Cut loss on United Food and Ocean Sky, invested into Suntec REIT on 28 Oct 2009

United Food Holdings

Mistakes are mistakes, no matter how they are packaged. United Food Holdings is one of the most spectacular value destructing business on my portfolio. Starting with a huge cash horde which translates into a large cash per share, it can easily qualify as one of my best cigar butt. But as time go on, the management demostrated outstanding capability to drain it with seemingly failed but huge investments (land, soya beans).

Ocean Sky International

Unlike United Food Holdings, I did not classify Ocean Sky as a cigar butt in the beginning. However, just like any typical manufacturers hit hard by the falling orders due to the ongoing economic recession, they are driven into quarterly losses.

Suntec REIT

Looking at the falling office rents, sliding occupancy rates, Suntec REIT might not seem to be a good investment option. However, even at current dismal rents and occupancy, Suntec REIT already offer nearly 10% yield based 3Q DPU and the price I bought.

Going forward, I have reasons to be optimistic about rising rents, occupancy rates and hence DPU. Looking at the Prime Grade A Office Rental Trend posted in the 3Q presentation slides, rising and falling rents just mirror cycling economic trends. As such, once the economy regains firmer footing, the demand for office space and retail space will resume, and especially after the completion of Marina Bay financial centre and Sands IR that further bring more vibrancy into the area. But in the short term, rents and hence DPU for Suntec REIT could worsen before it get better.

Action

I can choose to sit on United Food and Ocean Sky, especially the latter, and wait for them to recover with the broader economic situation. But going through my options, I see more potential in Suntec REIT than Ocean Sky, in terms of recovery.

Took profit on Cambridge Industrial Trust and Courage Marine on 2nd October 2009

Rationale

Both had almost doubled in share price since I acquired them. For past investments, I would have sold 1/2 of my holdings to recover my capital and let the 'profit' grow. But for Cambridge Industrial Trust (CIT) and Courage Marine, I decided to trim my holdings by about 1/3 each instead.

I decided to keep more of their shares because I am still confident of their potential to grow much further once the regional and global economy recover strongly.

On the other hand, I still took some profit because no matter how big that potential is, I prefer to diversify and raise cash for future investments.

Reinvested remaining proceeds from SPC into KS Energy on 29 September 2009

Motivation

Despite the recent oil price correction from above USD $147 last year to current level fluctuating around USD $70, I believe the demand for crude oil for energy needs, and accompanying support services will surge again as the world economy gets back on its footing.

KS Energy

KS Energy operates in the oil & gas industry. It has 2 main core business segments, trading of capital equipment and provider of capital equipment chartering, drilling and rig management services. It is the latter that I see potential.

Business Performance


Ignoring other operating income that normally arose from divestment of investment or interest income, profitablitiy seems to turn the corner since 3Q 2008. With a lower base in 3Q 2008, 3Q 2009 should see a better improvement in earnings.

Reason to be optimistic - leveraging on more economic locomotives

The surge in world demand for resouces in 2007 to 2008 might be only a prelude to a much bigger one in the next decade, 2010-2019. The global economy used to be pulled by one major (US) and several smaller (Eurozone, Japan) locomotives. The next decade will see, for the first time in recent history, several huge locomotives in operation together. These include US (awaiting recovery), China, India and Brazil. Together with the support locomotives from Eurozone and Japan, the pulling force in the next decade could be very powerful.

The consequence is a surge in demand for resources and services the world can ever produce. Unfortunately, the demand cuts both ways. On one hand, asset and security prices will be boosted and the next bubble that dwarf the one that burst in 2008 may well occur. On the other hand, inflation will break through the roof and governments around the world will have a hard time containing it.

Unless there is a concrete switch into alternative sources of energy, demand of oil and gas and its supporting services surge again, on a much larger scale. This is where I believe KS Energy, CH Offshore (that I invested earlier) and many other (currently more expensive) providers will stand to benefit.

Risk

One of my main point of concern for KS Energy is its debt, though it manage to reduce it somewhat via recent fund raising activities. KS Energy's growth and expansion strategy is much more aggressive than CH Offshore and I hope it does not more grow broke. Even though the recent credit crunch is easing, there is still a high chance it can occur again in the near future.

Conclusion

With the investment in KS Energy, my investment in oil & gas industry is more or less completed. I'll turn my attention to food commodities now, for the same reason I go into oil & gas segment.