prices are currently sandwiched in the middle of nowhere between key support and resistances. Would be buyers at ~$3.6 when prices cool down further as that coincides with the 20w average.

3. Ho Bee

• Big dip on first day of the week, erasing almost 6.5% off its share prices. Prices seem firmly support at $1.8 levels.
• MACD - MACD turning downwards with 3 weeks of declining positive divergence.
• RSI (25w) - Overbought RSI finally heading down for some cooling.
• Expect to buy at ~$1.8. Possible to wait for $1.8 resistance to be tested before entering. 

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4. Wing Tai

• Big dip on first day of the week, erasing almost 10% off its share prices.
• MACD - MACD turning downwards after weeks of low positive divergence.
• RSI (25w) - Overbought RSI finally heading down for some cooling.
• Expect to buy at ~$1.7. Possible to wait for $1.7 resistance to be tested before entering. 

Weekly Update - NOL, Yangzijiang, Swiber

Current Market Theme:
Favour oil & gas counters with solid order books for the current market recovery. Expect more new deals in the pipeline given the lifting outlook with emerging economies such as Latin America where oil exploration has always been key.

Also favour shipping companies given recent China's recovery and improved export data. Reports suggest that China may overtake US in economic leadership by 2014 so good news in China is good news for world trade. Europe and US are in a period of trade stagnation but no major shocks to be expected.

[Previous post: Olam Bonds plus Warrants Offer - To take or not to take for Retail Investors?]

1. Neptune Orient Lines (Shipping)

• Breakout in this week with high volume sending stock to a price of $1.31.
• MACD - positive divergence and trending into the positive
• RSI (25w) - crossed 50% and headed for 70%
• Price Target - $1.44 (~11% from current levels) over the next 3-4 weeks.

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2. Yangzijiang (Shipping and Oil & Gas)
The market has been viewing company's decision to enter into the Oil & Gas competition favourably. Bagging its first deal at a much lower revenue (and possibly profit margin) than a similar rig done by Keppel Corp, this is a significant milestone for the company and yet it speaks volumes about the intense competition and journey ahead. Kudos nonetheless to the management for diverting underutilised resources away from ship building to rig building.

• Breakout in this week with high volume sending stock to a price of $1.115.
• MACD - positive divergence and trending into the positive
• RSI (25w) - crossed 50% and headed for 70%
• Price Target - $1.32 (~19% from current levels) over the next 4 weeks.

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3. Swiber (Oil & Gas)

• Continuation of upward trend with increased trading volume this week.
• MACD - positive divergence and trending in the positive
• RSI (25w) - crossed 50% and headed for 70%
• Price Target - $0.71 (~8% from current levels) over the next 2 weeks.

Olam Bonds plus Warrants Offer - To take or not to take for Retail Investors?

I was on annual leave travelling Europe for the last couple of weeks and was too busy since being back earlier this week to make any decent postings. Oh my, how much has the stock market rallied in my absence and how Olam made tremendous amount of headlines during the Nov-Dec period.

Being a  retail shareholder of Olam (vested), I received the thick bond and warrant offer booklet outlining all the details of this terribly complicated offering. 

1. 5 year bonds +
2. 3 year European warrants and then 2 years of American style warrants +
3. USD denominated exchange rate risk (USD down, bond coupon and maturity payment when converted to SGD down // USD down, warrants cost down, capital gain increase)
4. Trade-ability of bonds and warrants only in 1,000 units boardlot on SGX which makes odd lots difficult to dispose of.
5. (And in addition) Newspaper reports of people suggesting that the offer is really good and hence likelihood that the offer might be fully subscribed leaving little odd lot conversion possible.

Anyway, that's the simple qualitative analysis. 

Below is another simple quantitative analysis that I have came up with to aid my decision making process

Assumptions to calculations are

1. Based on purchasing 1932 bonds + 1,000 warrants (162:313)
2. Hold bonds to maturity (5 years lock-up)
3. Sell warrants immediately after 3 years lock-up
4. USD/SGD stays at 1.2273 level throughout 5 years
5. Calculations include ~S$28 brokerage fee to sell exercised warrants
6. Calculations factor in dilution factor in Olam share prices right after this offering assuming that ALL warrants are exercised and the company adjusts the warrant strike price accordingly in future dilution exercises to maintain the same spread.
7. Total annualised returns = (1 + Gain from 5 year bond coupons + US$0.05 bond discount after maturity + Gain from Warrants sale)^(1/5years) - 1

I think that to be putting in ~S$2,300 (for 1932 bonds) and taking the risk for 5 years, the minimum annualised returns that I expect from this investment be at least 6%. This is based on my own risk and target investment profile. In order to achieve this, the table simply tells me that I would require Olam stock price to appreciate by at least 30% in 3 years. So now, if you believe such is possible, then this subscription does make some appetizing sense.

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I also repeated the same analysis above to find out the sensitivity of USD/SGD exchange to this investment gain. The additional assumption is fixing analysis based on 

1. 20% gain in Olam share price (changing to 50% gain on Olam share price does not make the exchange rate sensitivity any greater)

As shown, the obvious fact is that exchange rate does little to impact total annualised returns. For the nitpickers, the weaker the USD, the better the gain becomes. And for analysis sake, the USD has been on a downward slide against SGD in the last 5 years due to weaker economic fundamentals and huge monetary stimulus (devaluation). However, in end 2013 the Fed has suggested an easing of the monetary stimulus with growth recovery in sight so expect some support at near current USD/SGD levels for the next 2-3 years.

In a nutshell, this offering ties Olam to the shareholders of the company for the long-term (at least for retail investors who may find it difficult to unlock value of bonds/warrants in the bond/warrants market). If you believe in the stock fundamentals that there is nothing wrong with being overaggressive in capital investment of late, that the company will return to positive cashflows in 2013-2014 after investments start to realise potential, that Olam has the liquidity in place to ride out any more storms, that the commodities market will make a timely rebound to push its stock prices up, then I would say this investment makes sense.

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