The Boy who Procrastinates (TBWP): June 2018

Portfolio Review for June 2018

By The Boy Who Procrastinates - June 30, 2018

What is one to say about June? It is definitely an eventful first half of 2018. Just in the month of June alone, we have witnessed several significant events such as the kicking off of the World Cup, the historical Trump-Kim summit that took place in Singapore, the raising of short-term interest rate by the Federal Reserve to 2%, as well as the recent escalation of global trade tensions by US, with tariff threats against China, Canada and Mexico and the European Union.

Back to the local market, the STI appeared to be experiencing a roll-coaster ride in the 2nd quarter. It has closed at 3430.76 at the start of April, reached a 10-years high of 3641.65 in May and ended at 3268.70 in June, recording a drop of 4.72% for the quarter.

On the other hand, the SGX S-REIT 20 Index has been inching lower from 1246.74 in April to 1193.918 in June, with a decline of 4.24%.

Blog Update

I have recently set up a Facebook Page for the blog. This is to provide greater convenience and to better facilitate the notification for any new post that is being updated here. As an avid reader to other financial blogs myself, I would usually check Facebook for any new posts as compared to my mailbox.

Action in 2nd Quarter

I have applied for the IPO for Hyphens Pharma in May and was issued a small allotment. However, due to the market downturn, the number has since turned red. With the market volatility in mind, I will be monitoring the progress of this growth stock.

Earlier in June, I have recently initiated a position in Netlink NBN Trust which I have shared my thoughts on this week.

With the recent enthusiasm in the Temasek-linked Astrea IV's A-1 Bonds, I have also subscribed to a small position in June and have intended to hold it till maturity.

Taking into account the current weakness in the share price of Starhill Global, I have brought down my average price towards the end of Jun. I have elaborated in this post.

Portfolio

My portfolio value has increased sharply in June, mainly due to the injection of fund in view of the recent market downturn. As of 30 June, it has a total value of approximately $75,000, with just a quarter more to the $100,000 mark. Given the current sizable value, I should be looking to improve on my portfolio allocation, as well as to review and consolidate some of the holdings.

Breaking down the portfolio by types, it consists of 20% Bonds, 24% REITS and 56% Equity. Personally, I think it is a rather balanced portfolio. However, I should think that I can afford to take on greater risk as I still have a long investment horizon ahead and there is still an inflow of fund from my active income.

Dividend

For the 2nd quarter, I have been collecting dividends mainly in the months of April and May. The dividends derived from the portfolio might seem relatively meagre as most of the portfolio value comes from recent fund injection this year. Additionally, a portion of it is invested in long-term growth stocks which generally have lower dividend yields. I have since been looking to increase my exposure in the dividend segment such as REITs, especially with the recent sell-down impacted by interest rate increment.

I have also opted for Raffles Medical scrip dividend in June.

Total dividend collected: $436.87
Average dividend/month: $36.41

*Exchange Rate
1 EUR : 1.5617 SGD

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Investment

Analysis of Netlink NBN Trust

By The Boy Who Procrastinates - June 27, 2018

Source: Netlink Trust Image Library

I have recently initiated a small position in Netlink NBN Trust ("Netlink") at an average price of $0.769 in June. At this buying price, it is trading at approximately 5.6% discount to its adjusted NAV/unit of $0.8146. Not a significant margin to its NAV I must say but there are other areas of consideration to justify my purchase price.

Profile of Netlink NBN Trust

The Netlink NBN Trust is a business trust that owns 100% of the units in Netlink Trust ("Netlink"), which builds, manages and operates the fibre network infrastructure in Singapore.

Netlink, formerly OpenNet, supplies wholesale fibre connection services to the retail service providers ("RSP") such as Singtel, Starhub, M1, MyRepublic, SuperInternet and ViewQwest. The extensive network can be viewed as the foundation for the deliverance of islandwide end-user fibre connections for broadband and Internet-protocol TV in residential homes and non-residential premises.

Understanding its Business

To have a clearer overview of its business, let's examine the 3 largest areas in which Netlink derives its revenue from.

Source: Q4 FY18 Presentation Slide

As Netlink monopolises the provision of fibre connections for residential premises in Singapore, it should come as no surprise that the majority of Netlink's revenue (62%) is earned from the residential end-user connections. This comprises of a "one-off" installation charge upon the initial connection and a recurring monthly connection charge from the RSP for each residential end-user connection. Therefore, even if consumers switch to a different RSP for their fibre broadband plans, they will still be accessing the network deployed by Netlink. In fact, the competition among RSP might push down the prices which could possibly entice more people to switch to/sign up for fibre broadband.

The following sizable revenue segment (9.7%) is contributed by the duct and manholes services, which form parts of the passive fibre network infrastructure. This is made up of revenues received from RSP for accessing its ducts and manholes for their business needs.

The next considerable revenue segment (8.1%) comes from the non-residential end-user connection. Unlike the field of residential connection, Netlink does not have a monopolistic advantage in this domain. It faces competition from the other RSP which have their own fibre networks mainly in the central business district and other large business parks and data centres. As such, Netlink's strategy is to target the growing small and medium sized enterprise businesses located outside of these areas. Based on the figures by MDA, it has a market share of approximately 33.79% of the non-residential wired broadband subscription market as of 31 Mar 2018.

Another noteworthy division is the Non-Building Address Point ("NBAP") connections. These refer to connections of location that does not have a physical address or assigned postal code such as traffic lights, bus stops, lamp posts, ERP gantries, void decks and carparks. The application of NBAP can range from wireless network base stations for telco operators to cameras and sensors.

Even though the provision of NBAP services remains in its early stage and only forms a mere 0.3% of Netlink's revenue composition, it offers the most exciting growth potential as projected in the prospectus. It will largely be driven by Singapore's Smart Nation Programme initiatives which require the deployment of a network of sensors and monitoring equipment to support applications such as autonomous vehicles and high-definition surveillance cameras.

Growth Aspects of its Business

Now that we have a clear summary of Netlink's underlying business, we can discuss about the various drivers of growth for some of the key divisions.

Residential

Migration from slower technologies like Asymmetric Digital Subscriber Line (ADSL) and Hybrid Fiber-Coaxial (HFC) to fibre-based networks: This can be supported by the increasing competition among RSP which allows broadband plans to be more affordable. Additionally, various RSP are working towards retiring the ageing technologies as it might not be commercially viable for them to maintain it. Singtel has shut down its copper-based ADSL network in April this year and has offered fibre packages to the affected 47,000 customers. Starhub has also recently announced that they have ceased further rollout of its HFC network to new residential and commercial buildings. The switch from ADSL and HFC to fibre-based networks should lead to higher residential end-user connections.

Source: Analyst Briefing Presentation Slide

Population growth: As the COPIF 2013 requires an optical fibre termination point to be pre-installed in each new home, new BTO launches pave the way for organic growth in the number of end-user connections. In addition, Netlink is targeting to expand its network coverage to upcoming townships such as the new Tengah estate. The first batch of 1,500 HDB in the estate will be launched in November this year and it is expected to house a total of 42,000 new units by the end of two decades. Furthermore, it is announced that 2,000 more BTO flats will be launched next year with shorter waiting times. I believe the greater supply of new accommodation will provide a boost to the number of residential end-user connections.

NBAP

Launch of TPG Telecom in second half of 2018: Netlink stands to reap benefits through the provision of new NBAP connections for TPG's mobile network deployment.
Smart Nation Programme: The demand for NBAP services is expected to grow with the roll-out of Singapore's Smart Nation Programme. This includes initiatives such as the installation of surveillance cameras at HDB blocks and carparks and autonomous vehicles.
HetNet base stations: Heterogeneous Network which allows users to switch seamlessly between cellular and WiFi networks, was first rolled out by M1 in 2016. Other RSP are also assessing plans to roll out HetNet across Singapore after trial participation in the Jurong Lake District. Netlink is expected to provide the necessary fibre network infrastructure for the initiative.
Wireless@SG: Singaporeans should be pretty familiar with the Singapore's public wifi hotspot initiative ("Wireless@SG") which was launched in 2006. IMDA is on track to double its network of hotspots to 20,000 by 2018 which can reach more locations, even hawker centres! Netlink is expected to support the deployment of next phase of Wireless@SG with fibre broadband connection for the access points.

Source: Analyst Briefing Presentation Slide

Distribution Yield

Unlike REITs which are required to pay out at least 90% of their taxable income to the unitholders in order to enjoy tax exemption, business trusts are not required to distribute dividends.

In spite of that, Netlink NBN Trust has a distribution policy in place. Basically, it is a two-tiers system due to the business trust structure. Netlink will distribute at least 90% of its distributable income to Netlink NBN Trust, after setting aside reserves for future capital expenditure, working capital, debt repayment, etc. Subsequently, Netlink NBN Trust will distribute 100% of its available cash to the unitholders after paying for the Trust-related expenses and fees, etc.

Source: Analyst Briefing Presentation Slide

At my entry price, the distribution yield is calculated to be 5.72% based on FP2018 forecast. If the 5.5% projected growth is included, the yield should increase to 6.04%. As such, I believe it is reasonable to expect a distribution yield within this range.

Key Concerns

Heavily Regulated Environment: Netlink operates in a highly regulated industry and the provision of Netlink's principal services is subjected to terms and conditions of the Facilities-Based Operator license. This has a significant impact to its revenue as 80.1% of it is regulated under the Regulatory Asset Base model. This is evident from the review of its pricing terms which was conducted by IMDA every five years to ensure its affordability. Most of the wholesale prices that Netlink is able to charge has recently been reduced with effect from 1 Jan 2018 as follows:

Source: Excerpt of the revised pricing for Residential segment from IPO Prospectus

Meeting minimum QoS standards: Due to the tightly regulated industry, Netlink is required to meet certain Quality of Services ("QoS") guideline with respect to its provision of connection services. As a matter of fact, Netlink has been fined 6 times in 5 years for failing to deliver orders to home and business broadband users within the stipulated timeframe. These fines add up to a total of $2.14 million. While meeting a certain quality standards is part and parcel of operating in a regulated environment, it appears that Netlink faces difficulty in complying which inevitably amplified its business expense through the imposition of fines.
Concentration/Geographical Risk: As Netlink is principally engaged in providing fibre-related services in Singapore, it faces a certain degree of geographical and concentration risk to rely on a niche market in a single country.
Technological Obsolescence / Substitution Risk: Singtel's ADSL service was first launched in 1997 and was completely shut down in 2018. Starhub's HFC network has been an important part of Singapore's early broadband development since 2003 and Starhub has ceased its further rollout in 2018 as well. Having launched in 2007, the fibre broadband has been around in Singapore for a decade and is definitely not something new. With greater data consumption and our growing hunger for higher speed Internet access, it may seem inevitable that wired broadband will be displaced in future. Some of the potential substitution threats have their sources from (1) wireless broadband and (2) unlimited mobile data plans.

(1) With the proliferation of wireless broadband, it raises questions on whether this will reduce the relevancy of fibre technology in future. Netlink has since cited some of the drawbacks of wireless broadband such as limited speed, higher network latency and inability to match the reliability and coverage of wired broadband.

(2) These days, telco operators are rolling out unlimited mobile data plans which offers the possibility for light users to ditch their home broaband plans.

However, telco operators usually throttle the surfing speed of their mobile subscribers once their local data usage exceed a certain threshold. Therefore, with the reasons stated above,

I am not too concerned with the possibility of technological obsolescence at this stage. In my humble opinion, I would think that fibre broadband will not be easily displaced as a stable means of high speed data transmission in the near term.

Conclusion

I must admit that I am buying into its growth story, the monopolistic advantage that Netlink has in the residential segment and its extensive nationwide network that forms a natural barrier to entry for other potential entrants.

In this current technological era, the Internet has become embedded in every aspect of our day-to-day lives. Building on the demand for high-speed Internet access, Netlink has grown to be a resilient business in the defensive sector.

In view of the rising interest rate environment, Netlink has also minimised the interest rate risk on 86% of its borrowing through hedging with fixed interest rate till maturity.

This will sit nicely among the dividend play on my portfolio, with an anticipated distribution yield of between 5.72% to 6.04%.

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Disclaimer: All information in this post is published in good faith and for general information purpose only. The ideas and opinions expressed in this post are purely that of the author's and should not be used or construed as an offer to sell, a solicitation of an offer to buy, a recommendation for any security or as professional financial investment advice.

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Savings

Best Passive Savings Accounts for 2018

By The Boy Who Procrastinates - June 01, 2018

This is a continuation from the previous post on Active Savings Accounts, which are mainly targeted at salaried employees.

For the self-employed/freelancers who do not draw salary through GIRO with transaction reference codes of SAL/PAY, or the frugal bunch who struggle with spending $500 on your credit card a month, fret not! There is a series of savings accounts that do not require you to complete the burdensome hurdles of salary crediting or credit card spending. In such scenarios, it will definitely be worthwhile to look into passive savings accounts instead.

UOB Stash Account

Personally, I feel that this is one of the most advertised savings account, as evidenced by the eye-catching glittering word, "STASH" seen from the external advertisement panels as well as stickers on taxis. But is this really as good as its marketing effort? Let's find out!

UOB Stash Account earns bonus interest if the current month's Monthly Average Balance ("MAB") is greater than or equal to the previous month's MAB. In another words, it is probably safer to not perform withdrawals in order to collect the bonus interest for that month. Whilst it is good saving practice to impose restriction on withdrawal, it can be rather annoying if you have genuine emergency need for cash. Therefore, it might be prudent to pair it with another account that does not penalize on withdrawal (eg. active savings accounts).

Your first $10,000 balance will only yield the base interest rate of 0.05%. To start earning the bonus interest on UOB Stash Account, you will need to have an account balance of more than $10,000. That is a relatively high barrier for passive savings accounts.

The savings plan allocates different bonus interest rate tier based on the account balance. The effective interest rates for the first $50,000 and first $100,000 are 0.65% and 0.825% respectively.

Pros

Account can be set up online, so that will save you the hassle of dropping by the bank branch
UOB ATMs are ubiquitous which provides ease of cash withdrawal
Comparatively high maximum balance amount which the bonus interest rate applies to

Cons

High hurdle for minimum account balance to be more than $10,000 to earn bonus interest
Imposition of withdrawal restriction

Citi MaxiGain Account

[Citibank has revised the terms and conditions on the Citi MaxiGain Account from 2 Jan 2019. You may wish to refer to the updated post on the revision.]

I would usually avoid Citibank products, primarily because there is a onerous prerequisite to maintain at least $15,000 to fulfill the minimum total relationship balance ("TRB"). Should the TRB falls below the stipulated amount, an account service fee of $15 will be charged.

In spite of the demanding TRB, this account has a very distinctive way of interest rate mechanism that is worth examining. It is the sum of the following two categories:

1. Base Interest Rate

The base interest rate is equivalent to 80% of the 1-month Singapore Dollar Interbank Offer Rate ("SIBOR") and will fluctuate daily in accordance to the movement of the aforementioned rate. You can find out more about the latest SIBOR on the ABS website. In order to earn the base interest rate, a daily end of day balance of $10,000 is required to be maintained in the account.

SIBOR

For the uninitiated, the SIBOR refers to the interest rate at which banks in Singapore can borrow funds from one another. You may probably have noticed that most of the banks have their mortgage loan rate pegged to the 3-month SIBOR. However, on the flip side, it is definitely unusual to have the interest rate of a savings account pegged to the SIBOR.

Launched in Feb 2016, Citi Maxigain Account has been around for 2 years but the hype surrounding this passive savings accounts seemed to have picked up only last year. To investigate the rationale, we will conduct a lookback on the SIBOR trend from 2000.

During the period from 2009 to 2014, SIBOR is at its lowest below 0.50% mark. It was only from 2015 onwards that it started to pick up momentum and rise above 1% in 1Q of 2016 and subsequently fall back to between 0.5% to 1% region. The average 1-month SIBOR in 2016 is approximately 0.79%. At this SIBOR level, the base interest rate will equate to 0.63%, which may not be as attractive if we set side by side with the active savings accounts on the market at that time.

In recent times, the SIBOR has moved above the 1% mark since 3Q of 2017. At the current 1-month SIBOR of 1.38%, this will translate to 1.10% base interest rate. If we were to add in the bonus interest rate which can rise to the maximum of 1.2%, the total maximum interest rate will reach a whopping 2.3%! This can definitely match up against some of the active savings accounts which I have gone through previously. It is of little wonder that this is perceived to be the gem of passive savings accounts.

Determinant affecting the movement of SIBOR

As the economies across the world become increasingly intertwined and interdependent, it is unsurprising that the movement of the SIBOR can be affected by a myriad of internal and external factors. Amongst other elements, SIBOR is typically highly correlated with the US interest rates.

If we were to include the comparison between the US Fed Fund Rate and the SIBOR, it is apparent that these 2 rates move in tandem. The current US Fed Fund Rate is at 1.75% after the FOMC has raised the rate recently in March. The Fed is signalling at least 3 rate hikes in 2018. With the information at hand, the direction which the SIBOR is headed may be foreseeable in the short term.

Having the base interest rate pegged to the SIBOR can be considered to be a double-edged sword. Whilst there is potential upside to the base interest rate, it can be volatile and remained at the mercy of global forces.

2. Bonus Interest Rate

It operates via a counter mechanism which will increase the bonus interest rate by 0.1% along with each step up to a maximum of 1.2%. The counter starts at 0 and will raise by 1 each month provided that the lowest balance in a month is equal to or greater than the lowest balance in the previous month. What this effectively means is that the safest action is probably not to perform withdrawal on the savings account for at least 6 months.

If the condition is not met with the lowest balance in the current month being lower than that of the previous month, the counter will reset itself to either 0 or 6 as follows:

Once it reaches counter 12, it will remain so unless the aforementioned condition is not satisfied. The perceptive ones would have noticed that there is a safety net at Counter 6 which you can withdraw from your account without resetting the counter. Despite so, it might be prudent to pair it with another account that does not penalize on withdrawal (eg. active savings accounts).

And what is more is that the total interest (Base Interest + Bonus Interest) applies to the first $150,000! That is a very high ceiling even in the context of active savings accounts. The considerable interest boosted by the current SIBOR trend, coupled with the substantial maximum amount of account balance for which the bonus interest is accorded, makes it one of the unrivalled savings accounts in Singapore.

If the allurement of this passive savings account sounds too good to be true, it probably just might be. I have recently been notified that there should be a revision in its terms and conditions with effective from November. It is unconfirmed at this stage and more information will be released once the t&c has been updated. At this point, it would be recommended to wait for the official release before committing $15,000 for a minimum of 6 months (to avoid early closure fee of $50).

Pros

Provides a potentially high interest rate which can match that of the active savings accounts

SIBOR is on an upward trend which yields higher base interest rate in the near term

The base and bonus interest rate applies to the first $150,000 account balance which is considered to be an extremely high cap compared to other savings accounts

Cons

There is no option to set up the account online and it might be inconvenient to make a trip down to the branch for someone with fixed working schedule

The base interest rate fluctuates with SIBOR

High hurdle for minimum account balance to be at least $10,000 to earn base interest and $15,000 to not incur account service fee

Imposition of withdrawal restriction

Takes at least a year to reach Counter 12 for maximum bonus interest rate

A revision to its terms and conditions might be taking place next month

CIMB FastSaver Account

This is truly one of the no-frills savings account you can find in Singapore. It earns an interest rate of 1% on your first $50,000 balance and 0.6% on the additional balance. The only prerequisite is to have a minimum deposit of $1,000 to earn any interest which is a much reasonable sum than the UOB Stash Account.

Unlike most savings account, CIMB FastSaver Account does not have fall-below fee which means you can practically empty the account without any charges incurred. Furthermore, the account does not impose any restriction on withdrawal as the interest is calculated on a daily basis (on the entire daily balance) and credited to you monthly.

Pros

Account can be set up online, so that will save you the hassle of dropping by the bank branch
No fall below fee
No withdrawal restriction

Cons

Comparatively low maximum balance amount which the 1% bonus interest rate applies to

CIMB is not a participating bank in the atm⁵ shared network. Their ATMs are very rare to find

CIMB StarSaver Account

Another unsophisticated and modest CIMB product is the StarSaver Account which offers 0.8% interest on the entire account balance, without any additional requirements. Similar to CIMB FastSaver, the StarSaver Account requires a minimum deposit of $1,000 to earn any interest and does not have any fall-below fee.

There is an ongoing bonus interest promotion from 1 Mar to 31 Dec which applies on the incremental balance between the previous and current month's average daily balance. Unless you are transferring a large sum in and out of the account on alternate months, the interest earned on the incremental balance might be insignificant.

Similar to FastSaver Account, StarSaver does not have fall-below fee which means you can practically empty the account without any charges incurred. Furthermore, the account does not impose any restriction on withdrawal as the interest is calculated on a daily basis (on the entire daily balance) and credited to you monthly.

Pros

Account can be set up online, so that will save you the hassle of dropping by the bank branch
No cap on the balance amount which the interest rate applies to
No fall below fee
No withdrawal restriction

Cons

CIMB is not a participating bank in the atm⁵ shared network. Their ATMs are very rare to find

Comparison

To get the best bang for the buck for the first $50,000 account balance, Citi Maxigain Account naturally leads the pack at approximately 1.65% over a period of one year with the assumption that the SIBOR stays constant at 1.38%. The runner-up is the CIMB FastSaver Account at 1%.

If we were to raise the account balance to first $100,000, Citi MaxiGain Account still has the advantage and takes the lead at 1.65% given that its tremendous maximum amount of account balance of $150,000 for which the interest is accorded. For the second placing, UOB Stash Account has overtaken CIMB FastSaver Account with a meagre difference of 0.025% in interest. I would definitely forgo this little interest for flexibility of performing withdrawal.

Ideal Combination

Truth be told, I felt rather ambivalent regarding the pick for this segment. Unequivocally, Citi MaxiGain Account should take the cake in this category and fit impeccably as the rightful addition to the ideal combo. However, what concerns me is the high TRB barrier and the upcoming revision to its t&c which might make it less attractive or put the existing accountholders in an unfavourable position.

For now, I would stay on the safe side and propose the dual CIMB savings accounts to complement the active savings accounts which I have touched on previously. CIMB FastSaver Account yields 1% on the first $50,000 and the remaining can be placed with CIMB StarSaver Account at 0.8%. The reason that I have eliminated UOB Stash Account from the selection is because I personally value the convenience of withdrawing over a slight difference of 0.025% interest rate.

To be fair, the Citi MaxiGain account possesses great potential with its variable interest pegged to SIBOR especially in a rising interest rate environment. Further assessment will be made once there is more information regarding the revision to its t&c.

Disclaimer: Kindly note that this is not a sponsored post. The author is in no way affiliated with any of the financial institutions and does not receive any form of remuneration for this post. The Boy who Procrastinates has compiled the information for his own reference, with the hope that it will benefit others as well.

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Portfolio Review for June 2018

Blog Update

Action in 2nd Quarter

Portfolio

Dividend

Analysis of Netlink NBN Trust

Profile of Netlink NBN Trust

Understanding its Business

Growth Aspects of its Business

Distribution Yield

Key Concerns

Conclusion

Best Passive Savings Accounts for 2018

UOB Stash Account

Citi MaxiGain Account

1. Base Interest Rate

SIBOR

Determinant affecting the movement of SIBOR

2. Bonus Interest Rate

CIMB FastSaver Account

CIMB StarSaver Account

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