Saturday, 6 May 2023

Negative Equity Stocks- Is it An Outright Sell?

Contributed by: The Big Fat Whale

Recently, I have been looking up Oracle's financials to see if it is something that I would add to my watchlist. In a usual filtering process, using value investing metrics such as Price to Book, Debt to Equity and Return on Equity, Oracle would never appear in the list.

The reason being it is having negative equity. In simple terms, when you take their total assets and net off their total liabilities, they are coming in with a shortfall.

So it brings us to the question:

Are Negative Equity Stocks an Outright Sell?

Negative equity stocks, also known as “underwater stocks,” are shares of companies that are trading below their book value or the total value of their assets. In other words, if a company has more liabilities than assets, it can result in negative equity. While negative equity might seem like a cause for concern for investors, there are situations where it may not necessarily be a bad thing.


Why Negative Equity Might Be a Cause for Concern?

Negative equity can often be a red flag that something is not right with a company. It could indicate that the company has taken on too much debt or made poor investments, leading to financial troubles. In such situations, the company may struggle to pay off its debts and interest, which can lead to bankruptcy.

Negative equity may also be a sign of declining or stagnant revenues. If a company is losing money and not generating enough cash to cover its operating costs, it could result in a negative equity situation. This may be due to increased competition, changing market conditions, or poor management decisions.


Why Negative Equity Might Not Be a Bad Thing?

While negative equity might be a cause for concern in many cases, there are situations where it may not necessarily be a bad thing. For instance, a company with negative equity may have a large number of intangible assets, such as patents or brand value, that are not reflected in its book value. Such companies may be worth more than their current market value, even if their book value is negative.

Say, for example, McDonald's is one of the world's most recognisable and valuable brands, the brand value is estimated at 42 billion dollars. On their books, it is only valued at less than 2 billion dollars.

The value will only emerge when the business is sold with the total brand worth (the additional 40 billion dollars) highlighted as goodwill in the acquiring company accounts.

Market Values vs Book Values (In Millions) - Credit: OShaugnessy Asset Management

Also, when companies are acquiring other companies, the intangible assets/goodwill would be subjected to writing off on a gradual basis. So using back the McDonald's example, the 42 billion dollar brand value would see a write-off every year, despite the Mcdonald's brand value might be getting more valuable through advertising strategy and etc. The effect on the financial statements would be lower profitability and hence lower book value.

The company could also be buying back their shares in an aggressive mode or paying back huge dividends that would have an impact of turning the company into a negative equity situation. Even Apple, thou it is not in negative equity, Apple has negative retained profits as the company have been aggressively buying back its shares for the past few years.

Another reason why negative equity might not be a bad thing is when a company is undergoing a turnaround or restructuring. If a company is making strategic changes to its operations, such as selling off unprofitable divisions or reducing debt, it may be able to improve its financial position over time. In such cases, investors may see an opportunity to buy the stock at a lower price before it turns around.


Are Negative Equity Stocks an Outright Sell?

From a Singapore market perspective, I believe it is usually the case as negative equity stocks are not very common. It is negative equity for the right and logical reason, which translates to the company being in distress.

However, the US markets have lots of good quality companies that have been in negative equity situations at some point in time. Some examples will be Home Depot, McDonald, Yum Brands and Oracle.

Instead of writing a negative equity stock off, if the company have strong branding or is an established name, we should look beyond the trees. There could be other metrics such as revenue growth, profit growth, interest coverage and positive operating cash flow that we could look into. If there is a contradiction to the base thesis for the negative equity scenario which is a red flag by itself, we should revisit the investment decision.

As for Oracle, I am still in the midst of my research. The huge negative equity figure could be due to their huge acquisitions through the years and goodwill have to be written off that could have led to a negative equity situation. After saying that, their acquired companies could be worth more than what they are acquired at which the negative equity is more an accounting exercise than what Oracle is actually worth.

Given that their software solution and Java program create a sustainable moat for the company, I will not be too bothered by the negative equity situation. Nonetheless, at a PE of 30, there could be a better entry level.

To sum up, being in negative equity does not mean it will be an outright sell but more due diligence would be needed if the company is an attractive investment based on its growth and earnings prospect.


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The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.

Tuesday, 1 November 2022

Likely Property Crisis in Singapore- A drop of 30%?

Contributed by: The Big Fat Whale

In recent times, despite the upheaval around the world, the Singapore property market has been holding well. It is still on an upward trajectory that makes it like "Not being in the game is a fool's play".

It has been one of the surefire ways to build your golden nest by upgrading from your first BTO HDB to a private property and to another private property every 4-5 years to escape the Sellers Stamp Duty. Not many have not reaped returns using this foolproof path.

There is an interesting Tik Tok video where the content creator was mentioning that his property agent is pitching a newly launched condo as a sure-proof way to lock in profits after 5 years of holding. It is along the line of just buying the property at 1.5 million now and cashing out at 2 million 5 years later.

Then it shows the speech by our deputy Prime Minister who said no one he has known could have predicted property prices in the future. Moreover, this development is situated in a non-prime area which makes the pitch less convincing.


Property Price Trend

Singapore Property Price

Source: Trading Economics- Singapore's Residential Property Price

From the chart above, you could see property prices have been a worthwhile holding if you. have a time frame of 10 years or more.  The two notable periods where there was a profound correction would be the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008.

During the Asian Financial Crisis, prices plunge close to 40% and it took nearly a decade for those who got at the peak to be back to breakeven in 2007. The stock market declined by 60% during this period. We can affirm this as a friend who bought a condo unit at the peak of 1997 saw his property valuation come back to breakeven only ten years later. It is his version of the "Lost Decade".

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Friday, 21 October 2022

Demystifying Singapore's Government Debt to GDP of 130%

Contributed By: The Big Fat Whale

To be frank, we were very surprised when we saw Singapore at the top of the table for countries with the highest government debt to GDP.  Is it a worrying sign? Or is there more to it than what the figures are implying?

Therefore, we decided to take a deeper look by doing some research.

Debt to GDP

Source: Top 10 countries with the highest Debt to GDP in 2022


Debt Instrument Issued

Firstly, let's break down the different debt instruments that the Singapore government issued for their debt.

  • Singapore Savings Bond
  • Singapore Government Securities
  • Special Singapore Government Securities
  • Treasury Bills

Singapore Savings Bond is issued to give Singaporeans a debt instrument they could invest in to grow their money efficiently and safely to counter inflation. They are issued with a 10 years tenure and could be redeemed at any time with no loss of capital.

Singapore Government Securities is issued to promote the debt market in Singapore and could be used as a benchmark to price corporate bonds. They are issued with maturities of 2, 5, 10, 15, 20, and 30 years.

Special Singapore Government Securities are issued to provide returns for Singapore's State Pension, the Central Provident Fund. The securities earn the CPF Board a coupon rate that is pegged to the CPF rate the members receive.

Here are some details of the interest that members will receive. The member will earn 5% per year on up to the first $60,0000 of their Retirement, Special and Medisave Accounts if their Ordinary Account is less than $20,000. Also, they earn an additional extra interest of 1% per year on the first $30,000 of their CPF balances after age 55. This means they can earn up to 6% per year on the first $30,000 in their Retirement Account.

Treasury Bills are short-term debt instruments that are issued with a 1-year maturity. It is used to bridge and smoothen the cash flow from the operations of the government on a day-to-day basis.


Is Singapore in a Precarious Situation?

Singapore's government mainly borrow money not to fund the running of the country which is usually depicted in the yearly budget. In recent times, the UK is trying to borrow more so as to fund its proposed tax cuts and it has led to an all-time low for the sterling. 

Singapore's government borrow to fund infrastructure projects that will turn into assets once they are completed. Some notable projects funded by past government debt are the large initial costs for Changi Airport and the first MRT lines in the 1970s and 1980s,  There will be cashflow from the funded projects after completion which will lead to generating investment returns and contribute to the revenue of the nation.

Projects that will be financed by the government debt in the future will be the expansion of rail lines, major highways, other green projects and more importantly a sea wall that will protect Singapore from rising water levels due to climate change.

Based on Singapore's constitution and government securities act, it is not allowed to spend the funds raised through debt securities.  Therefore, the bulk of it is invested in infrastructure projects that have national interest. 

There are also safeguards to rein from an overdose of debt for infrastructure with a cap currently at 90 billion dollars which is around 20% of current Singapore's GDP.


Singapore is One of the World's Top Net Creditor

Source: Brookings

From the computed statistics shown, Singapore is one of the top net creditors according to the share of GDP in the world. Therefore, based on our earlier discussion, if we take the value of the assets that were financed by the debt, and deduct the debt amount, we are in a very healthy position.


Summing Up

Headline figures of 130% of government debt to GDP for Singapore would send uneasy signals if we do not look deeper into the figures. 

So based on our research, the debt is used to finance mainly infrastructure projects that would generate investment returns in the future once completed.  With these turning into cash-generating assets, the implication would be that Singapore is actually a net creditor when we take the assets minus the debt. 

On top of that, the reserves of Singapore which are managed by MAS (S$510 billion), Temasek (S$381 billion) and GIC (In excess of S$100 billion) as of 31st March 2021, which would put us in good stead to face any turbulence ahead with a trillion dollars of a buffer.


We hope you liked this write-up and do subscribe to our website to receive insightful articles whenever they are published.



The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.


Saturday, 15 October 2022

US Treasuries- A Screaming Buy?

Contributed By: The Big Fat Whale

The skyrocketing interest rate environment where fixed deposit promotional interest rates in Singapore have crept up beyond 3% for some banks is unheard of.

The last time the fixed deposit interest rate went up above 3% was in 1998. Savers and property owners on mortgages have been used to a low-interest rate environment for a long time.

With any hints of a crisis, the central banks have been very proactive in their quantitative easing policies that have flooded the financial markets with excessive liquidity.

That has led to euphoric bubbles with most now being tamed. The surprising element was inflation was accommodative during this period as it just nudge nicely along.

However, what changed the overall game plan in recent times was inflation is turning into a beast with the US latest figures hitting above 8%. The parallel scenario would be the 1970s period when the overall economy was in a stagflation mode- High inflation but low growth.

They only managed to finally curb the inflationary pressures when the US central bank go all out by increasing the interest rates to 20% in 1980. The current Federal Interest Rate is at 3.25% with the expectation of it reaching 4% in the near term.

Not taking into consideration the recent ultra-low interest rate environment over the past decade, the normal sweet spot for interest rates would be around 2%-5% region. Therefore, if you look at it, we are just back to a normalised situation.


US DebtCurrent Yield
2 Yr4.35%
10 Yr4%
30 Yr3.95%

Source: US Treasuries Yield

Given the backdrop, it is no surprise that US Treasuries are looking attractive with 2 Years Bills giving a yield of 4.35%.

Giving some perspective, a decent corporate bond in Singapore in the pedigree of AllGreen and Straits Trading is currently giving a yield of 4%-4.5% and has an expiry date of close to 3 years.

The latest Singapore Treasury Bill auction in October for 1-year yields 3.7%.

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Thursday, 23 June 2022

Investing in the Cinema Business at Good Value- Orange Sky Golden Harvest

Contributed by: The Big Fat Whale

The cinema business has weathered an unprecedented crisis brought by the pandemic. The massive plunge in patrons to the cinemas has drastically fallen off the cliff with all the measures by governments to contain Covid 19. However, things seem to be picking up with an about-turn to better days with the unwinding of earlier tough measures.

From Singapore's scenario, there is now no safe distance requirement and capacity could go back to 100%. With the pent-up supply where movie companies have held back launches of their blockbusters, the return of the good old days of the cinema business could be on track.

In recent times, the screening of Top Gun (meant to be released in June 2020), Jurassic World Dominion, and the upcoming Minions- The Rise of Gru, would generate the buzz for moviegoers to revisit the cinemas and get things back to normalcy.

Given this backdrop, an investment in the cinema business would be a way to ride this recovery thesis of the sector. Moreover, we have spotted a well-known company that is trading at a deep value which provides a good margin of safety.


Deep Value Play

The stock that we are considering would be no other than Orange Sky Golden Harvest which is listed on the Hong Kong Stock Exchange. They are owners of the Golden Village chain of cinemas in Singapore (14 cinemas) and also have exposure to the Hong Kong (10 cinemas) and Taiwan (16 cinemas) cinema industry.

Golden Village is an iconic name in the Singapore Cinema scene with the first multiplex (Numerous cinemas) established in Singapore on 27th May 1992.

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