Sunday, September 3, 2017

Stalwarts of the 90s and the end of moats

Listed on the SGX, many of the below companies have grown over the years from strength to strength. Today's article covers the problems they face in the face of disruption.

1. Singapore Press Holdings
2. Singapore Post
3. Singtel
4. Comfortdelgro

5. Keppel Corporation
6. Noble

7. Singapore Pools (not listed, but just here to illustrate a point)
8. Singapore Technology Engineering
9. SATs
10. Singapore Exchange

How the mighty has fallen in the era of disruption

As technology and new business models threaten industries. Many billion dollar companies have been hit by the smaller players who grew up and have big ambition/plenty of money.

Think media - SPH. A company with brand and substance to back and yet they are failing. Why?
This probably lies in the complacent nature of management and its inability to disrupt the status quo. We could see new media/social media appear. I mean if you had ambition, you would grow business times/share investor to become something like Fortune, Baron's, Financial Times - basically international news. And only now they started shifting their strategy.....to areas of healthcare, property, education. Well good luck, if that is not 'diworsification', I don't know what is.

Think delivery - Singapore Post. Hit by itself really. In an era where they are still a monopoly, they failed to grow any secondary industry....even now while no one is really disrupting the delivery business but they have horrible service and an inability to grow inorganically. Their bad acquisitions just show a poor level of management capabilities to handle the new era. I think even Alibaba isn't betting on this horse as it acquired Lazada and Redmart to play in the region.

Think telecom - Singtel. Singtel is a smart company. As a true blue chip, it has grown its presence all over Asia - in India, Australia and around. While telecoms remain an expensive business with high capital expenditure costs. It is unlikely to be disrupted to the same extent as the basic understanding is that communication is a basic, provision of broadband is a necessity and well entertainment (cable tv) is part of life. Does anyone watch TV these days though?
On a side note TPG is threatening to eat into its Australia and Singapore business....can a business truly under-price everyone else to take out a market leader? I wonder.

Think transportation - Comfortdelgro. While probably no one is disrupting the infrastructure of train and buses. People are disrupting the transport business with the model of shared economy. These days, private cars have taken to the roads and provide the very service of transportation. Grab, Uber has transform the industry and are beginning to take on the delivery business of food as well. Can they vertically change the industry? Only time will tell if their cash burn can grow their presence to a sustainable size. Comfort on the other hand has seen its number of taxis being rented declined to the extent that it has reached out to uber for further collaboration.

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Cyclical business

The second group of companies I want to cover are those with exposure to commodities.
Namely Keppel Corp (to oil) and Noble (to hard and soft commodities).

Keppel's position as no.1 O&M offshore rig was really admired 5 years ago. To think that we were reading about how the battle for Brazilian oil rig deal was the big big thing. Fast forward today, allegations about corruption/bribery/govt espionage. Man. That's really not a pretty sight when the music stops. Will Keppel survive? I certain believe so, the company has some of the brightest talents and their strength allows them to grow their fund management business, property development, infrastructure and different parts of O&M (e.g. LPG). O&M is cyclical and well....it remains to be said but I don't believe their moat has been destroyed, just cyclically under performing for now.

Noble on the other hand, is on the highway like a lemmings off the cliff. Many years of high debt has finally caught up to it as shortsellers circled it like a shark. The company in desperation to stay afloat sold all its crown jewels. What is left is a couple of junk trading business that is resulting in all the key management leaving. If the captain of a ship (CEO and Chairman) is taking the life boat out, I advise that you don't stay on as well.

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Business with strong moats

Singapore Pools. Undisputed money churning company of providing hope. Even two casinos could not take away the regular habit/hobbies of people just punting and hoping for a brighter future with winnings (hopefully millions). Online gambling is illegal in Singapore and well, people don't trust digital money so much as it may just be an online theft.

ST Engineering. With a business with the SAF. How could you possibly go wrong. As the only AAA rated listed company in the fixed income market in Singapore. ST Engineering has the orderbook and dividend that pays. Early shareholders know the testament and enduring nature of the defense industry and as long as Singapore govt continues to dedicate 5% of its GDP to defense, we are going to continue to see the company roll on.

SATS. A company closely intertwined with Singapore's aviation industry. As Singapore remains an Aviation hub for the region. SATS has a strong plan of providing food and ancillary services to the aviation industry such as logistics and handling services. Till the day people are able to travel quick and safely via another mode of transport other than flight or Singapore loses its Aviation hub status. SATS will be here to stay as it rides on Singapore new air terminals opening.

SGX. Trading stocks, bonds, derivatives and listing companies is a bread and butter business. Will this industry ever disappear. Very unlikely so. While the digital era has enabled bond raising through private means (such as crowdfunding and IOUs). The size and segment that SGX caters to are still big fund managers and nobody really could replace exchanges in such a market.


What should you invest in then?
1. Look for companies with a strong moat (competitive advantage) - e.g. the 3rd group / Avoid companies without it!
2. Look for those with great managers and strong corporate cultures of putting the customer and employee first before shareholders
3. Figure out a fair price to pay, and wait for that day to come. Buy when its on sale.
4. Review yearly by going through step 1-3.

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