Penny stocks plummet after record highs

[Musicwhiz]

Hi Nick,

Thanks for the succinct summary. Perhaps I should clarify that I am not "lambasting" any particular asset class - my disdain in general for REITs is due to the fact that yields have compressed and that they also seem to be the "Flavour of the Day", or whatever you call it which signifies popularity. In other words, many people feel that "REITs can do no wrong" and yield-hungry investors would IGNORE the risks just to get a return, albeit a levered one. So all things being equal, if I could get a no-debt blue-chip yielding around 5% compared to a REIT with 40% leverage yielding 5.6%, I would choose the blue-chip.

And one more thing is that I do not feel REITs are as easy to understand as you'd think. There are many macro events which would affect REITs, regulatory environment + of course interest rates. I am not pretending to be able to understand all the influences, therefore I choose to avoid.

[KopiKat]

Hi Nick,

Thanks for the succinct summary. Perhaps I should clarify that I am not "lambasting" any particular asset class - my disdain in general for REITs is due to the fact that yields have compressed and that they also seem to be the "Flavour of the Day", or whatever you call it which signifies popularity. In other words, many people feel that "REITs can do no wrong" and yield-hungry investors would IGNORE the risks just to get a return, albeit a levered one. So all things being equal, if I could get a no-debt blue-chip yielding around 5% compared to a REIT with 40% leverage yielding 5.6%, I would choose the blue-chip.

And one more thing is that I do not feel REITs are as easy to understand as you'd think. There are many macro events which would affect REITs, regulatory environment + of course interest rates. I am not pretending to be able to understand all the influences, therefore I choose to avoid.

It's not just REITs seeing Yield compression, but rather, almost all the Yield stocks which I'm tracking. For eg. SIAEC must have gone up >20% over the past year, even hitting >$5 recently.

The % gains in many REITs may seem a lot more but that's because after the last crisis, many investors became averse to REITs as quite a few, especially the Aussie run ones, almost closed shop and their share price dropped a lot more. It's only last year that we see them playing catch up.

BTW, care to highlight which Blue Chip has zero debt and yields 5%? Most blue chips are also geared and only a handful yields 5% now. You must be thinking of SIAEC as it's only one I know which has almost zero debt, but, as it'd run up in tandem with the market, Yield is <4.5%(assume no Special Div).

[Nick]

Hi Nick,

Thanks for the succinct summary. Perhaps I should clarify that I am not "lambasting" any particular asset class - my disdain in general for REITs is due to the fact that yields have compressed and that they also seem to be the "Flavour of the Day", or whatever you call it which signifies popularity. In other words, many people feel that "REITs can do no wrong" and yield-hungry investors would IGNORE the risks just to get a return, albeit a levered one. So all things being equal, if I could get a no-debt blue-chip yielding around 5% compared to a REIT with 40% leverage yielding 5.6%, I would choose the blue-chip.

And one more thing is that I do not feel REITs are as easy to understand as you'd think. There are many macro events which would affect REITs, regulatory environment + of course interest rates. I am not pretending to be able to understand all the influences, therefore I choose to avoid.

1) I do understand where you are coming from. Higher risk should translate to higher return - which is why the 2 above mentioned REITs have significantly outperformed SIAEC, Sats and other 5% yielding blue chips over the past 7 years.

2) The business of REITs is easy to understand - just picture FCT which owns heartland malls. Almost anyone can easily look at occupancy rates, locations, tenant mix, shopper traffic at a site visit. The financial statements are easily structured - revenue, NPI, interest expense + investment properties, equity, debt. Business is substantially cash based so there is little worries of receivables growing and so on. Contrast this with blue chips - Keppel Corp or even SIAEC - the business is almost impossible to understand, the common man has no affinity, the accounting much harder and its virtually impossible to predict how the business is faring prospectively (unless you have industry knowledge).

3) This doesn't mean that REITs were the best asset class to own in that period let alone going forward. Investors can easily point out to cash rich yield mid caps like Vicom which have outperformed virtually all the REITs etc. Can REITs continue to prosper going forward - I wouldn't know. But it was certaintly a great asset class to ride on over the past 7 years.

4) Yield compression isn't unique to REITs. The over-arching issue is earning yield compression which is affecting virtually every profitable firm listed in SGX. Most of us has seen our stocks soaring in value over the past 12 months and while I would like to think its due to our superior stock picking skill, it is probably due to a market based earning yield compression. Since REITs pay out 100% of their earnings - earning yield = dividend yield, so the compression is even more apparent. This will bring some interesting spin to the overall stock market going forward.

[Musicwhiz]

Hi yes was referring to SIAEC but note I said "around 5%".

[mrEngineer]

The question whether will STI head to 2000 first before ascent to 6000?

[maniac]

if I could get a no-debt blue-chip yielding around 5% compared to a REIT with 40% leverage yielding 5.6%, I would choose the blue-chip.

Hi MW,

I am not familiar with SIAEC, but "technically" if a company consists (I understand that SIAEC has an operating business as well) of only associates and JVs, which it uses equity accounting, it will "always" have no debt on its balance sheet, and its net profit margin (which the SIAEC management usually highlights in their briefing slides) is infinite. I believe there should be some debt at its associates and JVs. I understand you are an auditor, kindly correct me if I am wrong.

Thanks.

[Musicwhiz]

Hi Maniac,

This should technically belong to the SIAEC thread, but I will answer it here anyway.

Yes, equity accounting means that the assets/liabilities of the associates/JVs are NOT consolidated into SIAEC's BS. This means that the debt of the associates/JV are considered "off-Balance Sheet". So technically if you wish to compute if SIAEC group has any debt, you should take the proportional stake SIAEC has in each of its associates and multiply by the debt levels there, to get a sum total.

It does not mean that SIAEC will älways" be debt-free though - it could take on debt on its own or through its subsidiaries which will then be consolidated back to the Group level and disclosed as debt on a Group basis.

NPM also is not infinite - it is based on SIAEC's top line revenue. The earnings from associates are equity-accounted so you should drill down to each associate to find out the NPM there, but I believe these details are not separately disclosed.

Hope this explains. Thanks.

[2V.]

Thats a good news for all of us if STI heads to 2000, all of us can buy cheap value shares

The question whether will STI head to 2000 first before ascent to 6000?

[godjira1]

@shanrui thanks for sharing. V good presentation of the pertinent points and what should be considered.

[a74henry]

I too thank shanrui_91 for sharing. Good points raised.